Employee Contracts in California

Posted in Employer Rights, Employment Law on August 5, 2020

During an economic crisis, employees are understandably focused on retaining their current job. But having a protective employment agreement is always important. Favorable terms in an employment contract can make it more difficult for an employer to terminate your employment without cause, ensure that you receive an adequate severance payment, and secure your family’s health benefits in the event of layoff or other firing.  What are the key features of an employment contract in California, what leverage do you have to secure favorable terms, and how do you make sure that your next agreement gives you the rights you need to survive the next economic downturn?

Is California an “at-will” employment state? 

California is an at-will employment state. This means that, in California, an employee can be fired for any reason or no reason, with or without notice. There are three exceptions to this rule. First, unionized employees covered by a collective bargaining agreement have the right to challenge a termination as unfair. Second, both union and non-union employees are protected from being discharged for unlawful reasons. For example, an employer may not fire an employee because of her protected status (i.e., her race, gender, or sexual orientation), or in retaliation for having objected to unlawful conduct in the workplace. Third, a non-union employee may negotiate an employment agreement that limits her employer’s right to fire her or gives her certain benefits in the event she is discharged without cause.

A California employee’s rights under an employment agreement are generally governed by California contract law. There are exceptions. Certain benefits (for example, rights under retirement or welfare benefit plans) are governed by the federal Employee Retirement Income Security Act (ERISA), and Internal Revenue rules govern the tax treatment of payments made under an employment agreement.

So what are the key terms to include in a California employment contract?

The Right to Termination for Cause or Quit for Good Reason

A foundational employee-protective feature of an employment contract is the right to separation by the employer for Cause or by the employee for Good Reason. A Cause provision in an employee contract does not prevent the employer from firing an employee without Cause, but it does trigger certain payments to/benefits for the employee. For example, an employer that fires an employee without Cause might be required to pay the employee a certain number of months of severance pay. Similarly, a Good Reason provision in an employment contract may provide for certain benefits payable to an employee who chooses to leave employment because the employer has diminished her scope of responsibilities or reduced her pay.

An employee negotiating a Cause provision should work to achieve the narrowest possible definition of Cause. Ideally, “Cause” will be limited to theft, fraud or embezzlement, or a conviction/guilty plea on a criminal felony charge. Termination for any other reason will entitle the employee to certain benefits, including severance pay or stock vesting.

Fixed Term of Employment

An employee may also negotiate an employment contract with a fixed term of employment, subject to renewal. With the right language, an employee may be able to ensure that she is paid out on the contract in the event of early termination.

Other Benefits

Certain employees, including executive and C-Suite employees, may be able to negotiate additional benefits above and beyond those provided under company policies. Such additional benefits may include a car allowance, sign-on bonus, tax equalization (for globally mobile employees), relocation benefits, enhanced severance, flight enhancement (i.e., guaranteed business or first class travel), executive financial planning, and outplacement services in the event of termination.

Contract Provisions to Avoid

An employer will often try to insert provisions into an employee’s contract that are unfavorable to the employee. California employees should beware of provisions that: require you to bring or defend any claim in a court or arbitration proceeding outside of California; prevent you from competing against your employer after you leave employment; or have you give up rights under California law (for example, by agreeing to apply the law of another state to any employment dispute).

What to Do When Your Employer Breaches Your Contract of Employment

If all you have is an offer letter containing your starting salary, general employment benefits, and at-will employment status, there is no meaningful contract for the employer to breach.  An employer may reduce an at-will employee’s salary or rate of compensation whenever it feels it is appropriate. An employer may also impose a cap on accrued vacation or paid time off (although it may not require the employee to forfeit vacation wages already earned) or change other employment benefits in accordance with plan terms. However, if you have negotiated a strong individual contract, with a right to “For Cause” termination, the employer may be liable for breach should it refuse to pay you benefits owed under the contract. In that case, it may be time to find a lawyer to protect your rights.