Good Faith & Fair Dealing in Employment Contracts

Employment contracts are often used to define the specific terms and conditions of the relationship between an employee and an employer.  Under New Jersey law, every employment contract has an implied covenant of good faith and fair dealing.   This means that even though it might not be explicitly stated in the contract itself, there is an implication that both parties agree to the terms of the contract in good faith and plan to deal fairly with one another in performing and enforcing the contract.

 

In order to fulfill the obligations of a covenant of good faith and fair dealing, each party must act honestly and faithfully with respect to the contract.  If a party acts dishonestly or knowingly deviates from the terms of the contract, then that will likely be considered bad faith and a breach of the covenant of good faith and fair dealing.  In these instances, the party who has acted in bad faith, whether it is the employee or employer, may be legally liable to the party who has acted in good faith.

 

To prove that a party has acted in bad faith during the execution of an employment contract, a plaintiff must be able to show certain things.  First, the plaintiff must show that a contract actually existed.  Although most employment relationships are at will, contracts can exist, and they may be either express or implied.  After demonstrating that a valid contract governed the employment relationship, the plaintiff must then show that the other party acted in bad faith to deprive the plaintiff of some benefit defined in the contract.  For instance, if an employee is entitled to pay for work already performed, but the employer, without just cause, refuses to pay, then the employer is likely acting in bad faith.

 

Although different people may interpret the definition of “bad faith” in various ways, a few key factors are often considered when establishing a bad faith claim.  These factors include the relative power possessed by each party in the relationship, the level of sophistication of each party, and each party’s reasonable expectations for the contract at the time it was formed.  It is important to note that a finding of bad faith cannot be based on an accidental or honest mistake.  Rather, bad faith requires intent to act unfairly or to deceive.

 

Although no strict test clearly defines the point at which the covenant of good faith and fair dealing has been broken, a variety of situations may involve such a breach.  An experienced employment attorney can help you understand your rights and how to exercise them in the event that your employer has treated you unfairly.  Conversely, since the law also requires that employees act in good faith with respect to an employment contract, it is important that you understand all the terms of any contract before binding yourself to it.  It may contain provisions that limit your rights.  By better understanding your rights, you will be able to make sure that you are treated fairly and do not mistakenly agree to contract terms that could have a negative impact on your future.