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Good Faith and Fair Dealing

A minority of states recognize that an employment contract may give rise to an implied covenant of good faith and fair dealing. Although this concept applies generally to all contracts, courts traditionally did not apply this covenant in cases involving employment contracts. This situation often arises where an employee has accrued benefits and the employer takes an action that effectively deprives the employee of these benefits. For instance, assume that an employee of a company has just completed a large sale, and the company will owe a large commission to the employee. On the following day, the company fires the employee, thus avoiding the requirement of paying the commission. In states that recognize an implied covenant of good faith and fair dealing, a court may apply the covenant to require payment of the commission.

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