Good Cause Defense for Terminating a Specified-Term Employment Contract: Guidance for California Employers

Introduction

California employers who contract for a fixed period of employment should know the statute and legal standards governing early termination. Unlike “at-will” employment, specified-term contracts sharply restrict your ability to discharge or demote an employee before the end of the contract.

Legal Grounds for Early Termination

Labor Code section 2924 sets out the exclusive statutory grounds: An employee under a contract for a specified term may only be discharged early for (1) willful breach of duty; (2) habitual neglect of duty; or (3) continued incapacity to perform. Employers cannot simply rely on honest but mistaken belief or minor performance issues to justify early termination (Khajavi v. Feather River Anesthesia Medical Group, 84 Cal.App.4th 32, 57–59 (Cal. Ct. App. 2000)).

What Counts as Good Cause?

“Willful” breach means the employee knowingly and intentionally failed to perform their duties (May v. New York Motion Picture Corp., 45 Cal.App. 396, 403 (Cal. Ct. App. 1920)). Disobedience of reasonable, contractually consistent instructions may constitute a breach entitling the employer to renounce the agreement (id.).

“Habitual neglect” requires ongoing failure to meet job responsibilities—not isolated or minor lapses (Holtzendorff v. Housing Auth. of Los Angeles, 250 Cal.App.2d 596, 610 (Cal. Ct. App. 1967)). Even if no demonstrable injury results from the neglect, discharge is justified (Bank of America Nat’l Trust & Savings Ass’n v. Republic Prods., Inc., 44 Cal.App.2d 651, 654 (Cal. Ct. App. 1941)).

“Continued incapacity” applies only where the employee is unable to fulfill duties and such incapacity is not covered or excused by law, such as statutory leave rights.

Employer Cautions

Not every deviation from the employer’s desired standard is sufficient. There must be a wilful act or misconduct—the employee’s sincere efforts to serve the employer’s interests generally warrant protection until the contract ends (Holtzendorff, 250 Cal.App.2d at 610).

A mistaken or subjective belief that the employee breached their duties does not constitute good cause for ending a fixed-term contract early (Khajavi, 84 Cal.App.4th at 39).

Practical Takeaways for Employers

• Reserve contract rights for termination only for clearly defined reasons.

• Document all instructions, warnings, and evidence of willful breach, habitual neglect, or incapacity.

• Avoid early termination for minor or isolated performance lapses.

• Know statutory leave protections and distinguish incapacity from protected absence.

• Understand that specified-term contracts grant much greater job security to employees than implied contracts or at-will arrangements.

Citations:

Lab. Code §§ 2922, 2924; Khajavi v. Feather River Anesthesia Med. Grp., 84 Cal.App.4th 32, 57–59 (Cal. Ct. App. 2000); Bank of America Nat’l Trust & Savings Ass’n v. Republic Prods., Inc., 44 Cal.App.2d 651, 654 (Cal. Ct. App. 1941); Holtzendorff v. Housing Auth. of Los Angeles, 250 Cal.App.2d 596, 610 (Cal. Ct. App. 1967); May v. New York Motion Picture Corp., 45 Cal.App. 396, 403 (Cal. Ct. App. 1920); CACI No. 2421.