Is There a Penalty for Early Termination of an Employment Contract?

Is there a penalty for terminating a contract early in an employment contract? The answer depends on what you consider a sentence and how the professional can terminate the contract. In all contracts, there needs to be termination language, meaning how the professional can terminate the employment agreement. And it’s usually one of four ways. If there’s a fixed term, so let’s say it’s a one-year contract, there’s no language about automatic renewal. After the term ends, the contract terminates, and the parties can move on. Two, mutual agreement, if the relationship isn’t working out and both parties are okay moving on, they can mutually agree to terminate and move on.

Can an Employer Terminate a Contract Early?

An employer can terminate an employment contract early, subject to the specific terms and conditions outlined in the agreement. Early termination may be permissible if it is based on valid grounds, such as performance issues, misconduct, or changes in business needs. However, the termination process must adhere to the provisions within the contract and comply with applicable labor laws. Employers should provide adequate notice, as required by the contract or law, and may be obligated to offer severance or other compensation, depending on the circumstances. It is essential for both employers and employees to thoroughly understand their rights and obligations under the employment contract and relevant legislation to ensure a lawful and fair termination process.

Employment Contract Early Termination For Cause

You can terminate for-cause. If one party is in breach, give them written notice, and then they have a certain period to fix whatever the breach is. And then lastly, without-cause termination is the most standard way of terminating a contract. It simply means either party can terminate the agreement at any time with a certain amount of notice to the other. It depends upon the industry, but anywhere from 30 to 90 days is standard. Whether the professional must pay the penalty or be penalized depends upon the agreement’s language. Let’s say the professional also received a signing bonus or relocation assistance. They’re moving from out of state or to a different city. Most of the time, there will be language in the contract that if the professional leaves before a certain period, they’ll have to pay back a portion of the bonus.

Minimum Term Employment Penalty Clause

Let’s take a $20,000 signing bonus as an example, and let’s say it’s a two-year contract. The professional receives the $20,000 signing bonus. The contract may state that it usually would be monthly forgiveness for the first two years of the agreement. So, every month that the professional works, 1/24 of that 20,000 are forgiven. If they stay for two years, they don’t have to pay anything back for the signing bonus. They only lasted a year and are left in that scenario. Well, they owe half of the signing bonus back. So, they’d have to pay back the employer $10,000. And that would, I guess, be considered by most people to be a penalty. 

Same for the relocation assistance. The same thing would apply if they reimbursed the professional for the costs associated with the move. Usually, it will stick to the initial term length, and they’d have to pay back a portion. Some places do monthly, some do quarterly, and some do yearly forgiveness. It’s better for the professional if it’s monthly forgiveness. Because if you think of it this way, let’s say the professional leaves in month 11. It’s yearly forgiveness, well, they spent almost the entire year there, but they left before the year ended. Now they must pay back half of the scenarios spoken about earlier. Whereas if it’s monthly, you will get 11 of the 12 months forgiven.

And so, you wouldn’t have to repay as much. Some contracts will have a penalty or liquidated damages if the professional leaves within a certain period. They’ll ask for recoupment of recruiting fees in healthcare credentialing, privileging, any money they’ve spent on licensing, and DEA registration.

What if the Professional Leaves Before the Contract Expires?

They may say in the contract that if the professional leaves in the first year, they must pay us back and reimburse us for everything we spent. I wouldn’t say I like that kind of language in a contract. I understand that the signing bonus and relocation assistance should be reasonable forgiveness. Still, for recruitment fees, that’s just kind of the cost of doing business in my mind. So, that could be another penalty. Rarely would I see a contract with a fixed number, meaning if the professional leaves within a certain period, they simply must pay back 20,000 or 50,000 or whatever the number is. That is in some contracts. I wouldn’t say I like that language either. I don’t think that’s fair. But these are all things the professional must consider and absolutely must negotiate before signing the employment agreement.

Legal Consequences of Improper Early Termination

Everything looks great for everyone who enters a new job with the intention of it being a tremendous opportunity. All the people are great to work with when you get there. It’s terrible, or if you’re based upon collections, commission, or whatever, the work isn’t there. You’re not making nearly as much as they said you would or expected. In that scenario, you want the option to terminate the agreement and move on. And if a bunch of penalties is associated with that, it could be a problem.

Another thing to think about is if someone has a bunch of penalties in their contract for leaving. Let’s say in the first year, usually to me, that’s a red flag that they’ve had difficulty holding on to people. This means they’re probably a lousy employer or treat their employees poorly or for whatever reason. But if there’s a bunch of penalties in the contract for leaving within the first year or two, that usually means they’re either bad businesspeople or treat their employees poorly. So, something to think about as well. Those are how professionals can be penalized if they leave before the term ends. Really must think about, alright, if this goes bad, what will I owe after the contract ends? And then you must determine if it’s worth even pursuing the opportunity or not.

Other Blogs of Interest

• Contract Termination Letter: Can You Write an Email to Terminate a Contract?
• What Should be in a Termination Agreement Letter?
• Early Termination of Employment Contract by an Employee

Consequences of Breaking an Employment Contract

What are the consequences of breaking an employment contract? The first issue is what is considered breaking a contract. Some think just exercising their right to terminate the agreement breaks the contract. I don’t think of it that way. You don’t give proper notice when I think of breaking a contract. You simply leave the job without following the terms of the agreement. In that scenario, what are the potential consequences? Let’s say professionals at a job are not working out for whatever reason. In almost any employment contract, there will be a section discussing how to terminate the contract. And then, within that section, there’ll be what’s called without-cause termination. Without-cause termination means either party can terminate the agreement at any time with a certain amount of notice to the other party, generally between 30 to 90 days.

Breach of Notice Period Agreement Might Cause Legal Damages

Let’s say the professional walks in on Monday and says, I’m leaving tomorrow. Still, they had a 60-day without-cause termination notice requirement. Well, if that does happen, the employer could then potentially go after. When I say go after, I mean legally go after them, sue them for breach of contract. And when you sue somebody for breach of contract, it can involve several damages. There could be lost profits for what they would’ve expected that employee to generate during those 60 days. They could also go after the replacement value. They could go after the employee if they had to find a costly short-term replacement. There could be damages for recruitment fees in trying to find that employee’s replacement. They could maybe go after them to get back a signing bonus, relocation assistance, licensing fees, and credentialing if they’re a healthcare provider.

So, if you break a contract, you walk out and don’t fulfill the terms of the agreement. The professional may be liable for several things. When I’m having a consultation with somebody unhappy, they say, well, these are all the things the employer is not doing right. They’re not paying me my bonus in time, or they’re making me work more than that in the contract, or I have to take twice as many calls as they said I would. Okay, just because they’re doing it or breaking the contract doesn’t mean you can leave and then cite that as a reason. 

What Should You Do If Your Employer Is Breaking a Contract?

If you believe the employer is in breach of contract, you need to provide them with written notice that states you are in breach of contract for these reasons. And then typically, there’d be some language that states you can cure the breach, usually somewhere between 15 to 30 days. And if the employer does fix the problem, then the employee cannot terminate the contract for-cause.

If you can terminate it for-cause, usually, it can be immediate. You give the employer written notice that they’re in breach of contract and if the employer does nothing. It would be the option of the employee to terminate it immediately. That is simply different than the employee just breaking the contract. It would be best if you went through it to protect yourself under the terms of the agreement. And even if the employer is not fulfilling their terms, you still must give them notice. You still must wait for the cure period. Then if they fix whatever the problem was, you still can’t just break the contract and jump immediately to a new position.

How to Ensure Your Safety if You Need to Break an Employment Contract

To protect yourself, read the contract, see how the contract can be terminated either for-cause or without-cause termination, and follow the requirements. Suppose you must give 60 days’ notice to terminate the agreement without-cause. In that case, you must provide 60 days’ notice, or you can potentially open yourself up for a lawsuit in damages. Lastly, there will be a section in the contract that states how to give effective notice. What I mean by that is it will say to provide proper notice. You must send certified mail, hand delivery, a written letter to the address of the business or the attorney of the firm, or whatever. 

If you don’t give effective notice, It is not considered a proper termination. Means you don’t follow that notice section. And in that scenario, the employer can say, “Well, you owe us another 60 days until you give us effective notice.” So, follow the termination section, and follow the notice requirement. In that way, you can avoid paying anything back to the employer or damages for lost profits, recruitment fees, etc. I went over it at the beginning of the video.

Can an Offer Letter Be Revised After Signing It?

Can an offer letter be revised after signing it? In short, yes, it can. There are infrequent times when an offer letter, also known as a letter of intent, would be binding upon a professional. I mean, it would need to explicitly state that the terms of the offer letter are binding. And usually, in that case, it would be something in academia and much more detailed than just a standard employment contract. I can’t recall a time where an offer letter said it is binding with an employment agreement to follow that would also be binding. And there are several reasons why most employers don’t do that. 

First, from the employee side, receiving an offer letter will break down the basic terms of the employment relationship:

• The compensation, 
• Productivity,
• Bonuses, 
• The length of the term,
• How long the contract lasts, 
• How it can be terminated,
• Some of the benefits, 
• Malpractice insurance, 
• If necessary, the restrictive covenant, 
• Non-compete, 
• Non-solicit 
• Non-disparagement confidentiality

It’s basic terms. An offer letter is usually a page or two at the most. In contrast, an average employment agreement is at least 20 pages and could be longer. It’s just basic terms. Now, if you look at basic terms and say, you know what, that’s an excellent salary. I’m okay with that. And maybe it just says it has a non-compete but doesn’t have the actual terms. And then you agree to sign the offer letter. But then, when you get the employment agreement, you have some context provided. Having some specific language provided could change a contract you thought would be significant to cannot be not so great.

When You’re Uncomfortable With the Terms

And let me give you an example. Let’s say, in the offer letter, it says, yes, there’s non-compete. But it doesn’t have any terms. Then you look at the actual employment agreement. The non-compete lasts for three years and a hundred miles from your primary practice location, sales territory, or whatever. Well, that job where the comp looked great, maybe the benefits look great. Well, if the non-compete will force you to move from your current community, that may be a deal-breaker for some people. Maybe you can go back to them and say, hey, I’d like the terms of this non-compete reduced. It is not what I was expecting. It’s much more restrictive than average. And for me to feel comfortable signing this agreement, we need to change these terms.

Revision Due to Lack of Specificity

The terms may not have been in the offer letter, but you want to get the terms changed before you sign the employment agreement. What if they say no? Let’s say they say, no, we’re not willing to change the terms of the non-compete. Well, you could go back to them and say, I know we already agreed to base salary. However, if I’m going to accept the terms of this non-compete, it’s not worth what I decided to initially.

 It’s worth a hundred thousand more for me to agree to this. Although we originally settled on the base salary in the offer letter, I’m not okay with that now. I’m not going to accept that now. And if you want me to sign this employment agreement, we will need to change the compensation structure. That’s fine. They may be upset. They may be irritated. Still, when you do something like that, when you’re coming back at them and renegotiating already negotiated terms listed in an offer letter, you need to provide context and reasoning for why.

Can You Change an Offer Letter After You’ve Already Signed It?

And non-compete is a good example. I didn’t have the terms of what it would be. Now that I see those specific terms, I’m not okay with it. And this is the reason why I want changes to other things. I think any savvy employer is going to understand, okay, well, I mean, that makes sense. Now, they may not be willing to make any changes. And as I said before, they may be slightly upset that you’re coming back at them. Still, I would never suggest that a professional should ever sign an employment agreement with terms. They’re not willing or comfortable just because they signed an offer letter and agreed to the terms of an offer letter. Unless it says it’s binding, it is not binding. You can still negotiate terms even though you signed the offer letter. And even though you negotiated them initially. It is much better to tick off an employer and maybe reach terms than to accept terms with which you disagree.

If you go into a job and feel your compensation is not correct. Or you are concerned about one of the restrictive covenants. Most people don’t last that long in those positions. You want to feel good going into a new job. If you don’t feel good even if you’ve signed the offer letter, don’t go through with taking on the new job and starting a new position.

Go through with taking on the new job and starting a new position.

Can an Employee Terminate an Employment Contract?

The short answer is, obviously, yes. However, it will be determined based on the terms of the contract. In any employment contract, there will be a section that deals with the times, the employment contract’s length, and then termination, so how that contract ends. Let’s first talk about the terms of the agreement.

Most employment contracts will have a date, meaning it’s a year-long, two-year, or three-year contract. Then if the agreement doesn’t terminate, it will state a language. It will automatically renew for successive one-year terms. In that case, if a contract isn’t closed in another way after the initial period ends, it’ll just continue forever until terminated.

I would say there is a rarely fixed term with no language about automatic termination. If it’s just a two-year fixed term with no automatic renewal, it would just end at the end of two years, and that would be it. The parties can go their ways. 

What Are the Reasons for Contract Termination?

Now, regarding terminating the contract, the first part is that if there is no renewal, it ends, and the employment contract ends. Second, by mutual agreement. Suppose the employer and the employee agree that the relationship isn’t working. In that case, they can always, by contract, decide to move on, and then that’s it, you can move on. Next would be with-cause termination. In this case, if someone breaches the employment contract, there’ll be language that states why the employer can fire the employee. If you need a license to perform the activity and lose your license, or if insurance is required and you’re uninsurable. There are, I guess, vague behavioral clauses. 

If you’re disabled, you die, I mean, ordinary things, but there should also be a part called a cure. And so, in that case, if one of the parties believes the other party is in breach of an employment contract, the most common reason is just payment concerns. Either someone is unpaid, they were promised an amount in the associate employment agreement, or maybe the timing. Also, the bonus payment is involved, and there is disagreement over the professional owed amount. That’s always a big, I guess, reason why there would be an allegation of breach of contract. 

What Happens if Breach of Contract Is Committed?

If you believe the employer breached an employment contract, you’d have to provide them with written notice. And then the cure period means the employer would have a period to fix whatever the breach of associate contract is. Typically, that’s somewhere between 15 to 30 days. And the same can go for an employee. 

If the employer thinks the employee is in breach of contract, they give them written notice, and then the employee has 15 to 30 days to fix the breach. If the breach is unfixed, the other party still believes the other party is in breach. Usually, that party has the option to terminate the dental associate agreements immediately. The last and most common way in most employment contracts is without-cause termination. There’ll be language that states that either party can terminate the employment agreement at any time, for any reason, with a certain amount of notice to the other party.

Typically, it would be somewhere between 30 to 90 days. Suppose the professional is unhappy and wants to move on. In that case, they give written notice saying I’m utilizing the without-cause termination notice in the employment contract. Then they must work out for 30, 60, or 90 days. Then at the end of that period, they can move on without any concerns regarding terminating the employment contract. Yes, an employee can terminate an employment contract, but they must follow the terms of the agreement. 

Employment Contract Termination and Non-Compete Law

Just because an employee terminates, the contract doesn’t mean it necessarily ultimately ends at that point. They could be required of the employee if they terminate the contract. Many times, if given a signing bonus or relocation assistance, The employee would have to pay back a prorated portion of that if they left within the initial term of the employment agreement. Others could have non-compete associated with it.

So, just because an employee terminates the contract doesn’t mean that the non-compete doesn’t apply. It does, or at least it does in most circumstances if you’re in a state where non-competes are enforceable. How long will that last if there is a geographic restriction and then some temporary condition? That will continue even if the employee terminates the contract. If some malpractice insurance is involved and tail insurance is needed, it will say who must pay for that in the contract. Employees may also be responsible for that if they terminate the agreement. Although the employee can terminate the employment agreement, it doesn’t mean that there aren’t at least some strings attached. 

One of the highest priority things I look at in the contract when I’m going over it with a professional. How do you get out of the agreement? And then what do you have to do if it ends within a certain period? In that way, the employee can know that I need to set aside this amount of money if I must pay for tail insurance or if I must pay back the signing bonus. So, they’re essential discussions and things employees could negotiate before signing any employment agreement. Hopefully, that was helpful—kind of an overview of termination of an employment contract. 

How You Can Terminate an Agreement

You probably shouldn’t, and your employment contract probably prohibits it. In any agreement, it’s going to state how you can terminate an agreement. It could be for-cause, without-cause, mutual termination, or maybe the initial term ends. But in most cases, I mean most contracts are terminated without-cause termination. Without-cause termination means, either party can terminate the contract with a certain amount of notice to the other. Typically, around 30 to 90 days is a standard amount for most employment agreements. Suppose you are an employee, and for whatever reason, you don’t want to work for the employer anymore. In that case, you must follow those terms written on the without-cause termination notice.

And it always needs to be written. It’s going to state that you must write a letter. And then, it will also say if it’s a 60-day without-cause termination. The employee has to provide it 60 days prior, work it out, and after the 60 days are over. The employees are free to go once the contract terminates, and the employees are free to move on. They want to go where they want to go after that—considering if there’s a non-compete or a non-solicit. Still, we’re not going to get into that today. 

How Do Employees Communicate a Notice?

The most crucial part as far as this goes is that it will be called “notice” or “notices.” It’s toward the back of the employment agreement initially provided by the company. And this will state who, then how you need to provide notice if there is communication.

An employee could provide in writing a certified letter or overnight hand delivery of whatever termination notice you’re going to provide. And that would then be considered adequate notice. Very few contracts allow email as an effective notice medium. If you gave, let’s say, you wrote an email telling your employer. I’m giving you without-cause termination notice, and I have 60 days. X will be my last day of work. I appreciate the opportunity. Well, if the email is not an effective communication medium within that notice section, that’s not considered effective notice. And then, the employer could make you work for another 60 days until you provide adequate notice. So, that’s the essential part. You need to look in the notices section and determine if the proper way to terminate the employment agreement includes email. 

I can tell you if I review a hundred employment contracts, 98 of them will not include email or fax. And you certainly can’t just verbally tell your employer you’re leaving. It must be in writing. And most often, it has to be sent either by certified mail or hand-delivered. It depends on whether you work for a small practice or a vast conglomerate with locations in every state. It’ll be impossible to hand-deliver the notice if you must provide notice to the headquarters, and that’s halfway across the country. 

The Consequence of Notice Not Received

To be safe for the most part, you need to write a letter. You’ll have to print it out and send it via certified mail that the employer is using. Usually, it’s one or two. You must send it to the owner if it’s a smaller practice. If it’s a big conglomerate, you have to send it to probably your boss plus the legal apartment of the company as well. If you look through, how much notice do I have to provide? And then how do I have to provide effective notice? You’ll be safe. 

I have a couple of scenarios, and people have called me after the fact. And they’ll say I sent a letter to my employer’s email. I told them I was going to terminate the employment contract, and they didn’t say anything. I assumed that my contract would end on a specific date. The employer was mad about the employee leaving the company. The employer ticked off that they were leaving. So, what they did was they just sat on it for 45 days. And then, 15 days before the physician thought he was going to leave, they said, you didn’t provide us with effective notice. Email isn’t an effective form of communication to provide notice. You owe us another 60 days until you give us adequate notice, meaning a written letter sent via certified mail. 

And so, the physician had already lined up another job, he had a start date in mind, and then he had to return to the new employer. He would say, I apologize; I will have to delay my start date by almost two months. That was a tough pill to swallow for the physician. If you follow the terms of the notice section, then you should be okay.