Employment Contract - When do documents between an employer and employee consist of an "employment contract" under Tennessee Law?

Analysis:  The Tennessee Court of Appeals recently discussed the important issue of when a document or series of documents should be considered an “employment contract” under Tennessee law in Robert Thomas Edmunds v. Delta Partners, LLC, No. M2012-00047-COA-R3-CV, 2012 WL 6604580 (Tenn. Ct. App. December 18, 2012).  In this case the employee received several documents from his employer about his employment with Delta, the employer.  These documents included both a non-disclosure agreement and a non-competition agreement, to which the employee agreed to and signed.  (Edmunds at 1).  These employment documents (that the employee and employer executed) included the following language:

In consideration of the performance of all services required by Delta [ ], the confidentiality provisions and covenant not-to-compete set forth herein, the Company [i.e. Delta] agrees to pay Employee [i.e. Mr. Edmunds] a salary outlined in the Employee Offer Letter. This initial salary and other benefits provided to Employee pursuant to the Offer Letter may, from time to time as agreed by Employee and Company, be modified.

It is of note that both the employer representative and the employee signed the documents as well as the offer letter identifying the $65,000.00 starting salary.  (Edmunds at 1).  A dispute eventually arose about the compensation the employee was owed after the employer informed the employee in 2006 that the employer could no longer afford to pay the employee.  (Edmunds at 1).  Despite this representation from the employer, the employee continued to work for the company "out of personal loyalty" for over two years despite the fact he was only sporadically paid by the employer.  (Edmunds at 1 - 3).  Eventually the employee resigned in the fall of 2008 and then brought suit against the employer for breach of the employment contract (among other things). 

The trial court awarded significant breach of contract damages for pay owed under the "employment contract" that existed based on the employment documentation.  (Edmunds at 4).  As a result, one of the key issues on appeal was whether there was, in fact, an employment agreement.  The Appellate Court noted that Tennessee follows the "at-will employment doctrine” which basically means that "employment contracts of indefinite duration are terminable at the will of the employer or employee for any or no cause."  (Edmunds at 7) (citing Guy v. Mutual of Omaha Ins. Co., 79 S.W.3d 528, 534-535 (Tenn. 2002)).  The Appellate Court, however, found there was an employment contract in this case because of several supporting factors.  One was the employment document was signed by both the employer representative and the employee.  (Edmunds at 6).  Additionally, there were non-disclosure and non-competition requirements for the employee and the agreement spelled out the specific duties of the employee.  (Edmunds at 6).  Additionally, one of the document refers to itself as an “agreement.”  The court therefore found that because "an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law" is an enforceable contract under Tennessee law, the terms of the relationship between the parties in this case consisted of employment contract.  (Edmunds at 6). 

The employer, however, argued that because the contract was for an indefinite term that the employer could terminate the contract at its sole discretion at any time and therefore the employee had no enforceable right to recover compensation as he was promised under the contract. (Edmunds at 6).  The real problem in this case for the employer, however, was the employer never actually terminated the employee's employment. (Edmunds at 6).  There was a conversation at least two years prior to the employee's resignation where the employer informed the employee that it did not have money to pay the employee, however, the employer continued to accept the employee's services and he continued to work there for multiple years prior to resigning from the position. (Edmunds at 6, 7).  During the time the employee continued to work without payment the employer’s owner told the employee that he would catch him up on "back pay" and would pay him for the entirety of his work and make everything right in the end.  (Edmunds at 7).  The Appellate Court therefore the employee remained an employee until his resignation in October of 2008 and therefore was entitled to pay during the entire time he worked pursuant to the employment contract. (Edmunds at 7, 8).

This case is important because it shows how crucial it is for an employer to make it very clear what its intentions are for an employee at the beginning or end of employment.  Based on my reading of this case it appears there were a lot of "employment" documents exchanged and signed by the parties that did not properly clarify whether or not there was an employment contract between the employer and employee.  Additionally, the employer never made it clear when it informed the employee that the employer could no longer pay the employee, whether the employee was no longer employed by the employer as a result.  The parties then moved forward after this “no pay” conversation and the employee continued to work for the employer for over 2 years.  As a result of these facts, in the end the employee was found to be under an employment contract and therefore was owed pay for the entire length of the employment contract until the employee's resignation.  Employers should be made aware of this case because it shows what can happen when there is a fuzzy, poorly defined employer – employee relationship.  Generally employment documents are going to be construed in favor of the employee so Tennessee employers must be very careful in properly defining the employer – employee relationship at the beginning and the end of the relationship. 

This case actually reminds me of one of my favorite Seinfeld episodes.  In that episode Kramer is fired from a job where he was never really hired by the employer to work there in the first place.  The short clip of the key scene in this Seinfeld episode can be viewed here.  The key lines at the end of the scene when Kramer is terminated from a job where he was working, but was never actually hired, are as follows:

            Boss – “I am sorry, there is just no way we can keep you on.”

            Kramer – “I don't even really work here.”

            Boss – “That's what makes this so difficult.”