Why You Should Avoid Implied Contracts of Employment

Unlike an express contract, which is a verbal or written agreement with specific terms, an implied contract of employment is not expressed in writing or orally between the employee and employer. Instead, as its name suggests, it is determined to exist based on the employer’s previous actions or statements.

Implied contracts of employment can cause many negative complications, including miscommunication and lawsuits. Accordingly, you should avoid using and creating such agreements. Read this guide to learn more about implied contracts of employment, how they work, and why you should avoid them. We will also discuss how to use contract lifecycle management (CLM) platforms to write and manage express employment contracts.

Implied contracts of employment are legally binding agreements that are not written or orally expressed. Instead, they are deemed to exist due to an employer’s actions and behavior. Implied contracts of employment are easy to “create” but difficult to enforce because they are hard to prove.

Generally speaking, there are two types of implied employment contracts.

1. Contracts implied in fact

A contract implied in fact arises when employees can reasonably infer their employment conditions based on their role and how their employer treats them.

To illustrate, suppose a tech company regularly hires the same cybersecurity technician for their services at $90 per hour. The company then asks the technician to fix their systems for only $60 per hour. Even though the technician did not have an official employment contract, they could seek additional payment by referencing their past agreements to prove an implied-by-fact contract.

Contracts implied in fact are legally binding, true contracts, meaning they can modify and supersede written contracts about the same topic.

2. Contracts implied in law

A contract implied in law arises when an employer has a legal obligation to their employee due to workplace practice laws. For instance, even if an employee says they don’t want overtime pay, the employer must give them overtime pay or else violate their implied-in-law contract.

Unlike contracts implied in fact, contracts implied in law only operate as valid contracts to avoid unjust enrichment or for the sake of justice. As such, general contract rules don’t apply to contracts implied in law. Additionally, a court doesn’t recognize a contract implied in law if an express or implied contract about the same subject matter already exists.

Like express employment relationships, implied employment relationships are presumed to be “at will” in every state except Montana.

In United States labor law, at-will employment is an employment arrangement where the employee may quit at any time. The employer may also terminate at any time for any reason and without warning if the reason is legal and non-discriminatory.

However, despite the presumption in favor of at-will employment, you can easily jeopardize an employee’s at-will status with implied contracts if you’re not careful. For instance, an employee may interpret a comment about not having to worry about losing their job as a promise of permanent employment.

Certain employment practices and policies may also jeopardize employees’ at-will statuses, including:

• Employee handbooks with discipline policies: If you’re not careful, an employee handbook can lock you into taking a course of action for all offenses. For instance, suppose your policy states that a verbal warning is the proper way to deal with all first offenses. If that’s the case, you may be unable to fire the employee for their first offense, even when the situation may call for it. To avoid creating implied contracts with your employee handbook, include a waiver stating that all employment is at will. That way, you can fire an employee at any time for any reason so long as the reason is non-discriminatory and legal.
• Performance reviews: Performance reviews are a great way to motivate employees. However, avoid giving praise that may be interpreted as a promise. If you tell your employee that they will always have a job if they keep up their performance level, you may have jeopardized your employee’s at-will status.
• Interviews and offers of employment: Avoid making promises when interviewing or extending employment offers. Otherwise, your employee may believe they have an implied contract of employment. You should also include a clause at the end of your employment offer letter that all employment is at will.

As you can see, implied contracts of employment can create many issues. Due to the vagueness of implied employment relationships, employees can easily misinterpret your actions, words, and intentions. At best, this can cause miscommunication and confusion, souring your relationships with your employees. At worst, these misunderstandings can lead to lengthy, expensive lawsuits.

Fortunately, you can avoid implied employment contracts by being aware of situations that can create implied contracts and being explicit about your actions when interacting with others in personal and business situations.

You can also avoid implied employment contracts by using a contract lifecycle management platform to draft, manage, store, and execute express employment contracts. Sleek, powerful, and low-code, a contract lifecycle management tool has everything employers, legal teams, and human resources (HR) managers need to create, manage, and execute legally-binding employment contracts.

A workflow designer

Almost every contract lifecycle management tool comes with a workflow designer—a low-code, self-serve tool that works straight out of the box without the need for technical expertise or long implementation times. Thanks to its simple drag-and-drop interface, anyone can generate and launch contract creation and approval processes in minutes.

To create a contract workflow, all you have to do is:

• Upload a template—every template should have up-to-date clause and approval routing guardrails to ensure 100% automatic contract compliance
• Tag fields that need to be provided
• Add signers and approvers

You can also add conditional approvers and contract clauses as needed.

Your workflow designer should also give you the ability to:

• Modify contract template language
• Adjust approval routing workflows
• Send updates instantly

An editor

As you probably already know, contract creation and execution can sap the energy and time of legal, marketing, procurement, and other teams, especially when they have countless other projects to execute.

That’s where your contract lifecycle management tool’s editor comes into play. Unlike traditional editing tools, your contract management platform’s editor doesn’t force you to choose between desktop software like Microsoft Word and basic in-browser editing like Google Docs. Instead, it gives the best of both: the ability to collaborate with colleagues in real time and a DOCX-native experience.

Specifically, it gives you the ability to:

• Loop in colleagues for contract review with internal comments and @mentions
• Accept and reject tracked changes with just a few clicks
• Email a DOCX copy of your employment contract directly from the contract lifecycle
• management platform
• Embed negotiation guides in your contracting workflow to preserve leverage, accelerate negotiations, and standardize clause substitutions

An artificial intelligence (AI)-powered contract repository

The ideal contract lifecycle management tool should also have an AI-powered contract repository that allows legal, marketing, procurement, and other teams to aggregate, store, and access all of your company’s contracts in one centralized hub. That way, they’ll have the full context of any agreement whenever they need it.

Your contract repository should also offer the following features:

• The ability to upload contracts at scale
• The ability to search, extract, and track data to identify opportunities and trends
• AI-powered filters that automatically detect contract properties and sort contracts by category
• AI-powered contract analytics tool that lets business and legal teams monitor renewals, key performance indicators (KPIs), and contractual obligations without the help of outside teams and developers
• The ability to trace the entire audit trail of every contract in the repository

Data reporting

Finally, your contract management tool should provide a dashboard for actionable contract data reporting. At a minimum, this dashboard should empower you to:

• Zoom in on the highest-priority contracts
• Clear contract bottlenecks
• Create custom views to stay on top of contracts
• Visualize contract processing to answer questions like “How is employment contract work distributed among your team?”

If you’re not careful, you can easily enter an implied contract of employment. Unlike express agreements, implied contracts are deemed to exist due to your behavior, actions, and words.

For instance, if you tell an employee they can always work for you, they may interpret your words as a promise of permanent employment. This can have troubling consequences, especially if you fire your employee and they decide to sue you for violating the implied employment contract.

There are three main ways to avoid implied contracts:

1. Avoiding situations that can create implied contracts
2. Being explicit about your intentions in personal and business settings
3. Using a contract lifecycle management platform to create express employment agreements

Streamlined and efficient, the right contract lifecycle management app has all of the tools you need to draft, manage, execute, and share express employment contracts across departments, including a workflow designer, an editor, and an AI-powered contract repository.