Class 3: Employment Contracts

Topics Overview:

• Beyond At-Will – Contractual Employment: Situations where the terms of employment are governed by an express or implied contract. This can include formal employment agreements (for a set term or requiring cause for termination), as well as offer letters or collective bargaining agreements. We discuss what provisions are common in contracts (job duties, duration, grounds for termination, severance, non-compete clauses, arbitration clauses, etc.) and how they alter the default at-will relationship.
• Implied Contracts & Promissory Estoppel: Not all employment agreements are written. We examine how courts determine if an implied-in-fact contract exists – for instance, from an employer’s promises in interviews (“You’ll have a job here as long as you meet your sales targets”) or from progressive discipline policies, past practices, or longevity and assurances. Illinois follows general contract principles: a binding contract requires clear terms and mutual assent. Vague assurances usually aren’t enough, but definite promises (even oral) can be enforced if the employee relied on them. We also cover promissory estoppel as a theory – if an employer makes a promise that the employee reasonably relies on to their detriment (like turning down another job), some courts may enforce the promise even without a formal contract, to avoid injustice.
• Offer Letters and Integration Clauses: Many employees get an offer letter at hiring – we discuss how these can function as contracts, especially if they mention salary, position, and maybe duration or probation. Often, offer letters and contracts contain an integration (merger) clause stating that the written document is the entire agreement. Such clauses are intended to bar claims of additional oral promises. Illinois courts, for example, will generally hold employees to an integration clause – meaning if it’s not in the contract, it’s not enforceable, absent fraud or something extraordinary.
• Breach of Contract Claims: What must an employee prove to win a breach of employment contract case? (Existence of a valid contract, the employer’s breach – e.g., firing without cause when contract required cause – and damages such as lost wages.) We highlight how damages are calculated (typically limited to what the employee would have earned under the contract; rarely emotional distress or punitive damages unless you can be clever and get a tort-like or statutory claim to stick). We also note that many employment contracts specify dispute resolution procedures or choice of law that can affect these claims.
• Specific Illinois Issues: Illinois courts have decided notable cases on implied contracts via employee handbooks (covered in Class 2) and on restrictive covenants (Class 5) which often appear in contracts. We mention here an important concept: consideration for mid-stream modifications. For example, if an at-will employee is asked to sign a new contract (like a non-compete) after starting work, Illinois requires additional consideration beyond just keeping the job (Illinois courts often use a rule of thumb that less than two years of continued at-will employment is insufficient consideration for a post-hire covenant, absent other benefits) – foreshadowing Class 5 topic, but relevant to contract formation.

Required Readings:

• Casebook   
• Illinois Contract Case: Duldulao v. St. Mary’s Hospital (Ill. 1987) – although discussed under at-will, it’s fundamentally a contract case: it set the three-part test for when an employee handbook creates an enforceable contract. This illustrates contract formation in the employment context. 
• Oral Contract, Proof of Contract, and Parole Evidence  Illinois Jury Instruction
• Elon Musk Compensation Decision (First 10 pages only) 
• Twitter Arbitration Documents Part 1 & Part 2

Supplemental Materials:

• Restatement (Third) of Employment Law: Sections on Job Security and Modification of Employment Contracts – as supplementary reading for the conceptual framework adopted by the new Restatement (e.g., on when handbooks modify the contract).
• Illinois Wage Payment and Collection Act (IWPCA): While primarily a wage law, the IWPCA in Illinois recognizes “agreements” (even unwritten) to pay certain compensation. We’ll note here that if an employer promises a bonus or PTO payout, the IWPCA can enforce that as an agreement. This ties contract principles into statutory enforcement of promised pay.

Hypothetical Questions & Model Responses:

Hypothetical: An employer tells a job candidate: “We commit to you – as long as you meet performance expectations, you have a place here until retirement.” The candidate accepts and works for the company. After five years, a new manager fires him despite good performance, citing “restructuring.” Can the employee claim breach of contract?

Model Response: The outcome hinges on whether that initial statement is deemed an enforceable contractual promise of job security. Generally, a clear, definite promise of continued employment can create an implied contract overcoming at-will. Here, “a place here until retirement if you meet expectations” sounds like a promise not to fire except for cause (poor performance). If the employee can prove this was said and he relied on it (took the job based on that assurance), a court might find an implied contract existed. The firing during a restructuring (despite satisfactory performance) would then breach that contract, entitling the employee to damages (likely the wages and benefits for the period he would have worked, perhaps until some notional retirement age or for a reasonable time). However, the employer will argue this was merely an aspirational statement or too indefinite to be a contract (what are “performance expectations”? when is “retirement”?). Courts often view such long-term job promises skeptically unless there is specific language and perhaps it’s in writing. In Illinois, for example, it would be an uphill battle to enforce an oral promise of “lifetime employment”. The employee might alternatively sue under promissory estoppel, claiming he or she relied on the promise to his detriment (maybe he left a secure job to join). That could be a fallback if no formal contract is found. Ultimately, if a jury (if a judge lets it go that far) believes the promise was made and meant seriously, they could find for the employee. If they see it as puffery or an unenforceable indefinite promise, the employee remains at-will and loses. It’s a fact-intensive scenario – but it teaches that employers should avoid making sweeping job security promises they don’t intend to keep (or should put proper disclaimers), and employees should get such promises in writing if they expect to enforce them.

Hypothetical: An employee’s written contract states a one-year term of employment, with a clause: “Renewable upon mutual agreement.” At the end of the year, the employer orally tells the employee, “You’re doing great – consider it renewed for another year,” but no new written contract is signed. A few months into this second year, the employer lets the employee go. Does the employee have a breach of contract claim for year two?

Model Response: Possibly. The original contract expired after one year, but it said it could be renewed by mutual agreement. The oral statement by the employer indicating renewal could form a new contract for the second year. The key question is whether both parties agreed to renew and on what terms. If the only change is extending the term another year under the same conditions, and both sides assent (the employee kept working, the employer said “consider it renewed”), a court may find there was a mutual agreement to renew for a second year, albeit orally. Typically, contracts that can’t be performed within one year must be written (Statute of Frauds), but here the renewed term is one year (starting at the time of renewal) – some courts might say the one-year oral extension is enforceable because it’s a one-year deal (and the part performance – the employee working – also evidences the agreement). If enforceable, firing the employee a few months into that second year would be a breach of contract, entitling the employee to the pay for the remainder of the year (minus any mitigation income). The employer might argue that the oral “you’re renewed” was not sufficiently specific or that it was more of a hope than a firm promise. However, the facts suggest a clear intention to extend the contract. In Illinois, courts would likely enforce the oral renewal if convinced of mutual assent – Illinois has, for example, enforced oral extensions in some cases if the terms were largely unchanged and both acted on it. The Statute of Frauds could be raised, but since the renewed period is only one year and the employee has partly performed, a court may find an exception (promissory estoppel or part performance) to avoid a fraud result. The takeaway: Employers should document renewals in writing to avoid these disputes, and employees in such situations should confirm renewal terms explicitly. Here, the employee has a good argument for breach of the implied renewal contract.  

Real-World Example:

Executive Contracts and Golden Parachutes: High-level executives often negotiate detailed employment contracts. For instance, when the University of Illinois hires a new head football coach or when a public company hires a CEO, the contract might guarantee 5 years of employment and specify a buyout payment if terminated early without cause. A few years ago, a university in Illinois fired its football coach two years into a five-year deal; because of the contract, the coach was owed a multi-million dollar buyout (essentially severance for the remaining term). This illustrates how contracts override at-will: the parties explicitly agree on job duration and consequences for early termination. It can become controversial – the public saw the university paying a huge sum to a fired coach – but it was legally required by the contract. Contrast that with a regular at-will employee, who would get nothing if fired (unless there’s a severance policy). The lesson: contractual protection can be extremely valuable to employees but comes at the bargaining stage – typically only employees with leverage or unique skills get these. Illinois courts will enforce clear contract terms in such cases to the letter.

Statute of Frauds excerpt: A note on the Statute of Frauds (which requires certain contracts to be in writing). Employment contracts that cannot be performed within one year must be written to be enforceable. Illinois follows this rule – so a claimed two-year oral employment contract, for example, would be void under the Statute of Frauds.  

Impacts on Employers and Employees:

• For Employers: Using written contracts allows an employer to define the employment relationship and limit uncertainty. Employers may want contracts for executives or key personnel to include non-disclosure, non-solicitation, and non-compete clauses, and to ensure they can terminate the employee for defined “Cause” without owing severance. However, offering a contract might also commit the employer to a set term or severance obligations. Many Illinois employers keep most employees as at-will to maintain flexibility, using only offer letters that clarify compensation but reiterate at-will status. Employers must also be careful with the language in offer letters, handbooks, and what managers verbally communicate – an inadvertent promise can later be alleged as a contract. It’s wise to include integration clauses in any formal agreements and disclaimers in handbooks to prevent unintended contractual obligations. When requiring current employees to sign new agreements (like for non-competes or arbitration), Illinois employers should provide something of value (a bonus, etc.) to ensure the contract is enforceable.
• For Employees: Non-union employees rarely negotiate individual contracts except at high levels, but employees should realize that policies and promises can be binding.  Terms like “at-will,” “cause,” or restrictive covenants have significant consequences. Illinois employees can also use the IWPCA to enforce agreements to pay certain wages or earned vacation – meaning if your boss promised a certain commission or PTO payout, even informally, that statute might help you. One common scenario: an employer promises severance or a bonus and then doesn’t pay – if documented, an employee can sue for breach of an oral promise to pay money (which is enforceable if proven). Knowing what counts as a contract or agreement is thus important for employees to claim what they’re owed. Finally, if an employee is recruited based on certain representations (e.g., “we foresee you in this role for five years”), they should consider getting that in writing or at least confirm by email, because it might be crucial evidence later if things go awry.

Additional Commentary & Resources:

• Recent Illinois Legislation: Illinois Freedom to Work Act (2021 amendments) – While primarily about non-competes (Class 5), it also reflects contract principles: it forbids non-compete agreements for employees below certain income levels, effectively nullifying such contract terms despite what parties sign. It’s a reminder that some contracts in employment are subject to statutory overrides (another example: an agreement to waive minimum wage or overtime rights is void by law; you can’t contract out of those protections).