What is an “Implied Employment Contract” in California?

An “implied employment contract” in California labor law is an agreement between you and your employer that is not in writing but is instead formed through both parties’ behavior (including spoken promises).¹

An implied employment contract is an exception to the rule of at-will employment in California. The “at-will” rule says that, absent a contrary agreement between an employer and employee, either party may terminate the employment relationship at any time, for any reason or no reason.²

But if an implied contract for continued employment exists, and your employer fires you despite that contract, then you may be able to sue for damages under California wrongful termination laws.

In this article, our California employment lawyers will address the following issues regarding implied employment contracts and wrongful termination lawsuits:

• 1. Implied Contracts
• 2. Proving Implied Contracts
• 3. At-Will Employment
• 4. Remedies
• 5. Statute of Limitations
• Additional Reading

If you have further questions after reading this article, we invite you to contact us at Shouse Law Group.

1. Implied Contracts

An implied contract is a contract (a binding agreement) that is not set down in writing but is instead formed by the conduct of the parties to the contract.³

In the employment law context, an implied contract typically means an agreement by the employer not to terminate the employee from his/her job without good cause.

Under California employment law, the default assumption for employees without an employment contract or collective bargaining agreement is that the employer may fire them at any time, regardless of whether there is a good reason. This is what is known as the “at-will” employment rule.⁴

An implied employment contract is created by conduct, not by a written agreement.

For example, an employer can fire a loyal and high-performing employee and hire someone else to do the same job just because the new person demands a lower salary, or is a friend or romantic partner of the employer.

However, an implied employment contract is an exception to the at-will employment rule. (Other exceptions include wrongful termination in violation of public policy.) Suppose you can show that your employer’s past conduct created an implied contract not to terminate employment except for good cause. In that case, you can sue the employer for wrongful termination if you lose your job in a way that violates the terms of that contract.

2. Proving Implied Contracts

Your employer’s conduct creates an implied contract–that is, its behavior. Thus, the way to prove an implied contract exists between you and your employer is through evidence of the employer’s conduct.⁵

When asked to determine whether an implied employment agreement exists, California courts are supposed to look at all of the circumstances of the employee-employer relationship.⁶

Factors that are often relevant to the question of whether you and your employer had an implied employment contract include:

• Your employer’s general personnel policies and practices;
• The length of time you had worked for that employer;
• Actions or communications by the employer assuring you that you could count on continued employment; and
• Practices of the industry in which you were working.⁷

Example: Chris is a skilled mechanic who works for an auto repair shop that focuses on luxury cars. He does not have a written employment contract. But his employer does have a written “employee handbook” that lists several reasons why employment may be terminated (including improper behavior at work or unsatisfactory job performance).

Chris is considered one of the best mechanics at the shop and has a number of loyal customers who ask for him by name. He has been working at this shop for ten years.

When he and his wife decide to buy their first house, he mentions to his boss that he is nervous about signing up for a thirty-year mortgage. His boss tells him not to worry because his salary at the auto repair shop will guarantee that he can make the payments indefinitely.

One day Chris is fired from his job without warning. He finds out a few days later from an ex-coworker that his boss only fired him because his new girlfriend’s brother is a mechanic and needed a job, and he wanted to give him Chris’s position.

Chris may have a claim for wrongful discharge from his job based on an implied contract not to terminate him except for good cause.

But it is important to understand that, even when there is an implied employment contract, the agreement is usually that the employee will not be terminated without good cause.

This means that your employer probably still had the right under the agreement to fire you for poor performance or violating company rules.

Example: Let’s return to the example of Chris from above. Let’s say that Chris makes a serious error when he is working on the car of a very important customer who owns multiple luxury cars. This error leads to further damage to the customer’s car.

Shortly after, Chris is terminated from his job, and his boss hires the boss’s girlfriend’s brother instead.

Chris may not be able to sue the auto repair shop for wrongful termination in this case. Even though there may have been an implied employment contract not to terminate him without cause, in this case his boss had good cause to fire him.

3. At-Will Employment

An implied employment contract providing that you will not be terminated without good cause is only possible in situations where you are an at-will employee under California default employment law.

But if you do have a written employment contract that specifies that you are an at-will employee, then typically courts will NOT find an implied contract not to terminate you. The written contract will control over any implied employment contract.⁸

However, in some cases, an express at-will employment agreement can be overridden by a later agreement not to terminate employment without good cause.

In these sorts of cases, the later agreement must be explicitly spelled out, either in writing or orally. It cannot be implied by behavior alone.

The employee must also provide some “consideration” for the employer’s new promise not to terminate employment without cause — for example, a promise not to work for a competitor (a non-compete agreement) or a promise not to leave the job until a certain project is complete.⁹

4. Remedies

Suppose you sue your former employer for wrongful termination based on the implied employment contract theory. In that case, the damages you can recover will generally be limited to the value of the implied contract.¹⁰

So the damages for a broken implied employment agreement will consist of:

1. The amount you would have earned from your employer up to the day you receive your court verdict, including the value of benefits and pay increases you could have expected; PLUS
2. The present value of the amount (including benefits and pay increases) you would have earned from your employer from the date of your court verdict for as long as the employment could reasonably have been expected to continue;¹¹ MINUS
3.  The amount you could have earned from other substantially similar employment in the same time periods.¹²

The last item in the list above comes as a surprise to many employees who are suing their employers for breach of implied employment contracts. California contract law requires plaintiffs in contract suits to “mitigate damages” — that is, do their best to make up the money they lost because the other party to the contract broke their promise.

In wrongful termination suits based on an implied contract theory, that means that your damages may be reduced by the amount you could have earned in another job after you were fired, IF your employer can show that:

1. A job that was substantially similar to your old job was available to you; and
2. You failed to seek and retain such a job.¹³

So, for example, if you were wrongfully fired from a job as an engineer despite an implied contract and were unable to find new work in your field, your damages will not be reduced by the amount that you could have earned in a fast-food job. But they could be reduced by the amount you could have earned in another engineering job, IF such a job was available to you.¹⁴

5. Statute of Limitations

The “statute of limitations” (aka the deadline) for filing a wrongful termination lawsuit based on breach of an implied employment contract is two (2) years from the date of your termination.¹⁵

This may seem like a long time. However, it also takes time to do research and gather evidence before beginning a lawsuit in order to make sure that you can put forth the strongest possible case.

Suppose you think you have a case for breach of an implied employment contract against a former employer. In that case, you should contact a wrongful termination employment lawyer as soon as possible to discuss your options and work to gather evidence in your case.

Additional Reading

For more in-depth information, refer to the following scholarly articles:

• Implied Contract Rights to Job Security – Stanford Law Review.
• The Inevitable Demise of the Implied Employment Contract – Berkeley Journal of Employment & Labor Law.
• Implied Obligation of an Employee – Pennsylvania Law Review.
• Implied Terms in the Contract of Employment – Industrial Law Journal.
• The Implied Contract Exception to At-Will Employment – Labor Law Journal.

Legal References: