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Implied Renewal of Employment Agreements

Employers frequently enter into employment agreements with their employees for a fixed period of time at a stated annual salary. What happens if at the end of such an agreement’s term both parties continue to perform under the expired employment agreement as if the agreement were still in effect? Perhaps the parties have negotiated but not consummated an extension or new agreement. Under these circumstances, employers might think that, because the employment agreement has expired, the employment relationship converts to “employment-at-will” and thus either the employer or the employee may terminate the relationship at any time for any lawful reason.

As we will discuss in this article, in a majority of states, including New York, there are certain circumstances in which a court may presume the employment agreement is automatically renewed for an additional term. In such states, courts have recognized such implied renewals and have permitted employees to sue for breach of contract based upon a theory of discharge without cause during the renewal term. We will also analyze how courts have addressed the enforce­ ability of non-competition or arbitration agreements following termination of employment after expiration of the original agreement but during a period when an impliedly renewed agreement is in effect. Finally, we will explore several considerations for drafting employment agreements to avoid unexpected results arising from the presumption of implied renewal.

Implied Renewal

The presumption of implied renewal of employment agreements is a vestige of the old English common law. Although a growing number of jurisdictions have rejected this principle as contrary to modern legal thought and employment practice,1 a majority of states, including New York, continue to recognize it.2

In New York, the issue of whether a holdover employee remains subject to the terms of an expired employment agreement or becomes employed “at-will” may depend in large measure on the length of the initial term of the employment agreement. If an employer and employee enter an employment agreement for a term that is less than a year, and the employer then permits the employee to continue to work following the end of the agreement’s term, New York courts have found no factual or legal presumption that the parties intended to renew the employment agreement following expiration of the original term. Accordingly, courts have held that at the end of the agreement’s term the employment relationship converts to employment-at-will. See Moskowitz v. Mawhinney, 137 N.Y.S.903 (1st Dept. 1912).

A different outcome may result where the parties enter into an employment agreement for a one-year term at a stated annual salary.3 If the employer permits the employee to hold over after the one-year term has ended, courts have recognized a factual presumption that the parties intended the employment agreement to be renewed for an additional one-year term under the same terms and conditions as the original agreement.4

New York courts have recognized a third possible outcome where the original term of the agreement is for more than one year. Under the Statute of Frauds, any unwritten agreement that cannot be completed within one year’s time, see General Obligations Law, § 5-701, subd a, par 1, is unenforceable. Pursuant to this rule of law, New York courts have not presumed that an employment agreement for more than one year is impliedly renewed for a term equal in duration to the original term of the agreement. In such cases, courts have renewed the employment agreement on a year-to-year basis. Thus, if an employer and employee enter into an employment agreement, with a stated annual salary and a fixed three-year term, courts have found that the agreement may not be renewed by implication for an additional three-year term—only for a series of one-year terms—and the employer would retain the right to discharge the employee for any lawful reason at the end of each such annual term.5

New York courts have held that the presumption of implied renewal is one of evidence, not of substantive law. As one New York court has noted: “Entering into a contract to run for a year, and then continuing to act as if its time had not run, is sufficient evidentiary support for a finding that the parties in fact intended to keep it alive for another year.” Cinefot International Corp. v. Hudson Photographic Industries, 13 N.Y.2d 249, 253 (1963).

Courts have recognized that the employer may seek to rebut this presumption of implied renewal with evidence demonstrating a new agreement between the parties with new terms, or by facts and circumstances showing that the parties did not intend a renewal for an additional annual term.6 If the employer fails to rebut the presumption, courts may deem the renewed contract to have continued upon the same terms and conditions as the original employment agreement, including the same salary and all other “provisions and restrictions forming essential parts of the original contract, even though collateral to the employment itself.” Borne Chemical Co. v. Dictrow, 85 A.D.2d 646, 648 (2d Dept. 1981).

Breach of Contract

Where an employment agreement has been renewed by implication, an employer may be held to have breached the agreement if it discharges an employee during the annual renewal period. For example, in Carter v. Bradlee, 245 A.D. 49 (1st Dept. 1935), aff’d, 269 N.Y. 664 (1936), an employer entered into an employment agreement with an employee to serve as a business manager for a two-year term, commencing on November 1, 1925 and ending on October 31, 1927. At the expiration of the two-year term, the employee continued to work for the employer for approximately three and one-half years without entering into a new written agreement until his discharge on April 31, 1931. The court found that the employment agreement renewed each year on the anniversary date of the expired contract, and the employer breached the agreement by discharging the holdover employee on April 31, 1931, six months before the anniversary date of the original agreement (October 31st).

Courts have awarded damages to employees in such cases as if the terms of the original employment agreement were in effect. The categories of relief available to the holdover employee in such actions may include the salary and benefits the employee would have earned for the remainder of the renewal period. See Mason v. New York Produce Exchange, 127 A.D. 282, 285 (2d Dept. 1908), aff’d, 196 N.Y. 548 (1909).

Non-Competition Agreements

The presumption of implied renewal also may impact an employer’s right to enforce a non-competition agreement against a holdover employee. This may be the case particularly where the employment agreement is not carefully drafted to anticipate the holdover issue. An example of the negative consequences to the employer from unartful drafting can be found in Hubbell v. Hubbell Highway Signs, Inc., 72 A.D.2d 923, 924 (4th Dept. 1979).

In Hubbel, an employee signed a five-year written employment agreement that contained a non-competition clause that was to run for three years “following the termination of [the employee’s] employment under [the] Agreement”. At the end of the agreement’s five-year term, the employer permitted the employee to hold over at the company for an additional five years without executing any written extension or additional agreement.

The court acknowledged that, at an employee’s election, an employer may be obligated to retain the employee for successive one-year periods at the same salary for each year the employee was retained beyond the anniversary date of the original agreement’s expiration or otherwise be in breach of contract. However, because the court found that the employee’s obligations under the non-competition clause commenced at the end of the employment agreement original five-year term, the non-competitionperiod was found to have already expired three years into the employee’s five-year holdover period. The court held that the employee’s non-competition agreement could not be renewed by implication in light of the Statute of Frauds. The court, therefore, refused to enforce the non-competition agreement against the holdover employee. The court did not address whether the outcome would have been different under the Statute of Frauds had the non-competition agreement’s restrictive post-employment period been for a one-year or shorter term.

In a case involving facts similar to those of Hubbel, the court in Borne Chemical Company v. Dictrow, 85 A.D.2d 646 (2d Dept. 1981) nevertheless distinguished Hubbell and reached a different outcome. In Borne, a three-year employment agreement included a restrictive covenant that prohibited all competitive activities ‘‘during the term [of the original employment] as from time to time [extended] and for three (3) years thereafter.’’ The court interpreted this language to mean that the employee had agreed in writing to ‘‘not compete for three years after any extension of the original term of employment”. Since the non-competition period began “to run upon the expiration of the last extension of the contract,” the court found that “[it] would not be violative of the Statute of Frauds.” As such, in Borne, the holdover period of the employee did not render the non-competition covenant unenforceable because the original employment agreement was drafted to anticipate extension periods of the holdover employee.

Arbitration Agreements

Arbitration provisions in employment agreements also can be rendered unenforceable where an employer permits an employee to hold over. In Donnkenny Apparel, Inc. v. Lee, 291 A.D.2d 224 (1st Dept. 2002), an employer appealed a trial court’s decision to stay an arbitration between an employer and a holdover employee. The employer argued that the holdover employee’s employment agreement was renewed by operation of law and that the arbitration provision contained in the employment agreement was, therefore, renewed by operation of law as well. The court observed that any alleged arbitration agreement between the parties had to be in writing, pursuant to CPLR 7501, and that the expired employment agreement expressly required any renewal of the agreement to be in writing. Under these circumstances, the court concluded that “[a]lthough the conduct of the parties subsequent to the expiration of a contract may be construed to imply an agreement to extend some of the provisions of the expired contract, it may not, in the absence of a clearly expressed intention to renew the arbitration provision, bind a party to arbitrate.” Accordingly, the appellate court affirmed the trial court’s stay of the arbitration between the employer and the holdover employee.

Practical Considerations

Because a majority of jurisdictions continue to recognize the presumption of implied annual renewal, employers should remain mindful of the end dates of their employees’ employment agreements. In advance of the end date for an employment agreement, an employer should decide what action should be taken regarding such an employee’s employment, i.e., whether to discharge the employee on the end date, enter into a new agreement for a term with the employee or make arrangements for the employee to continue his or her employment on an at-will basis. As noted above, if the employer does nothing, and allows the employee to continue to work, that behavior could result in a presumption of a new year-to-year agreement.

To the extent commercially practicable, employers should consider carefully whether it is necessary to enter into an employment agreement for a term of a year or more with an employee. In today’s workplace, most employees, including many high-level employees, are employed on an at-will basis. Sometimes such at-will agreements include severance benefit arrangements that provide the kind of job security that employment agreements for a particular term might provide. Not only do employment agreements for a term of a year or more limit an employer’s flexibility on issues such as salary, benefits, and the nature of job duties that may be assigned, they may also create unexpected hidden costs or obligations for the employer.

If an employer elects to enter into an employment agreement with an employee for a term of a year or more, the employer should be mindful of the problem of the holdover employee when drafting the agreement. To reduce the risk that a court would find that an employment agreement for a term has been impliedly renewed, the employer should draft a clause that avoids any extension of the agreement’s term by implication, oral agreement or the conduct of the parties.

There are numerous ways to accomplish this objective. For example, the agreement could provide expressly that any extension, modification or renewal of the employment agreement must be agreed upon and signed by both parties, and in the absence of such agreement, if the employment is not terminated by either party after expiration of the agreement that the parties’ relationship is agreed to be “at-will” upon expiration of the agreement’s term. Alternatively, the parties may expressly agree upon automatic renewals in the absence of notice of termination or modification by either party.

In either case, the employer should draft any restrictive covenants carefully to make clear, as in Borne, that the post-employment non-competition period will begin at the end of the employee’s employment under the agreement or any extensions of the agreement, not merely at the termination of the term of the original employment agreement. If the parties agree to arbitration of their disputes, the parties may wish to provide in their agreement that the arbitration clause will survive expiration of the term of the agreement or any extension thereof in order to avoid the unintended result in the Donnkenny case.

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  1. See, e.g., Craffey v. Bergen County Utils. Auth., 315 N.J. Super. 345 (1998), cert. denied 158 N.J. 74 (1999) (discussing the prevailing expectation by employers and employees of at-will employment in the state of New Jersey and noting that “[this expectation] is inconsistent with the anachronistic presumption that the expiration of a contract of employment for a fixed term automatically creates a contract of employment from year to year thereafter. We conclude, therefore, that [this anachronistic] presumption is no longer the law of this State.”).
  2. See Perlick v. Tahari, Ltd., 293 A.D.2d 275, 276 (1st Dept. 2002) (recognizing rebuttable presumption of implied annual renewal of an employment agreement); cf. Insinga v. Cooperatiev Centrale Raiffeisen Borenleenbank B.A., 2005 U.S. Dist. LEXIS 21104, **26-27 (S.D.N.Y. Sept. 20, 2005) (applying New York law, same).
  3. See, e.g., Shenn v. Fair-Tex Mills, Inc., 26 A.D.2d 282, 283 (1st Dept. 1966) (noting that rebuttable presumption of implied renewal exists where employment is for a fixed period, at a stated annual salary, although payment of salary is on a monthly basis).
  4. See Adams v. Fitzpatrick, 125 N.Y. 124, 128 (1891); Borne Chemical Co. v. Dictrow, 85 A.D.2d 646, 648 (2d Dept. 1981).
  5. See, e.g., Brightson v. H.B. Claflin Co., 180 N.Y. 76, 83 (1904); Carter v. Bradlee, 245 A.D. 49, 50 (1st Dept. 1935).
  6. See Insinga, 2005 U.S. Dist. LEXIS 21104, at *29 (S.D.N.Y. Sept. 20, 2005) (finding that employer rebutted presumption of implied annual renewal of employee’s employment agreement.