At-Will vs. Contract Employees: Know Your Legal Rights Regarding Discipline & Termination

Raise your hand if you enjoy disciplining or terminating problematic employees. Anyone? I thought so. No one enjoys this aspect of small business ownership, yet it comes with the territory. If you run a business, you must deal with difficult employees.

As uncomfortable as it is for both parties, knowing how to manage the discipline and dismissal process is important. One misstep and you’re at risk of a lawsuit, so it’s vital that you remain within the limits of the law.

Clearly identified procedures for discipline and dismissal are important, but how you approach the process also depends on an employee’s status. Is he a contracted employee or an at-will employee? This is often confusing for small business owners when considering disciplinary actions and termination. Let’s address some common questions to help you stay on the right side of the law.

Answers to Your FAQs

1. What is an at-will employee?

At-will employment, in its simplest terms, means an employee can be terminated at any time for almost any reason, with or without an explanation or warning. At the same time, it means an employee is free to quit without reason, too. As a business owner, you can walk up to any at-will employee and say, “I don’t like your attitude. You’re fired.” Nothing more is required other than escorting the employee out of the building. As long as the termination doesn’t violate employee rights or labor laws, you’re free to fire at-will employees whenever you deem it appropriate.

2. What are the limitations on at-will employment?

Despite the apparent ambiguity that accompanies at-will status, numerous federal and state laws restrict employers’ abilities to fire at-will employees. Employees cannot be fired if the termination is …

• … in violation of the terms of an implied contract of employment, which often occurs when a statement or document from the employer creates an intentional or unintentional formal contract.
• … intended to prevent the employee from receiving a benefit that has been earned or about to be earned, like an annual bonus or vesting in a pension plan.
• … under circumstances that violate public policy (committing perjury or violating the law) or for doing something public policy encourages or permits (taking time off for jury duty or to vote).

Termination for the reasons listed above is considered “wrongful termination.” Other wrongful termination situations can occur when an employee’s termination is related to the employee’s membership in a protected class such as, race, religion, national origin, sex, age, disability, or genetic information.

You should be clear whenever employment status is at-will. Include an at-will disclaimer on your job application. Once an employee is hired, distribute an employee handbook that includes content reinforcing your right to discharge at-will. Have your workers sign an acknowledgment document and retain a copy in the employee’s personnel file.

3. What is the difference between an at-will employee and a contractual employee?

Contract employees are a different ballgame because a contract exists for employment, whether it be a collective- bargaining agreement, executive compensation agreement or any other form of binding commitment between the employee and employer. Contracts usually indicate a starting date, compensation plan, benefits and how/why an employee can be terminated. Because of this, failure to adhere to the contract allows either party to sue for damages.

4. Are contracts always written?

No. Employers can sometimes create employment contracts without meaning to. Implied contacts occur when employers promise employees something, like job security. Saying something like, “after 90 days, you will become a permanent employee” to a new hire can be considered an implied contract.

5. Can I terminate a contract employee?

Yes. Employees with an express written contract must abide by the terms of the agreement. If they don’t, they can be fired. A contract usually specifies how the employee can and can’t be discharged. Most employment contracts only allow an employee to be terminated for “good cause.” Good cause can include things like poor work performance, violating company rules and threats of violence. But again, you can’t terminate for illegal reasons.

6. What’s the best way to avoid legal complications when disciplining or terminating an employee?

Document everything clearly and consistently for every employee — whether at-will or contract. For employees to prevail under “wrongful termination” cases, they must prove employers based firing decisions on an illegal factor (e.g., age, race, sex, retaliation, public policy violations, etc.) or illegitimate business reasons, such as poor performance or violation of a work rule.

In most lawsuits challenging an employment decision, the employer is more likely to prevail if records clearly establish a legitimate business reason for its actions, and there is no other evidence corroborating illegal allegations. For example, if an employee alleges unlawful termination based on age, but the employer’s records establish termination for repeated violation of company policy — and that others were treated the same for similar violations — the employer will have a stronger defense to that claim.

Consistency is Key

Dealing with employee discipline and termination is complicated and challenging. The Progressive Discipline Smart App helps streamline the process so employers do it the right way — for both at-will employees and contract employees. The app ensures consistency, creates an essential paper trail and, most important, protects businesses from possible legal disputes.