EMPLOYMENTCONTRACTS

This article is written by Samyak Lunia, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).

Introduction

An employment contract is an agreement that is entered into between an employer and an employee, which mentions the terms and conditions of the contract that need to be followed by them. This employment contract becomes binding on both the parties after they have signed the contract and after signing of this contract, if either party violates any terms of the contract or fails to perform their duties that are mentioned in the contract, then the party who is in default will be held legally responsible for their actions. In other words, when either party fails to perform their duties which they have agreed to while signing the contract or violates any term of the contract, then it will be known as ‘Breach of Contract’. The party in default will be held legally responsible for such a breach. Through this article, the author seeks to explore how damages are calculated and the various modes of recovery when there is a breach of the employment contract. 

How are damages calculated when an employment contract is breached?

When a contract of employment is signed between an employer and an employee, there are certain terms and conditions that are mentioned in the contract which need to be followed and when they sign the contract, it means that the parties to the contract have agreed to terms and conditions mentioned in that contract. In the case of a  breach by an employee or breach by an employer, the party who is in breach of the terms and conditions of the contract will be held liable for such breach and will have to pay the damages to the other party who has suffered because of such breach. 

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For instance, not paying an employee the fixed wage as stated in the contract or refusing the benefits to an employee to which he is entitled to as per the contract would constitute a breach of the contract.  Similarly, let’s take an example where an employee has committed a breach. So, for instance, when it is clearly mentioned in the terms of the contract that the employee should refrain from disclosing some confidential information of the company to anyone, but the employee has done so, then in such a case, the employee has committed the breach and he will be held liable for the same. 

In the subsequent parts of the article, we will sew what types of damages can be claimed when such a breach of contract takes place:

Expectation damages

This is awarded when the other party has been promised a certain amount of bonus in the contract. Suppose the employer has promised to pay Rs. 1,00,000 as a bonus to the employee at the end of the year if he is able to complete all the tasks within or before the time frame within which he was asked to complete the task.  Here, if the employee has fulfilled the condition of the employer and at the end of the year, the employer has given him Rs. 50,000 as a bonus for his work, then in such case the employee can ask for another Rs. 50,000 which was promised to him by the employer. This amount is the ‘expected damage’ that the employee was entitled to receive but didn’t receive because the employer breached the terms of the contract. In expectation damages, the measure of damages to be obtained is the difference between what was given and what was promised to the injured party, along with consequential and incidental expenses minus any payments received from the breaching party as a result of the breach.

However, employees are legally obliged to “mitigate” the damage caused by the breach of contract. This means that employees must take appropriate measures to minimize economic losses, such as finding another job. The employee’s damage is deducted from the amount that the employee actually earned or should have earned with reasonable effort.

For example, Stefan has a three-year employment contract that states that he can only be terminated for “serious financial misconduct” during the term of the contract. The contract provides for an annual salary of Rs. 15,00,000 plus benefits. Two years later, Stefan was fired to allow the company’s new CEO to bring in his own management team. Stefan can’t just spend a third of the year in front of the television on the sofa and then demand Rs. 15,00,000 plus the value of his accomplishments. Instead, he has to find a new job. 

If he finds one, he can ask the court what he’s lost in being fired. If Stefan dutifully looks for a new job and then finds out four months later that he is being paid Rs, 25,000 less per month (with similar benefits), he can go to court t for Rs. 7,00,000: Rs. 5,00,000 for the four months in which he was unemployed plus Rs. 2,00,000 in order to offset the difference between the contractually agreed income he should have earned for the next eight months ($ 25,000 x 8). 

The duty to mitigate damages falls on Stefan as it is the plaintiff that must take all reasonable steps to mitigate the loss he has sustained as a consequence of the defendant’s wrong, and, if he fails to do so, he cannot claim damages for any such loss which he ought to have avoided reasonably. In this particular example, Stefan cannot claim damages for the months he sat at home if he did not put in efforts to get hired in a job with similar pay, status etc.    

Liquidated damages

Some employment contracts contain provisions on liquidated damages. The terms of the contract stipulate that if a breach occurs, one party must pay the other party a certain amount decided while negotiating the contract. Liquidated damages as compensation are used to compensate for breaches that are difficult to assess in monetary terms. However, these terms are relatively few in the employment contract. (It is usually easy to find out what employees have lost in terms of the salary and benefits.) If your contract includes a liquidated damages clause, you can claim that amount in court.

For example, if the Company has employed a Construction Company to construct a building in one year and has agreed to pay such amount as agreed between them, and they have put a liquidated damages clause in the contract which says that if either party breaches the contract and leaves the work in between, then in such case the party who has committed the breach will have to pay Rs, 10,000 per day as liquidated damages for such breach and if the breaching party does not pay the amount as agreed, then in such case they can move to the Court for claiming such amount.

Compensatory and punitive damages

Compensatory and punitive damages are awarded for emotional distress. They are typically limited to cases that involve harassment and/or discrimination. Emotional stress compensation (sometimes called pain and suffering compensation) and punitive damages are damages designed to punish the employer for, particularly unwarranted harassing and discriminatory behaviour.  However, you cannot obtain them in breach of contract.

Attorney’s fees

The employee can receive the attorney’s fees in cases of breach of contract if he has filed the case- only when there is a clause related to attorney’s fees in the contract.  Otherwise;  the Court also has no right to ask the employer to pay the attorney’s fees of the employee, if there is no clause related to the same in the employment contract.

Limits to recovery for breach of employment contract

There are certain limitations on breach of employment contract for claiming damages. It is not necessary that the non-defaulting party will always receive damages for breach of the terms of the contract. They will receive the compensation for breach only when they are able to prove that they have suffered a real financial loss. Employees are not entitled to receive compensation for damages related to pain and suffering, i.e., emotional stress, and also, they are not entitled to punitive damages. 

There are certain situations under which damages to the party will either be reduced, or they will not receive it at all. Following are the situations mentioned below:

‘At will’ clause

This type of clause is generally not there in the employment contract in India. Employment at will is one of the clauses of employment contracts in the U.S. which means that an employee can be terminated from his job at any time by the employer for any reason, but the reason must not be an illegal one. Likewise, an employee can leave his job at any point in time. This also means that an employer can also change the terms of the contract at any point in time without any notice and consequences. For example, an employer can alter the salary of the employee or can terminate the benefits that the employee was receiving. One thing that must be noted here is that this situation does not apply in situations where the employer has unlawfully terminated the employee.

Foreseeable damages

When an employer and employee enter into the contract, they have the knowledge that if they commit a breach, then there will be potential consequences that might arise naturally as a result of said breach. Recovery of those damages is allowed for the damages that were reasonably contemplated by the parties to the contract, at the time the contract was made, as a probable result of a breach.  The breaching party should have had knowledge about the likely consequences of the breach. For example, when an employer has informed his employee that these are some tasks that need to be completed within a few days and if he is not able to complete the work within the stipulated time as informed to him, then they will have to face a huge loss. Knowing full well the probable consequences of inaction and thus, a resultant breach of contract, if the employee still doesn’t finish the work as stipulated in the contract, he cannot argue that he didn’t have enough knowledge about the situation to have contemplated those likely damages.

Proof of damages 

In cases where the non-breaching party cannot provide clear and verifiable proof that they are entitled to such damages, the court has specifically held that the court is competent to award reasonable compensation in a case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. 

Suppose an employer has hired an employee as manager for his business (Liquor business). When the contract was entered, there was a certainty that the manager would have the job but when the government imposed a  ban on liquor, then the contract between them became uncertain because the business which they were running became illegal in the eyes of law and they can no longer run their business in that state, the employee can claim damages even though no real damages have arisen. 

Duty to mitigate

When an employer and employee enter into a  contract, it is their duty that they must mitigate all the situations in order to make sure that they will not suffer any loss and even if any of such events arise before them, then they should be able to mitigate as much as they can. The duty to mitigate is a common law principle that requires an employee to minimize their losses or the damage they have suffered, after being terminated. 

The rule of mitigation must be applied with discretion. A man who has already misplaced himself by breaking his contract has no right to impose new and extraordinary duties on the aggrieved party. For example, if an employee has been wrongly terminated, he must make reasonable attempts to find a new job that is comparable in status, honour etc. to the employee’s old job. If they wait to be employed again because they were wrongfully terminated and did not, therefore, put efforts towards gaining new employment, their employer may be able to argue for a reduction in the damages that he is supposed to pay.

Conclusion

To conclude, we can see that the employee or employer will not receive damages for the breach of the contract in every situation. There are certain duties and responsibilities on their part that they should follow in order to get the damages they deserve when the breach has actually happened, and mitigate the situation properly. 

References

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