What Constitutes A Breach of an Employment Contract?
Breaches of contract in the employment context are a legal violation of an agreement that involves the elements of an employer/employee relationship. The breach usually occurs when either of the parties involved fails to fulfill the commitments of the employment contract.
A breach of contract in employment could arise when an employer does not pay the employee wages, alters the terms of the company policies or disregards the terms of a company agreement.
Example: An employee is offered a position with an annual salary of $60,000 and told at the time of employment that if he meets or exceeds his yearly quota of 5,000 units the company would provide him with a commission of 10% on all sales above 4,000 units. The employee works for the company for two years, increasing his quota year after year, bringing in an additional $600 , 000 in sales for year 2. The employee exceeds the 5,000 unit quota and should receive a $6,000 commission. However, the employer reneges on its verbal contract and refuses to pay the $6,000. Not paying the commission violates the company’s verbal contract and is considered a breach of contract.
Conversely, a breach of contract could occur when an employee does not fulfill his/her obligations under the contract. An employee’s failure to perform under his or her contract terms means they have breached the agreement. For example, an employee may have an obligation to work a certain number of hours, leave the office within a certain time frame, or acknowledge corporate intellectual property as an asset belonging to the company.
Example: The employee in the situation above fails to meet the yearly quota and the company suffers a $600,000 loss because of it.
Causes of Breaches
Breach of contract in the workplace can manifest itself in many forms. Perhaps the most commonly seen breaches in employment contracts involve salary. An employee may have a contract guaranteeing them X amount of income, and their employer pays them less than that. This is a relatively straightforward situation where the employee stands a solid chance of recovering the income they are owed, as well as attorney’s fees and possibly even punitive damages.
Occasionally, the breach in an employment contract will take the form of wrongful termination. This may be more complicated than initially may seem, as just because an employee’s contract has been broken does not mean that the employee is automatically entitled to punitive damages. According to Texas legal precedent, a breach of contract action entitles a plaintiff only to the actual damages (the dollar amount that they lost in their salary, dividends, etc.), and nothing more, unless fraud or malice factor into the mix of the issue. Even in cases where the plaintiff believes that punitive damages are warranted, they would need to go through the lengthy process of suing for both breach of contract and a new independent claim of wrongful termination.
Also, an employee’s contract may be breached by the violation of workplace policies. If an employee signs an agreement with an employer stating that they will not take part in certain actions (such as inappropriate relationships with co-workers, business practices like misappropriation of trade secrets, etc.), and the employee participates in these actions, or the employer protects employee’s who violate these agreements (and thereby protect the guilty party from punishment), the employee may very well have a legitimate reason to file a breach of contract lawsuit against the employer.
In these situations, documentation that supports or undermines the assertion that there was a violation is necessary to prove the claim. A violation of the sexual harassment policy, for example, may be backed up with notes and/or witnesses that can corroborate any allegations of what occurred, while an employer’s failure to pay an employee who has signed a contract for a certain income will likely be verified by pay stubs. With the right information and the help of an attorney, an employee wronged by their employer may be able to successfully sue for any breaches of contract that left them out of pocket.
Employee Breaches v. Employer Breaches
The distinction between an employee breach of contract and an employer breach of contract can often be critical. If your employer has breached the employment agreement, you may be entitled to extra damages in some cases (discussed below), for an employee breach of contract there are no extra damages as an employee has no duty to mitigate their damages. However, this does not lessen the importance of proving that the employment contract was broken. If you are an employee that has suffered from an employee breach of contract you may be able to receive extra damages dependant on your case.
When considering an employee breach one can look to the traditional sense of contract law. The breach at issue must be more than trivial and it must have resulted in harm to the innocent party in order for the action for breach of contract to be successful. It is important to keep in mind that not all breaches will result in damages suffered by the innocent party. A finding that the innocent party has suffered loss is very important for any breach of contract action.
Numerous courts from the Federal and Provincial level have held that an employer must take steps to ameliorate its harm and avoid excessive expense. However it is important to note that an employee has no obligation to take steps to mitigate his or her damages where the employer has committed a breach of contract.
The following are some acts which may be a breach of a contract of employment:
When considering an employer breach of contract courts have held that an employer has more than just an obligation to pay the employee at the end of employment. Some examples of breaches of contract committed by an employer include:
It is important to recognize that an employee is required to mitigate their damages when an employer has committed a breach of contract. If you are wondering what a reasonable effort could look like consider the following scenarios: An employer will be expected to provide references in order to assist the employee in obtaining new employment. Damages for a breach of contract as a result of lack of reference may be awarded where the employer had a duty to mitigate.
Actions of an employer upon termination can rise to the level of a breach of contract. Some of these actions include an employer refusing to pay an employee an earned bonus or declining to provide an employee with a reference for a forthcoming job.
Consequences of a Breach
Consequences of breach of contract in Employment
An employee or an employer may choose to issue court proceedings for breach of the contract of employment. The remedy that the employee may be awarded by the court will depend on whether the contract was for a fixed-term or a permanent period of employment, and on the court’s powers to grant a particular remedy in the circumstances of the case. A court does not have the power to issue an order for specific performance (as opposed to issuing an injunction) against an employer when it is contempt of court for any employee to work with the express or implied authority of his employer from whom he has received notice of dismissal or who has given him reasonable cause to believe he will be dismissed. The entitlement to compensation for the loss of earnings following the breach of the contract depends on the period for which the employee or the employer has agreed to continue working. If a contract of employment has been breached pre-maturely, an employee will most likely sue his employer for the loss of his earnings during the notice period. If an employee has breached a contract and has left his employment, the employer may sue for the salary for the notice period provided that the employer has fulfilled the duty to mitigate losses. Compensation for loss of earnings is calculated by determining the amount of earnings which would have been earned during the period in question; and deducting from it any amount actually earned during this period from alternative employment. The court also has the power to reduce the amount of any loss suffered by the innocent party on the ground that he should have made more efforts to mitigate this loss. Both parties to an employment contract are obliged to act in good faith towards each other. Thus, when considering a remedy for breach of a contract if it is held that one of the parties has acted in bad faith towards the other , the remedy granted will be reduced in order to reflect the fact that the party in breach has behaved badly. Even the innocent party who suffers the loss and is entitled to a remedy may lose part of that remedy where it is shown that he failed to act reasonably or in good faith towards the other party. An employee who has suffered a serious breach of trust and confidence by the employer may apply for a stay of his obligation to perform duties under the contract and obtained an injunction requiring the employer to restore the previous relationship of trust and confidence until it is clear whether the employee intends to exercise his right to terminate the contract. Where this relationship is incapable of being restored (as in the case of gross misconduct or serious breach of the contract by the employer), the employee will most likely elect to quit the contract and claim constructive dismissal. If the employer is in breach thereof before the employee has performed the contract and has not yet been paid for it (as it becomes due), the employee can sue the employer for the payment of an unpaid fee. In South African law an employee can also cancel the contract of employment if and when it is evidenced that (i) an insolvent employer continues in business without providing security, or (ii) the employer becomes insolvent or his estate is sequestered, or (iii) the employer assigns the business (or a major part thereof) to another person, or (iv) it is proved that the employer has given away the business of the employer; and (v) such breach of the contract of employment constitutes a fundamental breach thereof. When the employee decides to treat the contract of employment as having been repudiated by the employer, he will be entitled to payment of his remuneration from the date of the unlawful cancellation of the contract which may extend to the equivalent of the notice period. The employee or the employer may also be found guilty of deliberate repudiation which occurs when either of the parties to the contract acts with the intention of bringing the contract to an end before its normal expiration by doing something contrary to the relationship it created. An employment tribunal has the jurisdiction to award either the statutory maximum award compensation (to a maximum of £74,200) or the actual loss suffered by the employee of the contract of employment, whichever is lesser. Either of the parties may negotiate a conciliatory settlement within the limits of the minimum statutory award that is $8,000.
Responding to A Breach of Employment
In practice, breaches of contract, including those arising from employment agreements, are very common. When a breach occurs, it is typically in the best interest of the employee or employer to attempt to resolve the issue outside of the courts. To do so, the aggrieved party could begin by communicating directly with the breaching party to discuss the issue and identify an acceptable solution. It may be helpful here to keep in mind that all contracts between an employer and employee contain an implied term of "trust and confidence" – the duty of employees to perform a contract and the duty of employers to treat employees fairly.
The breaching party, in turn, may offer to remedy the breach depending on the circumstances. This may involve providing compensation for lost wages or reinstatement in cases of an employer dismissing an employee. If this does not result in a resolution, mediation or another form of alternative dispute resolution (ADR) may be the next step for the aggrieved party to pursue. In this way, parties can resolve their dispute with the assistance of a neutral third party. Notably, the decision to keep the resolution private rests with the parties rather than the court, allowing the parties to avoid the public scrutiny of litigation.
If a resolution cannot be reached, the party aggrieved by the breach of the contract may wish to consider taking action in court. A successful action following a breach may result in the employee or employer receiving compensation for their economic losses, loss of reputation, and/or any other harm they suffered because of the action. In reality, however, it is not always practical for parties to pursue a breach of contract action due to the resources it requires. Because of the resources needed, and the potential for negative publicity, parties may instead elect to proceed by way of settlement or negotiating the terms of their agreements with the intention of avoiding a breach of contract action entirely.
Avoiding Breaches in Employment Contracts
To prevent potential breaches of employment agreements, careful attention must be paid to the drafting of these agreements as well as to their regular review. Specifically, employers should ensure that they fully understand the terms and conditions they require their employees to follow. Given the complexity of such agreements, it is often beneficial for companies to have any agreements reviewed by legal counsel to minimize the risk of unanticipated legal issues arising down the road.
In addition to drafting clear contracts and having them reviewed by legal counsel, it is important for employers to have regular discussions with their employees about their contract terms. Regular meetings, training and other general discussions can often eliminate confusion over contractual obligations and key responsibilities that may result in a breach of contract . For example, an employee may inadvertently violate a non-competition clause at the end of the employment contract by continuing to work in a similar position for another company. This could result in a breach that could have been prevented if the non-competition obligation had been discussed with the employee in advance. Where contracts are drafted to comply with the many provisions of the Employment Standards Code, other legal requirements, and to reflect workplace standards, the risk of costly litigation and shared losses can also be reduced. Finally, keeping contracts up-to-date ensures that all the terms and conditions are reflected in the agreement and protecting yourself from any reliance on "prior agreements" that may have occurred over the course of employment.