Implied Contracts

Joe works as a senior manager at a car dealership, and Bob works as a salesperson at a competing dealership. They met at an industry business function, where they discussed their shared passion for cars and talked extensively about what they hoped to achieve at work in the next few years.

As Joe was leaving, he said to Bob,

“We could really use someone like you at our shop. You’d easily make double what you earn now because I can tell you’d do well for us. We could make a fortune together. You should join us. Think about it. You could be doing very well by next month.”

“That sounds great,” Bob said enthusiastically. “Let’s do it.”

Two weeks later, Bob quit his position at the competitor’s dealership and showed up at Joe’s dealership ready to work. Joe was taken aback. He admired Bob’s boldness. Joe thought he had just been boasting to a competitor but had he really extended a job offer to Bob? Was his employer obliged to honor it as an implied contract?

What Is an Implied Contract?

An implied contract is an unwritten agreement between two or more parties where the law creates an obligation in the interest of fairness based on the parties’ conduct or circumstances. If the circumstances or conduct suggests that the parties had an agreement, then the law will enforce it.

 

An implied contract is also referred to as an “oral contract” and holds as much weight as a written one, and it can be legally binding. Except for Montana, all U.S. states consider employees to be “at-will,” meaning that either party can terminate the employment relationship at any time. Although there is a strong presumption in favor of at-will employment status, an implied contract can be created based on an employer’s oral assurances, written policies, or customs or practices.         

 

Although it can be difficult for someone to prove that an implied contract exists, if the individual is successful, the implied contract is binding on the employer. Because implied contracts can be created during any communication with a potential new hire or employee, employers must be wary of the possibility of forming a binding contract based on what they said.

How to Avoid Creating an Implied Contract

The danger for an employer is implying that a prospective or current employee has any kind of contract. To avoid creating an implied contract, employers should follow these tips:

  • Interview Candidates. When interviewing candidates, don’t make promises or exaggerate. For example, refer to the end of the probationary period not as a matter of certainty but rather as a matter of possibility. Don’t say, “WHEN the probationary period is over, you will receive this benefit”; instead, say, “IF you complete the probationary period.” The “when” statement sounds like a promise that the employee will obtain the benefit at the end of the probationary period, while the “if” statement sounds like a condition that must be fulfilled before the benefit is obtained.
  • Offer letters. Offer letters can create employment contracts if they are not carefully written. For example, it is best to include only a starting date in the offer letter, not a term of employment, and to state compensation in terms of payroll increments. Clearly specify any contingencies of the offer or conditions for continued employment. Also, make explicit that the employment relationship is “at-will.”
  • Employment contracts. A written contract can avoid the implied contract risk because it establishes clear terms and conditions of the employment (such as duties and responsibilities, notice periods for termination, and non-competition clauses). Of course, written employment contracts have some drawbacks, because they may make it more difficult to alter the terms of employment if the circumstances change.

To avoid inadvertently creating an implied contract, employers should seek legal counsel when making employment decisions. For more tips on employer obligations under federal and state labor laws, please visit the Poster Compliance Center website.