The Consequences of Early Termination of Employment Contracts

What is Early Termination?

Early Termination of an Employment Contract means that one of the parties to the employment contract ends the contract before the identified Circumstances for termination of the employment contract occur. Early Termination by an employer implies that a contract which should have ended when the employee turns 60 years old, ends before the employee turns 60. Moreover, it can also imply that the contract which should have ended either at the end of the time period agreed upon in the contract or upon the completion of the work agreed upon in the contract, ends earlier. Early Termination by the employee implies that the contract which should have ended in accordance with the circumstances of termination of employment contract provided for in the Labour Code, ends before then.
Early Termination may take place:
− On the part of the employer – When the employer does not wish to wait for the Circumstances for termination to occur , he/she can take an initiative to immediately terminate employment contract. Early Termination by the employer can happen through any of the ways in which a contract can be terminated and is done without any prior notice. The employer can early terminate the contract by dismissing and/or laying-off the employee. In cases of high level of dishonesty/ disloyalty, the employer may terminate the contract with immediate effect.
− On the part of the employee – The employee too may take an initiative to end the contract before the Circumstances for termination occurs. The employee can resign from his/her position. Adaptation of the employee to changes made by the employer, retrenchment of the employee, and/or illness of the employee, could be Circumstances for Termination of Employment Contract. In the event an employee resigns from his/her position, there is a requirement that he/she gives a prior notice to the employer. The employee is expected to give prior notice equivalent to 1/15th of the period for which remuneration is payable under the contract.

Reasons for Early Termination

There are numerous reasons why an employment contract may be terminated before the end contract date. An obvious example is the expiration of a fixed term contract. However, many early terminations do not arise because of the contract having reached its end date, but because an employer or employee decides to terminate the contract at an earlier time.
As far as employers are concerned, common reasons include:
• the employee’s performance not meeting expectations;
• the employee no longer being a focus of the business, perhaps because the employee’s function is no longer required (due to restructuring, business sale, insourcing/outsourcing);
• the employer no longer being able to sustain the cost of an employee (for example following poor trading results, loss of funding, loss of major client);
• the employee (or employer) committing a disciplinary or criminal offence;
• where the employer loses confidence in the employee and it is not possible for them to remain in the organisation (perhaps because of employee misconduct or other behaviour); and
• employment policies or terms in the contract of employment being breached, such as the employee being unable to attend work due to a serious illness that the employer believes cannot be reasonably accommodated.
As for early termination initiated by employees, common reasons include:
• the employee receiving better job offers elsewhere than what is on offer with the existing employer (either on a permanent or temporary basis);
• the employee needing to relocate for personal or business reasons;
• the employee no longer being able to fulfil the requirements of their role (whether due to health or otherwise);
• breakdown in the employer/employee relationship; and
• the employee being harassed or bullied at work.

Potential Penalties and How They Are Addressed

In addition to the financial burden, there are often wider legal implications. If the employee who you’ve terminated early takes you to tribunal, it will not just be them suing you personally. Any restrictions the former employee flouts are covered by the contract of employment. The employer (your company) may be made liable for any competition undertaken by your former employee. Depending on the nature of these restrictions, the former employee may also be issued with an injunction. This means they cannot legally engage in the behaviour in question until the case has been concluded, or the injunction has been lifted.
An injunction usually lasts 30 days. In the case of competition (sometimes referred to as restrictive covenants) the injunction may prevent your former employee from working for a competitor, soliciting your clients or engaging with their suppliers. The injunctions are effective because they have full legal authority; any breach is contempt of court, making the punishment much stricter and lasting longer than a penalty charge. Fines from breaking an injunction can be in the hundreds of thousands and risk imprisonment if you persistently refuse to comply.
While the legal implications can be severe, the disruption to your business isn’t going to go away quickly. You may have to give your remaining employees extra projects to cover the absence of your early termination. If you’re unable to hire in a replacement, you may have to limit the number of clients you work with until your pipeline works itself through. Even if you’re able to hire in a replacement, it can take considerable time to train them up. The extra workload on your remaining workforce can lead to your contracted staff becoming disgruntled. They may choose to leave or even pursue legal action for spending more hours than they are paid for.
If your early termination is on good terms, you may be able to make some of this up to your remaining workforce. By holding a staff event, giving bonuses or even offering the time accrued by the former employee to your other staff as paid holidays. An open and honest response can do wonders to keep your best staff on board after the termination.

Legal Basis for Penalties

The imposition of penalties for early termination of employment contracts is subject to a number of legal frameworks and regulations which have differing effects in major jurisdictions. In the United States, the fundamental principle is freedom of contract which extends to employment contracts. There is also a well-established public policy in favour of the power to terminate employment contracts upon notice and in accordance with the terms of such contracts being enforceable. This means that, as a matter of both common law and statutory employment law, clauses that provide for a compulsory payment in the event of early termination of an employment contract (often described as a "liquidated damages" clause) are generally unenforceable unless there exists an enforceable non-competition or non-solicitation post-termination restraint.
In Hong Kong, however, the law does not provide for the validity of standard penalty clauses or liquidated damages. The question of whether or not a clause which stipulates a sum to be paid in the event of breach is regarded as a penalty (in which case it is unenforceable) or as liquidated damages (in which case it will be enforceable) depends on whether the stipulated sum bears no relation to the greatest loss which may arise on a breach of that provision.
The situation in Singapore is in some respects similar to that in Hong Kong. Employers tend to be bound by employment contracts, including any provisions for the payment of a specified amount upon early termination, even where such provisions are considered onerous and existing solely for the purposes of penalising the employee. However, the law in Singapore does not provide a single test to determine whether a particular clause is a penalty or liquidated damages and the principal test has been adopted from English law. In other words, the question is whether the sum stipulated in a clause is extravagant or unconscionable in comparison to the greatest loss involved in a breach of that clause. Recent cases, however, have indicated a judicial reticence to strike down contractual provisions as penalties for fear of undermining litigation settlement negotiations.
In Malaysia there are also no express statutory provisions in relation to penalty clauses. Moreover, there is no judicial guidance as to the application of the penalty rule in Malaysia. Based on the English law precedents that have been followed, "the penalty rule should not apply if the parties were of relatively equal bargaining power".
In England, the common law position is that an agreed sum payable to the innocent party is regarded as a penalty and unenforceable unless it imposes a detriment on the breaching party substantially out of all proportion to that suffered by the innocent party. The difficulty in this context often lies in quantifying the correct proportion. A legitimate interest in the enforcement of a clause may exist even where the injured party lacks commercial freedom of action to refuse to pay sums unless they are reasonable.
The law in Canada relating to penalty clauses is, as may be expected, so closely linked to the English law position as to render the majority of judicial pronouncements interchangeable. The only major difference from the English approach is that the Canadian courts have suggested a rather less flexible approach to the proportionality idea.

Managing Risks and Avoiding Penalties

Employers and employees alike can take steps to avoid penalties for early contract terminations through clear communication and establishing positive relationships. For employees, understanding their rights and the specific termination clauses in their contracts is essential. Negotiating fair terms and consulting a lawyer when signing a contract can also help avoid future misunderstandings.
For employers, maintaining an open line of communication with employees about performance expectations and possible disciplinary actions is crucial. Clear policies on termination and grounds for dismissal can mitigate the risk of early terminations. Additionally , developing an employee handbook that outlines terms of employment can help both parties understand their rights, duties, and any penalties that may apply in the event of early termination.
Furthermore, fostering a positive work environment and effectively managing employee expectations may also decrease the likelihood of early contract terminations. Regular performance reviews and constructive feedback can help align organizational goals with employee aspirations.

Case Examples of Early Termination

Scenario 1: If the employer has evidence of the employee’s criminal misconduct, for example through police or court records, termination may be appropriate even if there is no criminal conviction yet.
Harper v. Rancho Los Amigos Hospital (2012) 203 Cal.App.4th 1457, 1477. In Harper, an insight into the employer’s position can be gleaned from its policy providing for termination of any employee who was arrested for alleged criminal misconduct. The plaintiff’s conviction in an unrelated case two months later, made clear the risk to the employer of waiting for a conviction before terminating the employee.
Scenario 2: Where an employee performs administrative functions such that he/she has access to confidential information, immediate termination may be appropriate to protect the employer’s interests.
Lynch v. Glassdoor, Inc. (2016) 245 Cal.App.4th 558, 568-570. In Lynch, the employee was terminated when he posted confidential internal communications on social media. The highly publicized public termination not only caused the employer to lose market share, but significantly impacted its IPO, making clear the risk to employers of losing such employees to competitors while they are still employed.
Scenario 3: Where the employee breached an agreement and misappropriated trade secrets, the threat of irreparable harm may justify early termination with summary termination.
Plantronics, Inc. v. Baehr (N.D. Cal. 2015) 2015 WL 12838887, *1, 51-54. In Plantronics, after providing the plaintiff with a 60 day notice period, the defendant choosed to terminate the plaintiff’s employment immediately, citing its "need to protect confidential information."
Scenario 4: Aggressive litigation against an employer by the employee frequently equates with termination being "grievous misconduct," justifying summary termination.
Beck v. Miranda O. Torres Corp. (Cal.Ct.App. 1979) 99 Cal.App.3d 514, 517, 518, 520. In Beck, the employee was terminated for "gross misconduct" that impaired his future employment to the detriment of the employer. John Alden Life Ins. Co. v. Laing (Bernard) (1990) 221 Cal.App.3d 202. The Court of Appeals affirmed summary judgment in the employer’s favor, concluding that Mr. Alden’s continued litigation of meritless claims following his termination, including three lawsuits in three different jurisdictions, was misconduct so grave as to warrant summary termination.
In another California decision, Lester v. Temecula Valley Hospital & Medical Center (2009) 176 Cal.App.4th 1005, 1009, 1010, 1013, the court of appeal held that where the employee engaged in "insubordination, offensive remarks and abusive treatment toward his supervisor" and his "insistence on personally confronting the supervisor" rather than specifically on the terms of the employment agreement on which he sued, his termination was justified on "grievous misconduct" grounds.

Consulting an Attorney

Understanding the possible ramifications for the breach of an employment contract can be a complex process. With possible claims for damages from the employer, along with the potential for a bad reference and a tarnished reputation, you could find yourself in a precarious situation. For this reason, you should always seek legal advice and support to help you understand your options and how you should proceed . A law firm or solicitors who specialise in employment law will be able to talk you through your options, help you to understand the possible legal ramifications, and provide support to help navigate you through what can be a challenging process. They will also be the best people to ensure that no legal loopholes have been missed during the early termination process.