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Unlike written or verbal contracts, which contain specific promises, an implied contract is created by a course of conduct between the employer and employee.



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January 2013 Legal Update

Employment Contract Oversight

Leads To Big Verdict For Terminated


By Christopher W. Olmsted

Most employers are familiar with the concept of “at will employment” and have taken steps to lock in that status with their rank and file employees. But where employees work for multiple entities in a business conglomerate, particularly executives, the terms and conditions of employment can become fuzzy, to the detriment of the employer. Employers should take steps to avoid the mistakes referenced in a recent California appellate case titled Faigin v. Signature Group Holdings.

Terminated Corporate Lawyer

Alan Faigin worked as a corporate attorney for Fremont General Corporation and several of its subsidiary companies, including an entity named FRC. His W-2 forms identified Freemont General as the employer rather than FRC.

In 2007, after some corporate restructuring prompted by regulatory requirements, Fremont General entered into a three year contract to employ Faigin as a corporate attorney. Among other things the contract included an “Involuntary Termination” clause which stated that he would be entitled to certain benefits in the event of a significant change in his responsibilities.

Although he performed work for the subsidiary, FRC, Faigin had no written contract with that entity.

Later in the year, the FRC board of directors terminated Faigin along with other executives. He continued to work for the other Fremont entities until he was terminated in March 2008. Later that year, Fremont General filed for bankruptcy.

Lawsuit For Breach of Implied Contract

Faigin sued Fremont for breach of contract, and its subsidiary corporation FRC for breach of an “implied-in-fact contract” (defined below). He alleged that he was jointly employed by Fremont General and FRC. Among other legal claims, he alleged that FRC breached this implied contract.

Eventually during the trial he ended up pursuing only FRC for the implied contract claim.

FRC offered several defenses, including that it was not Faigin’s employer (Fremont was) and that no implied contract of employment existed.

At trial, the jury awarded Faigin over $1.3 million in damages for breach of the implied contract.

What Is An “Implied Contract”?

Most of us understand the legal concept of written and verbal contracts, but few employers understand the concept of an “implied-in-fact contract.”

Start with the premise of “at will employment.” California Labor Code section 2922 provides: “An employment, having no specified term, may be terminated at the will of either party on notice to the other.” This means an employer can ordinarily terminate an at will employee for any reason or no reason at all. Good cause is not required.

However, this rule is merely a presumption, or if you will, the default setting on employment status. Employers and employees can set aside the at will status by entering into a written, verbal or implied contract.

Unless an employee has entered into an express at will agreement, employees may seek to prove the existence of an implied promise not to discharge without good cause. Unlike written or verbal contracts, which contain specific promises, an implied contract is created by a course of conduct between the employer and employee. This can include: (1) the employer's personnel policies and practices; (2) the employee's length of service; (3) conduct or words by the employer assuring continued employment; (4) practices in the industry in which the employee is engaged; and (5) whether the employee gave independent consideration for the employer's promise (such as a promise not to disclose confidential information obtained during employment).

Implied contracts are a frustrating concept for employers. Such contracts can seemingly come into existence unbeknownst to the employer, merely based on intangible aspects such as longevity, words and conduct over time.

It is a best practice to require employees to sign an at will acknowledgment which expressly states that the employee may be terminated at will. Courts have held that implied contracts cannot exist in the face of such written acknowledgments.

Employer Created Implied Contract

In the Fremont case, the company appealed the trial court result, but the appellate court upheld the verdict.

According to the appellate court, the evidence established that Faigin was an employee of the subsidiary FRC even though his employment contract was with the parent company Fremont. Faigin was named general counsel of the FRC and also served in other executive capacities. He performed work for the FRC over many years. He occupied an office at FRC and supervised FRC employees. The fact that he worked for other Fremont entities, and that his W-2 identified him as a Fremont General employee, was insufficient to prove otherwise.

Not only was Faigin an FRC employee, but the evidence also supported the finding that there existed an implied-in-fact contract not to terminate him without good cause.

Fremont argued that its written contract with Faigin precluded the existence of a separate implied contract with the subsidiary FRC. The court rejected this argument. The court found nothing in the terms of the Fremont contract which precluded another contract with the subsidiary. “A subsidiary employing an individual who has a written employment contract with the parent conceivably could agree to continue to employ the individual unless there is good cause to terminate the employment even if the parent, for whatever reason, terminates the individual‘s employment with the parent.”

The court noted that Faigin’s written employment contract with Fremont General stated a fixed employment term of three years and did not state that his employment during that period of time with all Fremont entities, or with Fremont General, was at-will.

Accordingly, the court allowed the verdict to stand against FRC.

Practical Tips:

Get At Will: Generally it is a best practice to require employees to sign an at will acknowledgment to avoid the creation of implied contracts.

Beware Corporate Groups: The employer got sloppy here, assigning the employee to work at different subsidiaries but failing to carefully document the employment relationships. That led to ambiguities which opened the door to liability. Employment law counsel can help corporate conglomerates avoid this problem.

Draft Carefully: Although not referenced in this summary, another problem was found in the ambiguous involuntary termination clause of the written contract. It apparently failed to contemplate personnel changes necessitated by banking regulations. Executive employment contracts should be carefully drafted and customized to the industry in order to avoid such unforeseen complications.

This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2013 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.

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