Employment 101
In the United States, the majority of employment relationships are considered ‘at-will’. This means that employees can quit their jobs for any reason at any time and employers can also terminate their employees with or without cause. Exceptions may apply in certain circumstances depending on applicable state law such as a contract or collective bargaining agreement.
Contract employment on the other hand refers to that which is entered into between an employee and employer at the start of employment , outlining specific conditions of employment. These conditions may include the length of employment, job duties, compensation, termination notice, confidentiality and non-compete agreements amongst other things.
The prevalence of employment types such as contracts and at-will relationships speaks to the fact that they are critical not only to the efficient operation of most organizations, but also important for the economy as a whole.
What is a Contract Employee?
Contract employment is most often represented by a written agreement entered into between the employer and employee. However, while most common in the context of formal employment agreements, there is no legal strict requirement that an employer and employee contract must be in writing. A contract can be made verbally or even through an implied term that the employee is employed for a certain period of time. For example, if an employer hires a temporary foreign worker for a defined period of time, and the worker spends the defined period working for the employer, it may be assumed by the normal expectations of the employer-employee relationship that the employer has consented to employ the worker on the same terms at the end of that period.
Irrespective of the manner in which an employment agreement is made, where an agreement exists that states that the employee is engaged for a fixed term, the relationship is not at-will or indefinite. This means that the person under the contract can only be dismissed for cause before the end of the contract period or, in the absence of a fixed cause, the contract period must be respected. If the employee is dismissed before the end of the contract period, they are entitled to damages equal to the expected wages for the remainder of the contract term. If the employee resigns before the expected end of the contract period, the employer is entitled to withhold any damages it would otherwise be liable to pay in the case of an early dismissal. When it can be demonstrated that the employer engaged in intentional misconduct in the inducement of the employee to enter into the contract, even when the contract is for a defined period, the employer may be liable for the wages for the entire length of the contract; in other words, the full contract damages that the employee would have been entitled to had they been wrongfully dismissed at the end of the contract period.
An employer cannot simply say that the employee was a contract employee if the nature of the employment is such as to induce the employee to rely upon the continuity of the employment. For example, if an employer says they intend to dismiss an employee after one year so that they can hire the employee’s brother-in-law, such action will be a wrongful dismissal. If an employer enters into a contract with a foreign worker for a 1 year-defined term and they terminate or repudiate that contract before the end of the defined term because the worker has become sick and has had to leave work, their actions would be wrongful dismissal. The employer, here, could be liable for the wages of the entire contract period, despite entering into a contract with a defined end date.
In the event that an employee has been offered a contract that purports to establish the employee as a contract employee, the offer may or may not be enforceable by the employee depending on the specifics of the situation.
At-Will Employment
In contrast to contract employment, at-will employment means that there is no formal agreement between the employer and employee as to the period of employment. While employment may be terminated by the employer or employee at any time, it does not allow for ongoing negotiations or assurances of a stable position. As such, businesses that hire employees under at-will employment clauses must ensure compliance with state and federal laws regulating employment status. Generally, the terms are understood to include the following terms: ● Employer will pay employee set wages for the duration of employment. ● Employee agrees to perform job duties as required by the employer. ● Either party may terminate the employment at any time with or without notice and with or without cause.
Key Differences Between Employment Types
The key differences between contract and at-will employment revolve primarily around job security and termination processes. A contract typically provides employment for a specified time period and establishes a clear cause for termination that is agreed upon by both the employer and employee prior to taking the new position.
For example, while it is not uncommon for new medical residents or advanced practice providers to be offered an employment agreement with certain guarantees about the duration of employment and types of causes for termination, such as sale of the practice or loss of license, it is likely to be written in a way that provides flexibility in employment decisions and will reduce your right to pursue a wrongful termination claim should you later find yourself in a position where the cause for termination seems ambiguous or unfair according to your understanding and belief. Employers are frequently wary of the risk that accompanies these types of agreements, but with careful drafting, contract physicians and APPs find such agreements to be beneficial.
In contrast, at-will employees have no guarantee of employment for any certain length of time. Both the employer and employee maintain the right to terminate the relationship with or without cause at any time (outside of certain protected classes such as age, gender, disability, etc.). As noted above, there are some exceptions to the general at-will rule. In addition to contract employees and those protected by law, certain states have public policy exceptions, such as the right of a physician to terminate an employment contract made in violation of their state’s corporate practice of medicine law.
Contract physicians and APPs who have been terminated and who believe their employment agreement was breached have the right to pursue their claim in court. While the courts generally favor the employer when it comes to interpreting ambiguities in employment contracts, physicians and APPs are frequently able to prevail if they are able to show that a reasonable interpretation of the contract would have allowed them to stay on.
Legal Rights and Legal Protections
Whether the employee is employed under contract or at-will, theories of recovery and applicable laws related to termination are very important to understand. They can impact the amount of damages that may be obtained if a dispute occurs and what steps an employer should take in the hiring and termination process.
Employment Contracts
There is a presumption of at-will employment if there is no employment contract, so an employee may try to argue that the parties had a contract, even if there is no written agreement. An employer should take steps to ensure that its at-will employment presumption is not overcome by an employee’s claims that a contract existed. They can do this by stating explicitly that employment is at will in any employment application, offer letter and/or employee handbook. Also, any information in an offer letter, employee handbook and/or other communications should not contradict a theory of employment at will.
For those employees who may be employed pursuant to a contract , there can be various provisions contained in it that are of particular importance. These include:
Assuming a contract does exist, if the employer were to terminate the employee for reasons other than ’cause’, the employer may be exposed to a claim of breach of contract.
At-Will Employment
Common laws related to at-will employment prohibit certain actions by covered employers and require them to maintain certain standards at their workplaces. For example, at-will employees are protected from unlawful discrimination under federal, state and local laws (Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act, and other anti-discrimination statutes), the duty to pay wages under wage and hour laws, unlawful retaliation when engaging in protected activities such as reporting discrimination or sexual harassment, and organizing under the National Labor Relations Act.
Even if the employee is employed at-will, the employer could be exposed to a wrongful termination claim if one of these laws was violated.
Pros and Cons
Contract and at-will employment each has its pros and cons, which affect both employers and employees.
At-will Employment Advantages
At-will employment provides maximum flexibility for both employee and employer. The employee can terminate employment at will with minimal consequences, similarly the employer can terminate employment at any time with minimal consequences. Flexibility and freedom characterize at-will employment.
From an employer’s perspective, at-will status also offers the benefit of limited liability. When a non-contract employee is terminated, any wrongful termination claims are limited. For example, an employee can claim discrimination under Title VII only if the employer employs at least 15 employees. Similarly, a claim for wrongful termination in violation of public policy is limited where employees are employed in an "employment-at-will relationship," because employees are generally free to pursue legal or administrative action to remedy their grievances without fear of retaliatory discharge. In contrast, contract employees are covered by many of the employment discrimination and employment law statutes like Title VII, the ADEA, the ADA, and the FMLA regardless of how many employees the employer employs. Because the benefits for the employer in limiting exposure to liability risks outweighs the cost of hiring a new employee, most employers prefer at-will status.
At-will employment is equally advantageous to the employee. It allows the employee the benefit of having less restrictions and flexibility in terminating employment. However, it is crucial that employees understand that employment at-will comes with limited rights to recourse for unlawful discrimination, unlawful retaliation, and employment related torts – unlike contract employees.
Contract Employment Advantages
Contract employment may offer employees more rights and job security than at-will employment. Depending on the terms and conditions of the contract, employees may have the right to challenge their termination in court. Further, employees may also be entitled to severance packages if the contract includes such terms. In other cases, contract employees may earn higher wages and/or better benefits than at-will employees.
But, contract employment also puts restrictions on the employee that at-will employment does not. Employees are usually required to provide a letter at least two weeks before termination in most contracts. Once the employee submits a letter in termination, he/she is bound to remain in employment until the contract termination date. As a result, employees may be required to work for the entire two weeks even if they were mistreated.
Employment agreements drafted solely by the employee do not offer the same protections as those that offer mutual rights for both parties. Unless the contract is for a specific term, employees cannot assume the contract prohibits an employer from terminating their employment rights if the company has a good reason for doing so. Also, contracts that lack compensation terms (i.e., salary requirements) do not entitle employees to receive severance packages.
In summary, whether a contract employee or an at-will employee, there are advantages and disadvantages to either status. It is essential that employees understand both sides of the equation in order to fully utilize the terms and conditions of their employment.
Choosing your Employment Type
As you consider whether to enter into a contract or at-will employment relationship with a prospective employer, bear in mind the following factors:
Industry Expectations: In some industries, contract employment is the norm, while others are more conducive to at-will arrangements. For example, high-level executives or professionals in fields such as law or healthcare may be more likely to have contract jobs, where a negotiated agreement sets forth terms such as bonuses and severance. Conversely, in the construction industry, it is more common to see at-will relationships, with a simple verbal or written arrangement in place.
Job Security: A contract will typically provide for protections if your relationship with the employer ends before the specified period is over. An at-will relationship may not provide similar protection, and you may be left without recourse if your employment is terminated unexpectedly.
Job Flexibility: Many at-will arrangements are flexible with respect to job duties and the future direction of the company. If you enter into a contract, you may be locked in to duties that become less relevant or even unpopular. Also, if the company changes direction and decides to divest any part of its business, you may not be able to easily transition into another position.
Non-compete or Restrictive Covenants: Employees employed on a contract basis may be subject to non-compete or similar covenants more often than at-will employees. Also, a contract, especially with a high starting salary or equity, may provide heightened exposure to potential breach of contract claims due to the large amount of damages that could be claimed by the employer in such an event.
Most importantly, if you are offered a contract, consider bringing in an attorney to review it. Only experienced legal counsel can evaluate a contract to assess if it offers the level of protection that it should and if there are other negotiated benefits that could be added to the equation.
Conclusion & Final Thoughts
In conclusion, knowing the difference between contract and at-will employment is crucial for anyone engaging in an employment relationship. Contract employees have a clearly defined relationship with their employer, including strict rules for how their employment may be altered or terminated. However, those who work without a written contract may find themselves in a much more flexible arrangement, where many employment decisions are left up to their employers.
It is important to note that most employers are not required to provide their employees with a written draft of the contract , as long as it is clearly defined after employment begins. Having an employment contract to refer to is important, as doing so provides you with protections and rights that would not otherwise be in place.
Therefore, anyone considering a job offer should make sure that they understand the terms of employment that will be expected of them, as this knowledge could help inform their decision in finding the best place for them to work.