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Implied contracts complicate employment relationships

Maybe it feels like you’re signing contracts more often all the time. What’s changing may be that businesses are learning to “get it in writing,” creating a paper trail in case of later disputes.

But many contracts are still unwritten, unspoken and usually even unnoticed. Many such “implied contracts” are just as enforceable as air-tight, written, signed, witnessed and notarized contracts.

Implied-in-law contracts

First, consider an implied-by-law contract. Michigan law, as in most states, presumes employment to be “at will,” meaning that the employee is free to quit whenever they wish, and the employer can terminate the employment whenever they wish.

So, when an employer tells you “You’re hired!” there’s an implication that you’re free to go any time and the employer is free to let you go at any time. It’s an implied-by-law clause, even in verbal contracts.

(Obviously, various exceptions apply, such as when immediately quitting may endanger public safety or when the firing discriminates based on gender, race, etc.)

Implied-in-fact contracts

An interesting case arose a couple years ago in California (also an at-will state), and it illustrates the difference between two kinds of implied employment contracts.

A bookstore’s employee handbook outlined the disciplinary process applied for employees with performance or conduct issues. A separate discussion described termination with no disciplinary process for very extreme performance or conduct problems.

One employee with relatively minor issues was simply terminated. She and her attorneys argued that the bookstore had, through its handbook, had promised to follow its disciplinary process before an employee could be fired.

It had opted out of the “at-will” rule (which companies can do in California) and the woman was therefore wrongfully terminated.

The appeals court agreed that, due to the handbook, an implied-by-fact contract had been struck committing the bookstore to abide by a rule other than “at-will” employment. The case had to go back down to a lower court.

It’s not clear whether the bookstore had consulted an attorney to review the handbook before it was issued to employees. If they had, an attorney might have cautioned the store not to enter into this implied contract unless they intended to.

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