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In the USA, employment is usually at-will, meaning that either the employee or the employer can terminate the employment relationship at any time for any (legal) or no reason.

However, it remains possible to enter into agreements for fixed or definite terms of employment. As far as I am aware, there are not many regulations specifically targeting the allowable terms of these sorts of agreements.

What legal principles or precedents exist, if any, exist that might affect enforceability of terms of fixed-term employment contracts in the USA?

I am specifically curious about terms such as:

  • duration (1 year, 5 year, 10 year, 20 year, etc.)
  • employee status (W2 vs 1099 vs ...)
  • termination (for cause, by written agreement of both parties, none, etc.)
  • remedies for breach (acceleration of payment for entire period, liquidated damages, specific performance, etc.)
  • compensation (raises, indexing to inflation or not, benefits, etc.)

To be clear, I am envisioning any answer that provides a unified summary or survey and not lists of individual outcomes. If this is improper, please restrict the scope of this question to include only the "duration" term and I can ask other questions for other terms.

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IMHO, this is an area of the law that is not clear. Employment contracts outside of senior executives are fairly new.

One problem with your question is that we don't know whether the employer or the employee is seeking to enforce the agreement.

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Fixed term employment contracts may be entered into, subject to the requirement that they be in writing if the entire contract cannot be performed within a year (the statute of frauds) (an employment contract for a natural person can never violate the rule against perpetuities for being too long).

Employment status (1099 v. W-2) must conform to applicable law as it evolves. Any provision to the contrary would be void against public policy because two people cannot by contract override a government's interpretation of its own regulations governing when someone is an independent contractor and when someone is an employee. Realistically, a long term agreement for the full time personal services of a particular natural person will almost alway cause one to be a W-2 employee.

No particular termination provision is required or forbidden, but a contractual provision with an individual requiring the individual to provide personal services after he or she is dead would likely be held to be unenforceable, and bankruptcy would provide another means to terminate the executory (i.e. not yet performed) obligations of the contract. In practice, it is almost unheard of to see an employment contract for much more than ten years (although a tenured professor or judge or civil service often has such an arrangement in practice), and a material breach of the contract would always provide a ground for terminating the contract for the non-breaching party under general contract principles.

N.B. there is a statutory maximum duration of a union-management collective bargaining agreement which is usually either three years or five years depending upon the nature of the industry, although it can usually be shorter.

Another specialized exception is that an attorney is generally required to be subject to dismissal without cause by an employer at any time, and that an attorney who has appeared in a lawsuit may not discontinue the representation without permission of the tribunal before which the lawsuit is pending.

The 13th Amendment prohibition against slavery prohibits "specific performance" of a contract for personal services (there is a limited exceptions for agreements to perform military service for the government, which can be specifically enforced). Otherwise, the general rules regarding contract damages apply, i.e. "penalties" are not allowed when actual damages can be determined reasonably easily, there is a duty to mitigate damages on the part of the non-breaching party and damages can be reduced if this duty is not met, "liquidated damages" are only allowed if the amount of actual damages cannot easily be determined and the amount of the liquidated damages is reasonably proportionate to the breach.

13th Amendment considerations would tend to disfavor under the doctrine of constitutional avoidance, large sums of money damages for the executory portion of the contract at the time of separation, but damages for quitting before the end of a term of employment are not forbidden if reasonable.

Almost every state severely limited the reasons, duration and scope of non-competition clauses in a contract under a rule of reason that is highly fact specific, but would rarely exceed five years absent unusual circumstances and would rarely exceed the geographic scope of the business of the employer at the time it is entered into. These limitations would also apply in cases of an employment contract that was terminated by an employee as a matter of right (even if the contract provided a longer term). While an employee has a duty of loyalty not to compete with a current employer unless agreed otherwise, this duty of loyalty would not extent into a period after the employee quit; once an employee quits as every employee except a soldier or an attorney before a tribunal has an absolute right to do, any remaining non-competition provision would be interpreted under the general law of non-competition clauses in the state in question (the enforceability of such clauses varies greatly from state to state with California being very liberal and the Northeast generally being rather strict).

Compensation can be set in any way that obeys minimum wage, overtime, tax laws, and similar other regulations of wages not particular to this kind of contract, subject to the absolute right to terminate the contract and pay any damages as of the date of termination (under the 13th Amendment) and restrictions on unconscionable contracts as applied (which is a very high bar).

It isn't at all easy to annotate this response as it covers a huge span of contract law and additional information regarding how contract law is applied in individual employee contexts.

  • Thanks for this answer. From what I can tell, these are basically general principles of contract law (outside of some examples where specific performance can be enforced against the employee). There is nothing inherently unconscionable about long fixed terms (provided they do not extend beyond lifetimes), termination by mutual agreement only (provided parties act in good faith), reasonable remedies to breach (provided damages are mitigated), etc., if agreed to in advance, even if some of the terms may appear much more advantageous to one party or the other? – Patrick87 Nov 15 '16 at 21:05
  • @Patrick87 Usually a court won't decide if the terms are more favorable to one party or the other, but if it goes too far the court could find the contract to be unconscionable, especially if it was very unusual compared to other employment contracts. The rule of thumb on unfairness is that pigs get fat and hogs get slaughtered. This could go either way. Usually the employer will be considered the unfair beneficiary of an unconscionable contract, but particularly fat contracts for CEOs entered into in circumstances of self-dealing can be invalidated as unconscionable as well in theory. – ohwilleke Nov 15 '16 at 22:12

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