Employment Contracts: When Do You Have One?

Oregon law has long followed the general rule that an employer may terminate an employee "at will." This means that, subject to specific exceptions provided by law, or limitations imposed by an employment contract, an employer generally does not need cause to terminate an employee. For example, subject to statutory and case law exceptions, an employer may generally terminate an employee for personal dislike alone, even if the employee's job performance is exemplary.

While most employers are generally aware of the existence of the "at will" doctrine in Oregon, many employers incorrectly assume the "at will" doctrine means that, absent an express written contract, an employer does not have a contractual relationship with its employees. Further, many employers believe that, despite oral promises the employer may make to employees, or work-place policies that the employer may choose to adopt, an employer may terminate an employee for any reason not otherwise prohibited by law. Some employers have learned the hard (and expensive) way that this is not always true.

The simple truth is that an employee's performance of work in consideration of an employer's offer of employment always creates an employment contract, even if the offer of employment is merely oral and no written employment contract is entered into. Properly restated, the "at will" doctrine provides that an employer may terminate its contract with its employee "at will", with or without cause, subject to statutory, case law or contractual exceptions. These exceptions include judicially created (case law) exceptions such as the tort of wrongful discharge, legislatively created (statutory) exceptions such as prohibitions against discrimination, and contractual exceptions based on express and implied contract theories. This article focuses on exceptions based on contract theories, and how employers can avoid unanticipated contractual consequences.

With the exception of certain high-level employees, who are less likely to make an employment claim anyway, most employees work under oral employment contracts. Even though most contracts are oral, the terms of the employment contract can often consist of much more than the payment of wages for work performed. For example, when an employer adopts an employment policy, whether written or oral, and makes the policy known to employees, the policy becomes an implied provision of the employment contract. For example, if the employer adopts a policy that it will issue written warnings to employees before termination, an employee terminated without such warning may have a claim for breach of contract against the employer, with damages including back pay. Similarly, an employer who adopts a policy that it will discharge employees only for "cause", or only for specified reasons, has effectively waived its right to discharge "at will." Further, depending on the circumstances, even an employer who does not expressly adopt a policy but who engages in conduct that evidences a policy could also possibly be exposed to a breach of contract action. For example, if an employer's announced policy is termination "at will", but the employer in fact always provides a written warning to employees prior to discharge, the employer may have implicitly adopted a policy of written warnings and be subject to liability for a discharge without such a warning.

Reasonable expectations based on promises made to an employee, whether or not part of a more general policy of the employer, may also be construed as an implied provision of the employment contract. For example, a promise of vacation pay upon termination of employment can give rise to a breach of contract action in favor of an employee who is terminated without vacation pay. However, an employee's mere belief or assumption alone that an employer will treat him or her in a certain manner will not give rise to a breach of contract claim.

The most significant type of implied contractual provision is created by an employer's adoption or publication of an employee handbook. It is well-established that a policy set forth in an employee handbook distributed or made known to an employee constitutes a valid and enforceable contractual provision. An employer should accordingly exercise great care in preparing an employment manual. While properly drafted employment manuals can often effectively accomplish employer objectives, as well as provide guidance and assistance to employees, poorly drafted manuals are, from an employer's perspective, worse than no manual at all, because they often result in unintended rights and benefits for employees.

For example, a poorly drafted manual may provide unintended limitations on an employer's right to terminate an employee at will, making termination difficult or providing an employee with an unintended claim for damages. Worse, an employment manual with ambiguous or contradictory policies may provide a basis for a claim no matter what course of action an employer takes. For these reasons, if an employer chooses to have an employment manual, it is difficult to overstate the importance of proper drafting. Additionally, prior to making the decision to have an employment manual, an employer should know the purposes and objectives it hopes to achieve through the manual.

Similarly, to the extent an employer adopts policies outside of an employment manual, it should do so explicitly and unambiguously to avoid confusion, and should do so only after carefully reviewing the purposes and goals of the policy. This often involves a weighing process comparing the advantages of a policy with its disadvantages. As with employment manuals, a carefully crafted policy specifically tailored to meet important objectives will usually benefit both the employer and its employees. A poorly considered or unintentional policy, on the other hand, will often cause confusion and unintended consequences. Of course, it goes without saying that a policy should not be adopted without the employer's commitment to implement the policy properly.

In summary, employers should be aware that every employment relationship is also a contractual relationship, and that an employer's promises and policies (written or oral) may become a part of the employment contract, regardless of the employer's intent. Simply keeping that in mind is a start to avoiding unnecessary and potentially costly contractual claims by employees.