What is an implied contract?
An implied contract is an agreement that an employer enters into with an employee based on their previous interactions and the general conditions of employment. While many employers automatically have at-will employment agreements where companies can terminate employees for any non-discriminatory reason, implied contracts can develop over time and give employees additional rights. Unlike express contracts, which are written and verbal agreements with specific terms, implied contracts create obligations between employers and employees through employer behavior and mutual trust between both parties.
Types of implied contracts
There are two main types of implied contracts that can impact the workplace:
1. Implied in-fact contracts
Implied-in-fact contracts happen when employees can reasonably infer the conditions of their employment based on the role they serve to their employer and how their employer treats them. For example, consider a building manager who regularly hires the same safety technician at $25 per hour for their services. They send the technician a text asking for additional help this upcoming weekend, but they only pay the contractor $15 per hour. Although the technician may not have an official employment contract for that service, they could reference their past professional agreements to prove an implied-in-fact contract and seek additional payment.
2. Implied-at-law contracts
Implied-at-law contracts occur when an employer has a legal obligation to their employee due to laws about workplace practices. Implied-at-law contracts usually revolve around labor laws, such as employers being obligated to give non-exempt employees overtime pay if they work more than 40 hours per week. Even if the employee says they do not want overtime pay, the employer would be violating their implied-at-law contract if they did not pay time-and-a-half for the extra hours they worked.
Factors that contribute to implied contracts (with examples)
Several factors can establish an implied contract with an employee. Some of the elements that can directly result in an implied contract are:
Promise of job security
Leading employees to believe that they have job security is one of the primary ways you can form an implied contract with your employee. Comments about how your employees don’t have to worry about losing their jobs or discussions during an interview about how you expect them to stay for a certain amount of time could create an expectation that they have a promise of employment that you would then be unable to violate.
For example, if you tell an employee during an interview that they can always keep working as long as they perform well, you could unintentionally create an implied contract. Despite the lack of specific terms about the employee’s job security, this could make them reasonably trust that they have a permanent place of employment with your company.
Employee handbook policies
Your employee handbook has the potential to create implied contracts if it includes information about when employees can expect raises and promotions, what actions can result in termination or other employment conditions and terms. One way to avoid creating an implied contract with your employee handbook is to include a waiver explicitly stating that all employment is at-will.
For example, if your employee handbook states that all employees can get a raise once a year, an employee could file a complaint if they did not have a discussion about a possible raise at their yearly performance review. They could argue that not being considered for a raise violates the implied agreement of the handbook.
Length of employment
The length of someone’s employment with your company can unintentionally create an implied contract. If you demonstrate to employees that have been employed for a long time that you only terminate employees for good cause, those employees could claim an implied contract that prevents you from firing them without a specific behavioral violation or failure to meet expectations.
For example, consider that you had an employee who worked for you for the past ten years. During that time you only fired employees who expressly violated company policies. You decide the employee is not a good fit and fire them. They can claim that your past behavior, along with their promotions and growth at the company, created an expectation of job security.