More than Words - The Danger of Oral Modification to Employment Agreements

It's a common occurrence. Employer and employee agree to a modification of the employment agreement during the course of the employment relationship but no one bothers to put that modification in writing. As a recent case from the U.S. District Court for the Southern District of Indiana demonstrates, hidden dangers lurk when making oral modifications to employment contracts.

An attorney and a medical device manufacturer entered into a written agreement providing for the attorney's employment as General Counsel for a five-year term that would expire in July 2005. The agreement also provided for automatic one-year extensions of his employment, though either party could cancel as long as proper notice was given before the term expired. The attorney, who had been practicing in Indiana for many years, made no secret of his long-time dream to move to Colorado after his child graduated from high school in the spring of 2005. During his employment as General Counsel, he began planning his relocation, including purchasing real estate and contracting with a home builder. In the final year of his employment contract, the attorney spoke frequently with his supervisor about his plans to move to Colorado, and his desire to continue as General Counsel through a remote virtual office in his new home. The attorney alleged that his supervisor agreed during their discussions to alter the employment agreement so that neither party would be able to cancel the first automatic one-year extension which would occur in August 2005. This modification of the contract was not reduced to writing.

The attorney moved to Colorado in May 2005. Much to the attorney's surprise, his employer provided the required 30 days' notice that the attorney's contract would not be extended. When the contract expired on July 31, 2005, the attorney was out of a job. He then sued his employer in federal court for breach of the employment contract.

The District Court judge decided that Indiana's Statute of Frauds rendered the alleged oral modification unenforceable. The Statute of Frauds requires that contracts which will not be performed within one year must be in writing and signed by the parties. The Court rejected the attorney's argument that the Statute of Frauds did not bar enforcement of the modification because it was agreed to less then one year before the right to terminate expired. Indiana case law construing the Statute of Frauds provides that if the underlying contract is required to be in writing to satisfy the Statute of Frauds (which it was), then the modification must be as well, regardless of the time period for the completion of the modified term. As a result, the Court could not enforce the alleged modification to the contract.

The failure to get the agreed-upon modification in writing benefited the employer in this case, but next time it might be the employer who desires to enforce a modification. The lesson for employers? Take the time to put the modifications you care about in writing.

Germaine Winnick Willett practices primarily in Ice Miller's employment litigation group focusing on employment discrimination and other employment-related litigation.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.