“You’re Fired.” “No, I’m Not.” Employee Wins. —The Importance of Defining Just Cause in an Employment Contract.

A recent decision by the Appellate Court of Illinois could significantly affect businesses’ liability under their existing employment contracts. On June 2, 2015, a business was held liable for breach of an employment contract because the terms of the contract were not sufficient and specific enough to fire the employee. The contract provided for two years of employment, so this individual was not an “at-will” employee. Agreements like this usually provide certain “just cause” provisions to allow an employer to discharge an employee if there is a good reason, such as substandard performance. Following the recent decision below, all businesses should begin to include it in any fixed-term employment agreement.

In Eakins v. Hanna Cylinders, the employment contract only stated a base salary, automatic bonuses and a “minimum term of employment 24 months from 7/15/2010.” The court held that this fixed term contract did not specify the conditions of performance or termination. Therefore the employee was entitled to work for the full 24 months he was promised, even though his performance fell below the accepted standard. The court did not, and will not, impose a just cause provision in a fixed term contract. If there are no provisions detailing the performance requirements or termination standard, a court will not impose those conditions on a contract. In effect, the employer cannot terminate the employee for any reason at all other than a breach of the contract, and failing to perform well is not a breach.

This ruling has significant implications for business owners. Businesses should always include some form of termination protocol, commonly a just cause standard, in their fixed employment contracts. A just cause provision for termination should be sufficient notice to the employee that their work performance is subject to review and possible termination. Businesses that have fixed term employment contracts without a just cause provision could find themselves in the middle of a lawsuit and liable for monetary damages under breach of contract.

There is a silver lining, though. Under the Illinois Wage Act, employers will not be liable for the remainder of unpaid wages under fixed term employment contracts once the contract is properly terminated even if there is a dispute about whether the termination was proper. The key for the Wage Act is to ensure that employees are paid for time they spent working. If the employee did not work, even if it is due to a claimed unjustified firing, then the Wage Act does not apply. However, employers should take the Wage Act very seriously and speak with an attorney to ensure that the specifics of your situation still apply under this rather general non-specific concept. Hearings on the Wage Act often heavily favor the employee and should be approached with caution by employers.

When structuring an employment contract, businesses must keep in mind the type of relationship they want to enter into. At-will and fixed term employment have very important legal considerations, and it is important to understand the repercussions of the choices made when formulating these contracts.

If you have further questions about employment contracts, you can contact attorney James D. Voigt at (847) 705-7555 or jvoigt@lavellelaw.com for a complimentary one-hour consultation.