What Are Liquidating Damages Provisions in Employment Contracts?
Many companies are going to great lengths (as they should) to protect their assets and their profits. This protection includes making specific provisions for employees so they can be proactive when hiring and onboarding. One of the common ways we see this is with non-compete clauses in employment contracts. Another way this can be achieved is through the addition of a liquidated damages provision.
According to Investopedia, “liquidated damages are presented in certain legal contracts as an estimate of otherwise intangible or hard-to-define losses of one of the parties. It is a provision that allows for the payment of a specified sum should one of the parties be in breach of contract.”
Essentially, an employer loosely calculates the value of what it may cost the company to lose the new employee. It includes this lump sum in the employment contract, notifying the employee that they would be responsible for paying that amount to the employer if they were to leave.
It’s tough to determine if and when these clauses are enforceable. This article will discuss them and how Denver currently sees them.
It’s important to note that if the clause seems to be strictly in place to punish the employee, most courts will not honor the clause.
What Makes Liquidating Damages Provisions Enforceable?
While adding clauses such as the liquidating damages clause to a contract helps ease the financial minds of the companies that write them, they may not be effective.
In order for the clauses to be effective in Colorado, the employer must prove that three elements exist. The first is that at the time the contract was drawn up, the amount of liquidated damages was a realistic estimate of actual damages and was not escalated in any way.
The second is that the parties mutually intended to liquidate damages rather than using this clause strictly for financial gain.
Finally, at the time of the initial contract creation, it was challenging to determine the amount of damages that would have actually resulted from a breach.
If these three elements are not present and adequately addressed in the contract, or if it’s felt that the verbiage denotes punishment rather than the company’s preservation, courts will likely not enforce the provisions.
From an Employer Aspect
There’s nothing worse than going the extra mile to protect your life’s work or your dream by including provisions and clauses, only to find out they aren’t enforceable when you need them the most.
To avoid this, ensure the amount in the liquidating damages provision is reasonable. If courts determine that the condition was in place to punish an employee for leaving, as stated earlier, they may not honor the clause, and you are out the money.
If you err on the side of a conservative amount and ensure that all three elements are present, you have a genuinely good shot at requiring that amount from your employees as they leave your company, and it will likely be held up in court.
Physicians: Employee Contracts With Liquidating Damages Provisions
One of the most common industries in which we see these provisions in contracts is for medical practices. The reason this is common is likely because the value of a physician to a company is substantially higher than that of other industries.
Although the statute has been in place for decades, it is rarely mentioned in the Colorado Court of Appeals, meaning that many contracts have been well communicated in the beginning, and all parties involved are aware of what is required of them should they choose to leave the practice.
Through the rare cases that have been thoroughly examined in Colorado, it’s imperative that courts can determine that the liquidated damages provision is reasonably relative to the expected loss at the time the physician ended employment. If the courts deem that the amount was escalated or graduated to reflect a potential future loss, they may choose not to honor the clause.
What This Means For Colorado Employers
Suppose you are in a position to require a liquidating damages provision in the state of Colorado. In that case, it’s imperative that you provide clear and concise vocabulary that is necessary to be enforceable.
Negotiate with your employees at the onset of employment and before the contracts are finalized. If it’s something they feel isn’t reasonable, help them see why and why. If they are still pushing back, you may want further clarification on it.
Similarly, if you need assistance ensuring that your contracts are sufficient enough to be enforceable, contact your experienced employment law attorney. Without the apparent inclusion of the three elements listed above, you may run the risk of going through all the work to protect your business and having the provisions unenforceable after all.
Employment Law Attorneys: Fiercely Protecting Your Dream
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