What Is Considered a Breach of Employment Contract?
A breach of an employment contract occurs once a party fails to perform their obligations according to the terms and conditions of the contract. Every employment contract contains express and/or implied terms and conditions of employment. The express terms are the provisions agreed to by the employer and employee that forms the contract; and the implied terms are those terms that are understood to be part of the contract by virtue of custom, practice or statutory requirements. When either the employer or the employee breaches the terms or conditions of employment, they expose themselves to claims by the other party.
A common breach of an employment contract by an employee is where the employee leaves their employment without providing the requisite notice period in terms of their employment contract. Leaving employment in breach of contract exposes the employee to an action for damages by the employer. Damages in this instance would be calculated by the employer’s loss as a result of the employee’s breach of contract. An employer would claim, as damages, the amount of remuneration that it would have paid the employee over the notice period the employee failed to work in compliance with the contract of employment. The contract of employment may not contain a provision that the employee forfeits his/her annual leave entitlement if notice is not given. An employer will not attempt to deduct the amount of money relating to the entitlements from the employee’s terminal benefits , as the claim that could be made for unpaid notice would not be offset.
The failure to comply with an employer’s guidelines, policies and procedures may also amount to a breach of contract. For example, where an employee has breached the company’s code of ethics by soliciting or accepting a bribe in the course and scope of employment. This may constitute both misconduct that may lead to the dismissal of the employee, as well as a breach of contract. In the latter case, dismissal would not be the remedy available to the employer. The employer could sue the employee for damages in relation to the consequences of the breach.
An employee’s breach of the implied terms of the employment contract is one that may lead to a claim of constructive dismissal, or even dismissal by the employer. An employee may also be held liable for damages caused to the company’s reputation and goodwill, for example, where he/she has unemployed confidential information regarding the company’s technology secrets in breach of the implied term of the contract of employment that employees should keep the employer’s confidential information confidential.
Employers’ Legal Rights When an Employee Breaches a Contract
Employers often find themselves impacted by the actions of those employees who (in one way or another) violate the terms of their employment contract. Depending on the severity of the breach, an employer’s options increase accordingly. For the most part, the primary options are two-fold: seek injunctive relief that will preserve the defendant’s obligations under the contract; and seek money damages.
Injunctive relief can be used to restrain the employee from some form of damaging property or confidential information, or otherwise violating the agreement, until a final determination on the merits can be reached. The employer may also seek a temporary restraining order to preserve certain property, assets or records, but relief of this type is only permissible on a showing that the employee (or defendant) had a specific intention to destroy or conceal evidence in order to prevent an arbitration, 1 Log Cabin Drive, LLC v. First Tennessee Bank Nat. Ass’n, 2010 WL 3237103, at *5 (Tenn.App.), perm. app. denied (Tenn., Oct. 19, 2010).
It is important to note that injunctive relief does not require an actual, or imminent, breach of the contract. Hughes v. Long, 248 Ga. 443, 445-46, 283 S.E.2d 468, 469 (1981) (factors to consider in determining whether injunctive relief should be granted on employee contract breach claim: (1) whether there will be irreparable injury to the party seeking the injunction; (2) whether the party seeking the injunction has a legitimate arm’s length contractual right in the subject matter of the litigation; (3) whether there exists an actual controversy between the parties; (4) whether the party seeking the injunction will be irreparably injured without it; (5) whether the irreparable injury to the party seeking the injunction outweighs any harm to the other party as a result of granting such relief; and (6) whether granting the injunction will benefit the public interest.). Additionally, where an employee’s employment with the company is governed by the contract, the employer may enjoin the breach of the contract under Georgia law. The non-compete agreement is a restraint of trade that requires the employee to keep the employer’s secrets confidential and not work for a competitor in an area within the United States of competing businesses for a period of time after leaving the employer. Such obligations prevent interference with, and damages to, the employer’s good will, trade secrets, customer relations and infringement on the employer’s intellectual property. Georgia Fed. Bank, FSB v. Luthringshausen, 213 Ga.App. 330, 331, 444 S.E.2d 859 (1994).
If the employer does not choose to seek injunctive relief, seeking money damages for breach of contract may also resolve the problem. At the outset, it should be noted that if the employee (or defendant) does not pay the judgment, the employer may execute on the employee’s property, funds, bank account, etc. However, if the employee performs services for the employer during the period of time covered by the contract and refuses to work, the employer may continue to pay the employee his/her wages. In this context, the employee’s performance of the construction project – even if specifically in breach of the contract – may entitle the employer to offset against, or reduce, the damages awarded by the jury.
On the other hand, where the breach of the employment contract is intentional, the employer should be able to recover attorney fees incurred, not only in the prosecution of the breach of contact action, but also in the potential collection of the judgment itself.
Risks or Penalties for the Employee
When an employee is in breach of an employment contract, whether that be by resigning before the end of the notice period, or by taking confidential information before leaving the role, there are two potential consequences for an employee: Liability and Damages.
Liability
The employee may be liable to the employer for costs incurred as a result of the breach, such as the cost of finding a replacement and any lost business they may have suffered. Again, this will vary upon the employee’s role and the seriousness of the breach.
It may be that the employee has breached specific obligations under the contract, such as confidentiality. An example of this would be if they disclosed sensitive material via social media to competitors such as in the case of a former employee of Moet Henessy recently, who posted confidential marketing information to his Twitter page. There could be a significant amount of money that the brand has spent on building its social media profile and bringing customers to it in a way that makes its content unique and recognisable. The employee’s actions in breaching an express term of his contract, despite it being done in what was described in news reports as an "innocent" way could be damaging to the brand and could have cost the brand thousands if not millions in lost business. It is this motive that would mean the damages would be sought by the company as a reflection of the damage done to the brand through the employees actions.
Sometimes it is clear from the employee’s actions that they have acted with a positive intent to cause harm to the company, and in such a case, an injunction may be sought to prevent further breach. Where the possibility of additional breaches exists, the employer may seek an injunction to prevent future breaches.
The amount of damages the employee could be liable for varies and is usually at the discretion of the judge. The Judge may consider whether the breach has caused loss to the employer, and will consider whether the breach prevented the employer from carrying out its services or getting new business that it could otherwise have done, had the breach not occurred. The judge will also consider whether the conduct was deliberate, how long the employee deliberately breached the restrictions placed upon him and whether there are circumstances where the employee believed that what they were doing was in the best interest of the employer.
There is also the possibility that the employer will seek injunctive relief, this occurs when an employee discloses confidential information, such as trade secrets. In such circumstances, the court is asked not only to award damages to the company for the financial cost of the breach, but also to prohibit the employee from continuing their contract. An interim injunction (a temporary injunction until the hearing date) can be sought before the breach occurs to try and stop it from happening, if the breach has already taken place, an interlocutory injunction (a permanent injunction) can be sought.
The conceding of interim injunctions in these situations is rare unless the threat of a breach is imminent, if an interim injunction were granted, it would usually continue until the final hearing.
Employees’ Defenses Against a Breach of Contract Claim
Although it is difficult to definitively prove or successfully defend a breach of contract claim, there are common arguments employers and employees use in asserting as a breach of contract or defending against one.
First, an employee may allege that the contract is void, not supported by sufficient consideration. In order for a person to be bound by a contract, there must be consideration. Consideration is something that is given by one party to a contract in exchange for something from the other party. Thus, if an employee signed an employment agreement but did not get anything in return for his or her promise to work for the employer such as a payment or benefits, a court or arbitrator may be asked to find that the contract either had no consideration or it is a "restrictive covenant." A restrictive covenant binds one party to a contract so that it cannot do something that is part of its legal rights. This is a common clause in employee contracts and many states strike down restrictive covenants if they are not reasonable. All contracts with restrictive covenants must be limited in time, geographic location and scope.
Second, an employee may allege that the employer breached the contract first, thereby excusing its performance. For example, if an employee is hired to work the night shift, but his or her employer routinely schedules them for the morning shift, then the employee may be excused from coming to work.
Third, an employee may claim that the contract was not specific enough to hold him or her accountable for the breach. In order to be enforceable, a contract must be definite in its terms. It must be clear what is required under the contract. Be wary of any vague terms or conditions in an employment contract. It is better to delete them than have them in the contract.
Actions Employers Can Take to Mitigate Risk
Employers can help mitigate losses that flow from the breach of an employment contract through planning and clear communication with employees. For example, a company can clearly communicate to all employees its entitlement to unpaid amounts by way of contractual stipulation and policy, and plan for such contractual enforcement in its budgeting and organizational decisions. Additionally, at the time of hiring, companies can take a more proactive approach and provide all employees with a copy of their contract and/or policies before they commence employment and, where relevant, have employees acknowledge receipt and understanding of the document. Such steps will aid in demonstrating to a court that the employee was aware of his/her obligations under the contract, and, in particular, the employer’s rights to withhold amounts owing to itself.
Another avenue to addressing employee breaches of employment contracts is to ensure employees are regularly trained on their contractual obligations. This can be achieved through an employee manual or by a contractual "deeming clause" that provides that all employees are deemed to have agreed to the policies effecting from time to time. It is important that all policies offered to employees be consistent with the provisions of their contracts of employment. The training will serve to reiterate to employees their obligations, make them conscious of their duty of good faith and fidelity to their employer, and present a moral deterrent to engaging in conduct that would be contrary to the employer’s interests .
Where an employee has committed a contractual breach, the employer must properly document and communicate with the employee on the issue of the breach itself and the potential consequences. Termination is an extreme step, and of course it is preferable not to discharge an employee for a minor incident. However, when faced with an egregious contractual breach, it is important for employers to clearly lay out how the specific misconduct constituted a breach of the employment contract. Documenting the events is important in aiding the employer in demonstrating to a court that the breach occurred, and that the breach was the result of a deliberate course of action, rather than a confused or misunderstood aspect of employee responsibilities. Further, where an employee has decided to leave his/her role with the expectation of working throughout a notice period, documenting any refusal to honour that notice will assist an organisation in making a claim against the employee for that amount. Finally, the employer should speak to the employee directly in addition to documenting the events, and confirm their understanding of the situation. In this context, the oral representations made by the employer will bolster his/her position that the breach was deliberate, and further show that the employer attempted to come to the employee with an understanding of the relevant facts before bringing a claim against the employee.
Case Examples and Scenarios
Real-world examples and case studies for employee breach of an employment contract
The Henkel GmbH v Rodarte example; Henkel is a large, international consumer product and chemical manufacturer based out of Dusseldor, Germany. In 2004, a woman, Rodarte, was hired as a long-term sales representative for the company in the State of California. A couple of years later, Henkel imposed a 1 year non-compete restriction, which Henkel argued focused on the trade secrets and customer relationships to which Rodarte had access as a sales representative. The sales requirement stipulated that any agents wishing to leave the company must provide 30 days notice and a "firm termination date". Rodarte provided her official written notice of termination to Henkel and it was accepted by Henkel under the terms of the agreement. In response to the restriction, Rodarte maintained that the restriction did not protect Henkel’s legitimate business interests, Rodarte did not have any customer contacts and that Henkel failed to consider competing companies in California when devising its requirements and information regarding the Goodyear tire company. Of note, Henkel did not seek an injunction or further injunctive relief, but instead went after Rodarte for lost profits, business damage and a breach of reimbursement provisions for training. Conclusion California law stipulated fewer limitations on non-compete laws and prior laws than the common law trade secrets law while also allowing damages for loss of profits for competition. Leaving the lawsuit in public caselaw, rather than legal restrictions or limitations for future lawsuits. The Morgan-Gardiner v CIES Ltd case; Although somewhat similar to the Henkel GmbH v Rodarte scenario, the Morgan-Gardiner v CIES Ltd situation has proven to be a warning to other employees regarding the aftermath of a breach of an employment contract. In 2010, Morgan-Gardiner was fired from his position at CIES Ltd. Prior to his dismissal, CIES had applied multiple restrictive covenants to Morgan-Gardiner, at the 2nd or 3rd extension of their employment. Morgan-Gardiner then pursued Morgan Gardening Pty Ltd (his new employer) and sought equitable relief on the grounds that such provisions were against the public interest. Following this, Morgan-Gardien submitted an application for relief under the Competition & Consumer Act 2010 (Cth). Morgan-Gardiner was unsuccessful on both claims with the judge ruling against him. This was primarily due to Morgan-Gardiner having ‘resigned’ (if only for 3 days) before being terminated, which under the unfair dismissal act would have barred him from rectifying his claim against his former employer. The common law applied in this instance because Morgan-Gardiner did not make a claim under a contract of employment, but rather as an employee of the state. His former employer countered Morgan-Gardiner with their own argument to the effect that he had acted contrary to his obligations at his previous workplace. Yet both parties got off scott-free, bringing to mind the adage that there are no winners in a court of law. Conclusion As stated previously, any judgment made under the Morgan-Gardiner v CIES Ltd complaint would have been less restrictive under the Commonwealths’ laws than those of the state, however the courts both referred to Australian courts with more of an emphasis on what may arise in the future.
The Role of Attorneys in Breach of Contract Situations
Legal counsel plays a significant role in breach of contract cases. At the outset, they will explain your legal rights and obligations to you. If you have been accused of a breach, it is critical that you get some legal advice, even if it’s just to know how serious the situation is. If someone has breached their contract with you, a lawyer will help you understand what remedies you may be able to access, how best to pursue them, and how strong your case is. In some situations, parties will negotiate immediately, while in others, there may be substantial grounds to dispute the allegations. A lawyer can help on all fronts.
They will also be able to help you navigate the law as it relates to employment contracts in British Columbia. For example, if you would like to terminate an employee , you may not know exactly what grounds you would have to term the contract right away or what your obligations would be as an employer in such a situation. A lawyer will provide clarity on this. They can help you decide whether you would be better off offering the person more advanced notice of termination or terminating their employment contract immediately. Drafting a legal document looks much different for an employee subject to "just cause" than if it is an "at will" contract. If your contract specifies a probation period, for example, you may not be liable for any pay beyond the probationary period.
Consider a situation where an employee breached his or her agreement with your company. If the breach was substantial, we may serve them with a Notice of Termination for Cause. Or we may wish to file an Injunction. Or we may be able to Serve them with a Federal Court Order. Having counsel in such a situation would be extremely helpful.
In situations where contractual breaches do go to trial, an attorney can best represent your interests in front of a judge, as most of them are well-versed in litigation. Even if they prefer not to litigate, they may find court handy when setting a precedent in your favor. Whatever the need, a legal representative will be there to protect your interests and act quickly.