Business Law 101 / Limitation In Employment Contracts

By Albert L. Kelley

Written employment contracts have become fairly commonplace for many corporate executives and other employees.  Employers are learning that these contracts can be customized to provide benefits that were previously unthought of.  These contracts can also be drafted to provide businesses with methods in which they can protect themselves from litigation, even over a breach of contract itself.

As an example, what if the employer could shorten the time period in which an employee could file suit against the employer?  Few employers take advantage of the opportunity to add limitation periods to their employment contracts that is shorter than those allowed by state statute.  However, employers should consider the opportunity to cut off many such suits by means of restrictive contract language.  Most states allow the parties to a contract to bargain for a shorter limitations period.  The usual requirements are that the shorter period chosen must be reasonable and must not conflict with public policy.  The task for the employer is to choose a limitation period short enough to cut off employee lawsuits but long enough to be considered reasonable.  This is by no means impossible and it can have great advantages.

In Florida, the statute of limitations period allows for a suit on a verbal contract to be brought within four years and a suit on a written contract to be brought within five years.  An employment contract with its own internal one or two year limitation period gives the employer a definite advantage.

Adding a shorter limitation period to an employment contract stops potential employee lawsuits in two ways.First, if the employee takes the contract to a lawyer to discuss a possible lawsuit against his/her former employer, that attorney may be discouraged from taking the case if the special limitation period has expired or is too soon for the attorney to safely draft the appropriate documents.  The attorney should realize that sanctions may be filed against him or her personally for filing a frivolous lawsuit.Second, special limitation periods also help employers dismiss cases that are brought too late.  If the employee does file a suit, the employer can ask for dismissal at the early stages based upon the contract clause.  This saves greatly in legal fees and costs.

How short a limitation period do you need?  A six month contract limitations period may work in some states.  This was allowed by courts in Illinois, but was deemed too short in Michigan.  The Michigan court was concerned that the shorter period would encourage more suits by pressuring employees to file prematurely before fully investigating and assessing their litigation prospects.  Second, the courts were concerned about the special nature of employment contracts.  The Michigan Supreme Court stated they would probably approve a limitation of two, three, four or five years.

While each state’s laws will offer different contractual limitation precedents, it should not be difficult to determine what special limitations period would satisfy the reasonableness requirement in one or more states.  You could look at other contract restrictions in employment contracts, such as non-competition clauses.  These must also be reasonable in length and therefore the employer could use those same time periods for the special limitation period.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University.  He is also the author of “Basics of Business Law” and “Basics of Florida’s Small Claims Court” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice.  If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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