Breach of Employment Contract for a Specified Term: What California Employers Need to Know

Introduction

Employers who enter into employment contracts for a definite term—such as one year or more—should understand their unique duties and potential liabilities under California law. When a contract sets a fixed length of employment, termination rules are stricter than the flexible “at-will” standard.

When Is an Employment Contract for a Specified Term Breached?

An employee alleging breach of a specified-term employment contract must prove:

1. The existence of an employment contract with a clearly defined period of employment;

2. That the employee substantially performed job duties (unless performance was excused or prevented);

3. That the employer discharged or demoted the employee before the contract period ended; and

4. That the employee was harmed by the employer’s action.

(Kane v. Sklar, 122 Cal.App.2d 480, 482 (Cal. Ct. App. 1954).)

Legal Standards for Early Termination

California Labor Code section 2924 provides that employees hired for a specified term may only be terminated before the end of the contract for “wilful breach of duty, habitual neglect of duty, or continued incapacity to perform.” This sharply limits when early discharge or demotion is permitted, contrasting with the broad discretion in at-will relationships (Lab. Code §§ 2922, 2924; Khajavi v. Feather River Anesthesia Med. Group, 84 Cal.App.4th 32, 57 (Cal. Ct. App. 2000)).

Calculating Damages

If the specified-term contract is breached, the measure of damages is usually the contract compensation for the remaining period. However, this amount:

• Must be reduced by any compensation the employee earned from other work during that time;

• May be further reduced or eliminated if you, as the employer, show the employee could have found comparable work through reasonable effort but did not do so (Erler v. Five Points Motors, Inc., 249 Cal.App.2d 560, 562 (Cal. Ct. App. 1967)).

Practical Steps for Employers

• Ensure duration and terms are clear and explicit in employment contracts.

• Keep records of the employee’s performance and all discipline or incapacity issues.

• Be aware that terminating a specified-term employee before the contract ends, without statutory cause, exposes your business to contractual damages.

• If facing a claim, document availability of comparable employment and the employee’s efforts (or lack thereof) to mitigate damages.

Citations:

Lab. Code §§ 2922, 2924; Civ. Code § 1439; Kane v. Sklar, 122 Cal.App.2d 480, 482 (Cal. Ct. App. 1954); Khajavi v. Feather River Anesthesia Med. Group, 84 Cal.App.4th 32, 57 (Cal. Ct. App. 2000); Erler v. Five Points Motors, Inc., 249 Cal.App.2d 560, 562 (Cal. Ct. App. 1967); CACI No. 2420.