Understanding Employer Breach of Contract
Employer breach of contract is a term that refers to the failure of an employer to honor a contract of employment. This could either be in relation to a contract for a dotted period, such as a settlement agreement, or an employment contract lasting for the indefinite term of employment.
Whether it is a written or a verbal contract, an employer can open themselves up to a breach of contract claim if an employee is dismissed without the necessary contractual or statutory notice period. This applies even if they enter into a settlement agreement during the notice period without certain clauses included.
A breach of contractual terms can also occur if an employer has made any express or implied contractual promises made to their employee, such as a right to a bonus, and fail to honour that .
If an employer is found to have breached a contract of employment, an employee can make a legal claim against them. This can be made through litigation in the courts or as a claim for a remedy in the Employment Tribunal.
In most breach of contract claims, the primary remedy is an award for damages (essentially monetary compensation) to make good the loss caused by the employer’s breach. As the loss caused by the breach is likely to be financial, the tribunal/court will not look to penalise the company for breach of contract by granting an injunction, for example, but look to put the employee in the same position they would have been had the terms of the contract been met.
Not Paying a Contractual Wage
It is commonplace that an employer and employee will agree on the level or rate of remuneration to be paid to the employee. The failure of the employer to pay that remuneration is an obvious and serious breach of the employment contract.
Any deduction from the amount payable to the employee, whether by way of deduction of tax or otherwise, must only be in accordance with law or the terms of the employment agreement agreed to by the employee. The employer must give the employee as much prior notice as possible before it makes any deductions from wage payments. This is the subject of Clause 4.2 of the Fair Work Regulations 2009 (Regulations). It has been held that to make a deduction in the absence of the employee’s consent, even if the deduction is in terms of the employment agreement, is a breach of contract.
An employer may, through say some administrative error, pay less than was agreed. The employee will have to assume that this is the cause of the error and, simply because of the failure to pay the correct amount, take no further action.
If the error continues or appears to be intentional (which would be difficult to imagine) then the question arises as to whether the employee is able to insist upon payment of the contractual salary or whether he is required to continue to work under the impression that it will be rectified. In Renard v Epson [1992] 4 VR 76 the employee was in breach by failing to give the requisite notice of termination but nonetheless he was held not to be in repudiatory breach because the question yet to be determined is whether a breach has occurred. In that case the question was whether his employment had been validly terminated. The Arbitrator had earlier considered that the employee was technically in breach but the employer had itself breached the contract because of its failure to effect payment of the monthly salary. The rejected appeal was said to be on the basis that the employer "was not guilty of breach of contract which gave rise to a right to end the employment relationship".
The position following Renard v Epson as to whether an employee may treat minor breaches by the employer, which in themselves do not amount to repudiation, as entitling him to terminate the contract, then take a redundancy or enact a similar right of opting out or seeking to claim an entitlement to damages, should be assessed with the above cases in mind. Circumstances which may lead the finding of a breach of contract may not be sufficient to justify the alleged repudiation or termination. That is, the conduct of the employer does not need to be sufficiently serious to constitute a repudiation in order for an employee to be entitled to choose to terminate the contract.
The principal remedy for an employee faced with a breach of contract would usually be to claim further damages, but if the breach affected pay, the employee may well be tempted to protest against the breach and insist upon performance of the contract while continuing to work under protest. He is faced with an undoubted dilemma that he must accept the breach and claim damages for it whilst at the same time insisting upon performance. As the employer is in breach he may be forced to take action for rescission, to recover damages or seek performance. The employee may also claim detriment as a result of the breach.
Illegal Job Termination
An employer also breaches an employment contract when it terminates an employee without cause. Although the contract itself may provide for the employee’s dismissal for cause, in some cases, an employer will terminate without the requisite level of cause. An employer can also breach a contract by failing to provide the notice of termination as set out in the contract. Courts will not generally accept an employer’s argument that it did not realize it’s conduct constituted cause. If the contract sets out the notice period, an employer will also be required to provide that notice even if the breaks in service were short and infrequent, rather than consistent and on a linear basis.
Where the employee has been wrongfully or unjustly dismissed, the employee may be entitled to damages. Although the court will primarily look to inspecting the contract and examining the intention of the parties to determine the applicable notice period, the courts have additionally considered the nature of the employment relationship in determining the amount of notice or pay in lieu of notice that the employee ought to receive as part of the severance package. Where the employer can establish that it was not able to terminate or provide the requisite notice to the employee, the employee will not be able to establish a breach of contract.
Changing Job Duties Without Employee Consent
Employee employment contracts, which are quite similar to written contracts in general, provide that subject to the language in the contract an employee is entitled to remain with the Employer in the same job and job title provided the Employer is pleased with the employee’s performance and the employee’s performance continues.
If the Employer is not pleased with the employee’s performance, or if the employee’s performance drops the Employer may have cause under the contract to terminate the employee.
The consequence of this language, which is in virtually all written employment contracts, is that the Employer must be satisfied with the employee’s performance and/or the performance must remain consistent. If the Employer intentionally reduces the performance, as determined by the Employer, as a means of avoiding paying severance or for some other reason, such an action may well be a breach of the contract.
Equally, an employer who changes the employee’s job title or duties without his or her consent may commit a breach of contract. In some cases this change may be agreed to by the employee by his or her continued work in the new job. However, that does not mean that the employee has to accept the changes. The employee must be very careful not to demonstrate his or her agreement to the change in circumstances in ways that confirm the new position. The employee should try to be consistent in refusing to accept the change in duties. If the change of title or duties is a demotion, this could be grounds for the employee to resign and still be entitled to notice and severance.
In this circumstance, an employee could argue that the term of employment is different than it was when the employer interfered with it and that the contract has been breached. If he or she can demonstrate that the contract has been breached the employee may be entitled to resign and receive all of the notice and severance pay that he or she would have received if the Employer had agreed to a severance term in the employment contract.
Of course, employers almost always reserve the right to change job duties and title and employees always have to take care to meet their obligations under the employment contract.
Denial and Misuse of Benefits
An employee may be entitled to certain benefits after employment. Whether it be something simple such as use of a company car, or medical and retirement plans, it is up to the employer to provide these contractual benefits. When an employer withholds these promised benefits, or fails to manage them properly, this can bring about an "employer breach of contract . " These mismanagements can be addressed in different ways, though their reasoning is often due to error on behalf of the employer. Some of these mistakes can include: When dealing with an employer’s failure to provide contractual benefits, there are various legal courses of action an employee can take. Wronged employees are able to file workers’ compensation claims, fair labor complaints, to bring legal action against the employer themselves.
Breaking Non-Compete Contracts
Employers also frequently breach their obligations with respect to employees’ non-compete clauses. For instance, some employers may attempt to enforce a non-compete clause that exceeds the bounds of reasonableness. For example, in Ajubei v. KKS/CPG, 275 AD2d 114 (2000), a New York State Court held a non-compete clause for two years that governed all of Latin America beyond three high-technology areas was unreasonable and unenforceable.
Others have claimed that an employer violated a covenant by not abiding by its side of the bargain under non-compete agreement. In Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2002), the plaintiff employed a number of individuals with non-compete agreements for a period of time after they left Fashion Boutique’s employ, but it also terminated those agreements. Defendants alleged that plaintiff terminated the agreements while the former employees were still employed by third parties, and that this released the employees from their non-compete obligations. Citing N. Y. Gen. Constr. Law § 5-511, which governs contracts performed by state residents outside the state, the court held that the choice of law provision in the dispute, which provided that the agreement would be interpreted in accordance with New York law, encompassed the Employee Handbook provision that was governed by California law, and ruled that the California choice of law provision was unenforceable. Defendants argued that since California, unlike New York, had found the agreement unenforceable, the court should find it unenforceable as well. The court held that Defendants’ argument had no merit because it disregarded the New York rule that is used when the parties included a choice of law clause in their contract. Under that rule, the New York provision, which included a choice of law clause, would apply, even if the chosen law is contrary to the public policy of New York. Defendants further argued that the provision of the Employee Handbook terminated the non-compete clauses. The court found Defendants’ argument without merit because both provisions were part of the same document and were consistent with each other. Thus, the court could not hold that the Employee Handbook provision terminated non-compete clauses.
What to Do if an Employer Breaches a Contract
The first step for an employee to take when they suspect that their employment contract has been breached is to document the suspected breach thoroughly. This means keeping a written record of every instance of the contractual violation, as well as when it occurred and how the employer responded, if at all. For instance in the case of a commission structure, the employee should keep a written account of their sales to show how their commissions should have been calculated and how they were in actuality, by comparing the actual amounts of commissions the employee received on a regular basis to the contractual agreements for those commissions. If the employee suspects that they have not been paid for work that they completed, they should keep a record of all hours worked, how they determined their pay should have been calculated, or a copy of the contract to show how the pay was supposed to be calculated.
The next step for an employee, especially those who suspect that their contract has been breached because of their actual termination, is to consult with an attorney specializing in representing employees in such cases. With the advice of an attorney with experience in advising employees in these situations, the employee will understand the implications of the breach and the best way to address it. The attorney will guide the employee as to what issues are most likely to be worth filing a claim for, how long the employee has to file a claim, and what other legal remedies may be available to them.
If an employee is still employed by the employer, their attorney will recommend strategies that could help the employee negotiate with the company so that they receive the benefits that they were entitled to under the contract. Through calm, collected negotiation, both the employee and employer can avoid terminating the employment relationship. The goal of the negotiations is to protect the employee’s wellbeing while still preserving the employment relationship.
However, if the employee and employer are unable to negotiate a settlement, the employee’s attorney will advise them on whether to file a claim for breach of contract and what the process for filing such a claim will look like. The attorney will also advise against filing a claim where the breach was not intentional. In fact, most judges in breach of contract cases seek to uphold the contract of the parties, not to punish the breaching party. Therefore, unless the employer laid off the employee in retaliation for protected classes or activities, the court is much more likely to side with the employee if the breach was intentional or retaliatory instead of unintentional.
Options and Remedies in Law
For employees who have had their employment contracts breached by their employer, the legal options and remedies available to them generally fall into several categories. First and foremost, if the breach of contract constitutes "cause" to terminate a contract without notice (or compensation in lieu of notice), such conduct may bring the contract to an end unless specific severance is required by the Employment Standards Act, 2000. However, there is a world of difference between justified cause and "good cause" as the distinction has been called by the courts.
In recent years, many cases have modified the once well-settled case law that the onus is solely on the employer to prove just cause. Current case law indicates that while the onus remains with the employer, failures to obtain a reasoned judgment on the facts as required by the industry standard may lead courts to refuse a finding of just cause (and/or wear down the time and expenses to the employer).
The second form of remedy would be to seek alternative dispute resolution versus commencing a claim in court. In cases of breach of an employment contract, most employee-employer relationships are governed by a collective agreement containing a grievance process whereby disputes are resolved. It is imperative to note that an action in court is almost never the first course of action . Employees seeking to rely on a contract of employment in a non-breach situation usually have the obligation to submit the matter to arbitration within the grievance procedure contained in the collective agreement. However, in cases of actual breach of contract, such as non-payment of wages, Brookfield v. Di Giuseppe, 2015 ONCA 3 offers escaped recourse. In the case of non-unionized employees, the only course of action for non-fulfillment of contractual payment of wages may be to seek damages in civil court.
When establishing damages for a breach of contract, there is no one-size-fits all formula. Breach of contract damages for lost salary depend on factors such as whether the employee has mitigated his or her damages, the expected period of recovery in terms of finding a new position, whether the employee is a long-term employee or new to the company and, if the employee is a new employee, whether they could have been induced to stay on a salary that was higher than the market wage for that job.
One thing is clear: courts will do their best to make the innocent party whole again. They will seek to put the innocent party in the position he or she would have been in if there was no breach of contract. In principle, that should mean that the employee will be compensated for the contract that was broken. However, the remedy depends on the nature of the agreement (which may be a collective agreement) and the nature of the breach.