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Do money problems release you from honoring employee contracts?

On Behalf of | Feb 16, 2021 | Business Litigation

After revealing your company’s financial struggles and letting a few employees go, you learn that one of them wants to take legal action against you. Do accusations of violating an employment contract have any merit during such difficult monetary times?

Chron explores when employers do not have to honor employment contracts during financial hardship. Understand how to react to your former employee’s claims.

Agreement vs. contract

The first thing to establish is whether the employee signed an employment contract or an at-will agreement. Usually, companies may terminate employees who sign at-will agreements for nondiscriminatory reasons, just as employees have the right to quit when they see fit. Employment contracts usually describe the circumstances under which either party may end the contract.


Did your business’s financial troubles lead you to file bankruptcy? With Chapter 7 bankruptcy, you eliminate your obligation to honor employment contracts while closing the doors on your company and selling assets. Chapter 11 bankruptcy allows businesses to stay open while creating a plan to resolve debt, which may not let them off the hook for honoring existing employment contracts.

Agreement negotiation

Rather than let go of contracted employees, consider working with them to renegotiate your agreement. Doing so may involve a lot of time and energy, but a potential alternative is facing a lawsuit from a contracted worker whom you terminated. If you feel you have no choice but to let go of an employee who signed a contract, ask for that worker’s consent before doing so.

Understand your rights as an employer in California and your responsibilities to employees. Financial hardship does not trump employment law violations.