Key rights on ending contracts

New York-based lawyer Arnold
Pedowitz, gives an overview of the laws and concepts used in protecting
employers who are considering terminating employees’ posts in the US and the
rules that might make the process more complex than it seems

As a general
principle, while it is a simple matter to terminate an employee’s contract in
the US, the employee rights that may be affected are quite complex.

Such rights may be
premised upon statutory, contract or common law. The law on termination often
varies from state to state and there are federal laws that apply as well.

Employment at will

Most states are
"employment at will" states. In these, an employee serves at the will
of the employer and can be laid off whenever the employer wants to, and no
reason or justification for the action need be had by the employer or given to
the employee.

Employees at will
comprise the overwhelming majority of the workforce in the US and are those who
do not have employment contracts for a definite term and to which no notice
period applies.

While no reason or
notice need be given before laying off an employee at will, employers need to
be cautious in order to avoid falling foul of the many rights that may apply.

The best protection
for the employer is careful risk avoidance termination planning. This means
evaluating the contemplated termination and determining whether the action is
justified and/or defensible and/or potentially in violation of applicable law.

Federal laws

Employees are
protected by federal laws from being made redundant because of their age, race,
colour, religion, sex, national origin, pregnancy, disability, sexual
harassment, for participating in concerted activity (commonly viewed as union
organising but also encompassing other forms of concerted activity).

Also included are
employees taking leave due to a serious health condition or to take care of a
spouse, parent or child, for claiming overtime pay, for refusing to take a lie
detector test, and for having reported violations of federal laws.

They are also
protected from retaliatory terminations by employers who are displeased with an
employee’s having asserted rights, or helped others to do so, under the various

Unfortunately, the
federal laws do not limit the area of concern for an employer.

Each state has its own
laws that may affect an employer’s ability to terminate an employee’s role. For
example, Montana, Puerto Rico and the Virgin Islands have laws that limit the
rights of employers to do this.

In addition, most
states have laws, like the federal ones, that limit an employer’s right to take
discriminatory action against workers.  


The state
anti-discrimination laws may look similar to the federal ones, but they are
often interpreted differently.

The federal law
against age discrimination protects people aged 40 and above, whereas the New
York State age discrimination law protects employees from actions where age
(old or young) is a determining factor.

Furthermore, states
may provide additional protections for employees against discriminatory conduct
by reason of marital status, sexual preference, off duty conduct, jury duty,
whistleblowing, etc.

For those employees who
have contracts, employers need to consider whether a termination during the
term of the contract violates the implied covenant of good faith and fair
dealing, implicates the concept of fraud in the inducement (ie where the
employee is fired a relatively short time after signing the contract or
starting employment and the employer knew at the time of hiring that the
employee’s position would actually be short term) or constitutes just cause.

While employees have
the obligation to mitigate their contract damages, applicable non-compete and
trade secret restrictions may limit a terminated employee’s ability to find
another job.

Contracts should
anticipate the possibility of needing to terminate a post and therefore ought
to be carefully written.

Maximum discretion

From the employer’s
perspective, just cause should be broadly defined, maximum discretion should be
given to management and provisions requiring arbitration should be inserted.

The manner in which
the termination is carried out can be an independent source of liability for an

If an investigation by
the employer served as the predicate for the employer’s action:

– Was it conducted
fairly; or were the results, or the underlying allegations, made more public
than necessary?  

– Did the employer
subject the employee to ridicule or excessive humiliation during the

– Was the termination
carried out in such a way as to injure the employee’s reputation? Actions based
on negligent investigations and/or for defamation in the employment context are
increasing and large judgments have been awarded in some of them.

For employers that lay
off employees improperly, the penalties can be quite substantial.

Depending on the law
or contract that is violated, an employee may be entitled to retroactive
reinstatement, back pay, advance pay, liquidated damages, compensatory damages,
punitive damages, nullification of a covenant not to compete, legal fees, costs
and interest.

While California is
probably known as the jurisdiction with the most multimillion dollar verdicts
for employment cases, they are increasing in frequency throughout the US.  

Challenging status

Finally, while people
may be treated by employers as independent contractors (even having agreements
calling them independent contractors), some people have been successful in
challenging their status both during and after termination.

Where individuals have
been successful, courts have evaluated their positions and services based on
applicable criteria and declared them to have been employees.

In such instances
employers have been found liable for back taxes, past pension contributions and

It is increasingly
common for employers to offer employees a severance package in exchange for a
release of claims.

Such releases have the
effect of facilitating the exit process and of ending the possibility of
employee litigation.

Various laws impact on
the enforceability of such release agreements and it is therefore not
sufficient to simply use a standard form for each situation – careful
consideration should be given to the specific governing federal and state laws
that apply to each case.

Careful planning of a
termination is key and can be the difference between a smooth transition out
and  expensive, time-consuming litigation.

Edited by Clare
Murray, employment law partner at Fox Williams and editor of, Fox
Williams’ online employment law information service

Comments are closed.