Damages and Recovery in Breaching an Employment Contract

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 What is an Employment Contract?

An employment contract is an agreement made between an employer and employee that provides the terms of employment. Once the employment agreement is signed, it becomes binding on both the employer and the employee. This means that if either party violates the terms of the contract, then they can be held legally responsible for their actions.

When one or both parties violates the terms of the contract, it is known as a “breach of contract” action. A breach of contract is basically when a party to a valid contract has failed to fulfill their side of the agreement.

For instance, specifically in regard to employment contracts, if the employer signs an agreement that promises the employee a certain amount of vacation days per year and the employee does not receive any even though they asked for time off, then the employer may have breached the terms of their employment contract.

Another example of when a breach of employment contract may have occurred, this time due to a violation committed by the employee, is if the contract explicitly stated that the employee must not share any trade secrets and the employee breaks that condition.

Finally, the important thing to remember about the above examples is that it is possible for both an employer and an employee to breach the employment agreement.

How are Damages Calculated When an Employment Contract is Breached?

Generally speaking, there are two categories of remedies that a non-breaching party can request in the event that a contract was breached: legal remedies or equitable remedies. Legal remedies refer to monetary damage awards, such as compensatory or restitution.

Equitable remedies on the other hand are not concerned with money. Instead, they are court-ordered actions that a judge prescribes to settle a dispute that cannot be resolved by compensation. For employment contract disputes, equitable remedies may mean reforming the terms of the contract, cancelling the contract (i.e., rescission), or reinstating an employee who was wrongfully terminated to their former position.

In most cases, the remedy issued for breach of an employment contract is usually compensatory damages. For example, if according to the contract an employee must provide a one-month notice to the employer before they quit and they only gave them a two-week notice, then the employer may sue for compensation.

In this scenario, the total amount of the damages award will be calculated by the cost of finding a replacement and potentially the money that could have been earned if the employee had stayed. As such, if their replacement is hired quickly and for the same salary arrangement, then the amount of compensatory damages the employee will have to pay to their former employer should be minimal.

Another way compensatory damages may be calculated is by reviewing the terms of the contract. For example, if an employee is wrongfully terminated under the terms of the contract, then they may sue their employer for expectation damages.

Expectation damages” are a subset of compensatory damages and refer to what a non-breaching party would have received if the contract had not been breached. In this instance, that usually means the amount of lost wages.

In addition, aside from the contract itself and replacement costs, other factors that can be used when calculating damages for breach of contract include:

  • The type of breach;
  • What remedies the non-breaching party seeks to gain;
  • How the matter is resolved (e.g., litigated in court, settled in arbitration, etc.);
  • The amount of damages caused by the breach; and
  • The category of employment the worker was hired under (e.g., independent contractor versus “at-will” employee).

A final thing to keep in mind when it comes to calculating damages for breach of employment contracts is that remedies and monetary amounts can vary based on the terms of a contract, the facts surrounding a case, and the laws of a particular state.

Also, just because an employee lives in a certain state does not necessarily mean that those state laws are the ones that apply under the contract. Therefore, it may be in both parties’ best interests to seek legal counsel for a breach of contract action.

Are there Limits to My Recovery for Breach of Employment Contract?

There are several limitations on breach of employment contract damages. For instance, a non-breaching party will only receive damages if they can prove that they suffered a real financial loss. In other words, damages awards will not be issued for certain claims, such as those involving emotional distress or pain and suffering, or for punitive measures.

In addition, there are also several situations in which damages for breach of an employment contract may be reduced or the case may be dismissed altogether, including:

  • When there is a duty to mitigate losses resulting from the breach;
  • If the non-breaching party cannot provide clear and verifiable proof that they are entitled to such damages;
  • When the employee is an “at-will” employee (note this does not apply if the employee is unlawfully terminated); and
  • If at the time the contract was made, both parties were aware of the potential damages that could arise from a breach (i.e., foreseeable damages).

Do I Need an Attorney if My Employment Contract was Breached?

In the event you believe that your employment contract was breached and you cannot reach a resolution by discussing the issue with your employer, then you may want to consider hiring a local contract lawyer for further legal guidance.

Your lawyer can review and explain the terms of your employment contract, determine whether you have a supportable claim, and can discuss what options you can take to settle the matter. Your lawyer can also help you seek the proper remedies and provide representation on your behalf in court if necessary.


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