Damages for Breach of Employment Contract With a Specified Term: Guidance for California Employers

Introduction

If your business enters into an employment contract that specifies a set duration, you should be aware of how damages are calculated in the event of an early, wrongful discharge or demotion.

How Damages Are Measured

When an employee prevails on a claim for breach of a specified-term contract, damages are generally measured as the amount the employee would have earned through the remainder of the contract, including salary, benefits, and any pay increases expected for the unexpired term (Silva v. McCoy, 259 Cal.App.2d 256, 260 (Cal. Ct. App. 1968)). If the contract includes options to extend, courts may factor the probability that the employee would have exercised such an option in projecting the damage period (Oldenkott v. Am. Elec., Inc., 14 Cal.App.3d 198, 204 (Cal. Ct. App. 1971)).

Offsets and Mitigation

The damages amount must be reduced by any compensation the employee actually received from other work during the contract’s unexpired term, or may be further reduced or eliminated if you, as the employer, show that the employee could have found comparable employment through reasonable diligence but did not do so (Erler v. Five Points Motors, Inc., 249 Cal.App.2d 560, 562, 567–68 (Cal. Ct. App. 1967)). A party found liable for breach bears the burden of proving facts relied on to mitigate damage (Steelduct Co. v. Henger-Seltzer Co., 26 Cal.2d 634, 654 (Cal. 1945)).

What Counts as Damages

Damages may reflect not only periodic wages but all contractually promised compensation—including health benefits, retirement, and bonuses—over the term that employment would have continued but for the breach. Actual damage is measured by “the amount of money the employee was out of pocket by reason of the wrongful discharge” (Erler, 249 Cal.App.2d at 567–68).

Practical Considerations for Employers

• Keep clear records related to contract terms, compensation, and benefits.

• Track employment dates, any contract extensions/options, and any earnings the employee may have received from new employment after discharge.

• If appropriate for your defense, gather evidence of comparable employment opportunities available and employee conduct that may have unreasonably increased damages.

Citations:

Silva v. McCoy, 259 Cal.App.2d 256, 260 (Cal. Ct. App. 1968); Oldenkott v. Am. Elec., Inc., 14 Cal.App.3d 198, 204 (Cal. Ct. App. 1971); Erler v. Five Points Motors, Inc., 249 Cal.App.2d 560, 562, 567–68 (Cal. Ct. App. 1967); Steelduct Co. v. Henger-Seltzer Co., 26 Cal.2d 634, 654 (Cal. 1945); CACI No. 2422.