Exceptions to Employment-at-Will: Policy, Contracts, and Good Faith, Lecture notes of Public Policy

Download Exceptions to Employment-at-Will: Policy, Contracts, and Good Faith and more Lecture notes Public Policy in PDF only on Docsity! Monthly Labor Review January 2001 3 Employment at Will The employment-at-will doctrine: three major exceptions In the United States, employees without a written employment contract generally can be fired for good cause, bad cause, or no cause at all; judicial exceptions to the rule seek to prevent wrongful terminations Charles J. Muhl Charles J. Muhl, formerly an economist with the Bureau of Labor Statistics, Washington, DC, is an attorney in Chicago, Illinois. Work joyfully and peacefully, knowing that right thoughts and right efforts will inevitably bring about right results —James Allen See only that thou work and thou canst not escape the reward —Ralph Waldo Emerson Like Allen and Emerson, many workers in the United States believe that satisfactory job performance should be rewarded with, among other benefits, job security. However, this expectation that employees will not be fired if they perform their jobs well has eroded in recent decades in the face of an increased incidence of mass layoffs, reductions in companies’ workforces, and job turnover. In legal terms, though, since the last half of the 19th century, employment in each of the United States has been “at will,” or terminable by either the employer or employee for any reason whatsoever. The em- ployment-at-will doctrine avows that, when an employee does not have a written employment contract and the term of employment is of indefi- nite duration, the employer can terminate the employee for good cause, bad cause, or no cause at all.1 Traditionally and as recently as the early 1900s, courts viewed the relationship between employer and employee as being on equal foot- ing in terms of bargaining power. Thus, the em- ployment-at-will doctrine reflected the belief that people should be free to enter into employment contracts of a specified duration, but that no ob- ligations attached to either employer or employee if a person was hired without such a contract. Because employees were able to resign from po- sitions they no longer cared to occupy, employ- ers also were permitted to discharge employees at their whim. The Industrial Revolution planted the seeds for the erosion of the employment-at-will doctrine. When employees began forming unions, the col- lective bargaining agreements they subsequently negotiated with employers frequently had provi- sions in them that required just cause for adverse employment actions, as well as procedures for arbitrating employee grievances.2 The 1960s marked the beginning of Federal legislative pro- tections (including Title VII of the 1964 Civil Rights Act) from wrongful discharge based on race, religion, sex, age, and national origin.3 These protections reflected the changing view of the relationship between employer and employee. Rather than seeing the relationship as being on equal footing, courts and legislatures slowly be- gan to recognize that employers frequently have structural and economic advantages when nego- tiating with potential or current employees. The recognition of employment as being central to a person’s livelihood and well-being, coupled with 4 Monthly Labor Review January 2001 Employment at Will the fear of being unable to protect a person’s livelihood from unjust termination, led to the development of common-law, or judicial, exceptions to the employment-at-will doctrine begin- ning in the late 1950s. The bulk of the development of these exceptions did not take place until the 1980s, but as we enter the new millennium, the employment-at-will doctrine has been significantly eroded by statutory and common-law protec- tions against wrongful discharge. This article focuses on the three major exceptions to the employment-at-will doctrine, as developed in common law, including recognition of these exceptions in the 50 States. The exceptions principally address terminations that, although they technically comply with the employment-at-will require- ments, do not seem just. The most widespread exception pre- vents terminations for reasons that violate a State’s public policy. Another widely recognized exception prohibits termi- nations after an implied contract for employment has been established; such a contract can be created through employer representations of continued employment, in the form of ei- ther oral assurances or expectations created by employer handbooks, policies, or other written assurances. Finally, a minority of States has read an implied covenant of good faith and fair dealing into the employment relationship. The good- faith covenant has been interpreted in different ways, from meaning that terminations must be for cause to meaning that terminations cannot be made in bad faith or with malice in- tended. Only six western States—Alaska, California, Idaho, Nevada, Utah, and Wyoming—recognize all three of the ma- jor exceptions.4 Three southern States—Florida, Georgia, and Louisiana—and Rhode Island do not recognize any of the three major exceptions to employment at will. (See exhibit 1.) Public-policy exception Under the public-policy exception to employment at will, an employee is wrongfully discharged when the termination is against an explicit, well-established public policy of the State. For example, in most States, an employer cannot terminate an employee for filing a workers’ compensation claim after being injured on the job, or for refusing to break the law at the re- quest of the employer. The majority view among States is that public policy may be found in either a State constitution, statute, or administrative rule, but some States have either restricted or expanded the doctrine beyond this bound. The public-policy exception is the most widely accepted ex- ception, recognized in 43 of the 50 States. (See map 1.) Although the significant development of exceptions to em- ployment at will occurred in the 1980s, the first case to recog- nize a public-policy exception occurred in California in 1959. In Petermann v. International Brotherhood of Teamsters,5 Peter Petermann was hired by the Teamsters Union as a busi- Exhibit 1. Recognition of employment-at-will exceptions, by State, as of Oct. 1, 2000 Total................. 43 38 11 Alabama............... no yes yes Alaska.................. yes yes yes Arizona................. yes yes yes Arkansas.............. yes yes no California.............. yes yes yes Colorado............... yes yes no Connecticut........... yes yes no Delaware............... yes no yes District of Columbia yes yes no Florida.................. no no no Georgia................ no no no Hawaii.................. yes yes no Idaho................... yes yes yes Illinois.................. yes yes no Indiana................. yes no no Iowa..................... yes yes no Kansas................. yes yes1 no Kentucky.............. yes yes no Louisiana.............. no no no Maine................... no yes no Maryland............... yes yes no Massachusetts...... yes no yes Michigan............... yes yes no Minnesota............. yes yes no Mississippi............ yes1 yes no Missouri................ yes no1 no Montana............... yes no yes Nebraska.............. no yes no Nevada................. yes yes yes New Hampshire...... yes yes no1 New Jersey........... yes yes no New Mexico........... yes yes no New York............... no yes no North Carolina........ yes no no North Dakota......... yes yes no Ohio..................... yes1 yes no Oklahoma............. yes yes no Oregon................. yes yes no Pennsylvania......... yes no no Rhode Island......... no no no South Carolina....... yes yes no South Dakota........ yes yes no Tennessee............ yes yes no Texas................... yes no no Utah..................... yes yes yes Vermont................ yes yes no Virginia................. yes no no Washington........... yes yes no West Virginia......... yes yes no Wisconsin............. yes yes no Wyoming............... yes yes yes State Public- policy exception Implied-contract exception Covenant of good faith and fair dealing SOURCE: Data are from David J. Walsh and Joshua L. Schwarz, “State Common Law Wrongful Discharge Doctrines: Up-date, Refine- ment, and Rationales,” 33 Am. Bus. L.J. 645 (summer 1996). Case law was shepardized (verified) to update the recognition of exceptions through Oct. 1, 2000. 1 Overturned previous decision that was contrary to current doctrine. Monthly Labor Review January 2001 7 found that legitimacy of the principal justification for such adoption—namely, inadequate bargaining power on the part of employees—was better left to the New York legislature to evaluate. The court found that legislators have “greater re- sources and procedural means to discern the public will” and “elicit the view of the various segments of the community that would be directly affected”.19 Because the recognition of such an exception requires some sort of principal scheme for its application, the configuration of that scheme must be deter- mined by the legislature after the public has had its opportu- nity to communicate its views, according to the court. Finally, the court found that any such change in the employment-at- will doctrine would fundamentally alter rights and obligations under the employment relationship and thus should be ap- plied prospectively by the legislature, rather than retrospec- tively by the court.20 To summarize, the vast majority of States do recognize some form of a public-policy exception to the employment-at-will doctrine. Such a regulation prevents employees from being terminated for an action that supports a State’s public policy. The definition of public policy varies from State to State, but most States either narrowly limit the definition to clear state- ments in their constitution or statutes, or permit a broader definition that enables judges to infer or declare a State’s pub- lic policy beyond the State’s constitution or statutes. Implied-contract exception The second major exception to the employment-at-will doc- trine is applied when an implied contract is formed between an employer and employee, even though no express, written in- strument regarding the employment relationship exists. Al- though employment is typically not governed by a contract, an employer may make oral or written representations to em- ployees regarding job security or procedures that will be fol- lowed when adverse employment actions are taken. If so, these representations may create a contract for employment. This exception is recognized in 38 of the 50 States. (See map 2.) A common occurrence in the recent past was courts find- ing that the contents and representations made in employee handbooks could create an implied contract, absent a clear and express waiver that the guidelines and policies in such 8 Monthly Labor Review January 2001 Employment at Will handbooks did not create contract rights. The typical situa- tion involves handbook provisions which state that employ- ees will be disciplined or terminated only for “just cause” or under other specified circumstances, or provisions which in- dicate that an employer will follow specific procedures before disciplining or terminating an employee.21 A hiring official’s oral representations to employees, such as saying that em- ployment will continue as long as the employee’s performance is adequate, also may create an implied contract that would prevent termination except for cause. The leading case having to do with the implied-contract exception is Toussaint v. Blue Cross & Blue Shield of Michi- gan, decided by the Supreme Court of that State in 1980.22 Charles Toussaint had been employed in a middle manage- ment position with Blue Cross for 5 years before his employ- ment was terminated. When he was hired, he asked his hiring official about his job security and was told that his employ- ment would continue “as long as [he] did [his] job.” Toussaint also was provided with a manual of Blue Cross personnel policies some 260 pages long; within the manual were state- ments that disciplinary procedures would be applied to all Blue Cross employees who completed their probationary pe- riod and that it was Blue Cross’ policy to terminate employees only for “just cause.” The court ruled that, even if employment is not for a defi- nite term, a provision indicating that an employee would be fired only for just cause was enforceable and that such a pro- vision could create an implied contract if it engendered legiti- mate expectations of job security in the employee. If the em- ployee is arbitrarily fired thereafter, then a claim for wrongful discharge is actionable. The court noted that Blue Cross could have established a policy giving it the right to terminate em- ployees for no cause at all, but chose instead to follow a “just cause” termination policy. The court argued that employer policies and practices create a “spirit of cooperation and friend- liness” in the workforce, making employees “orderly, coop- erative, and loyal” by giving them peace of mind regarding job security and the belief that they will be treated fairly when termination decisions are made.23 If an employer’s actions lead an employee to believe that the policies and guidelines of the employer are “established and official at any given time, purport to be fair, and are applied consistently and uniformly to each employee,” then the employer has created an obliga- tion.24 That obligation is created even though the parties may not have mutually agreed that contract rights would be estab- lished by the policies. An implied contract for employment cannot be disregarded at the employer’s whim, but the employer can prevent the contract from being created by including in its policies and provisions a clear and unambiguous disclaimer stating that its policies and guidelines do not create contractual rights.25 If a company does this, no employee could reasonably expect that the policies and guidelines provided a contractual right to job security or any other benefit described therein. In Pine River State Bank v. Mettilee,26 the Minnesota Supreme Court agreed with the rationale behind Touissant. In Pine River, an employee handbook was given to an employee after he had been working for the bank for several months. The handbook contained two sections that the employee claimed created contract rights. The first was a section titled “Job Security” that described employment in the banking in- dustry (though not the specific bank) as secure. The second involved the bank’s “Disciplinary Policy,” which outlined spe- cific procedures, including reprimands and opportunities to correct one’s behavior, that would be followed if an employee was alleged to have violated a company policy. The court found that the “Job Security” section was insufficient to cre- ate contract rights, but that the “Disciplinary Policy” section was sufficient. The court analyzed that provision according to traditional requirements for the creation of a contract: offer, acceptance, and consideration for the contract. The court found that the employer offered employment subject to the terms in the employee handbook; the employee accepted the employment offer by showing up for work. The employee’s labor was the consideration in support of the contract. Thus, argued the court, the employer breached the employment con- tract by terminating the employee without following the spe- cific procedures outlined in the handbook that created the implied contract. The court reasoned that, when an employer chooses to prepare and distribute a handbook, the employer is choosing to “implement or modify its existing contracts with all employees covered by the handbook.”27 Among the States rejecting the application of an implied- contract exception to employment at will are Florida, Pennsyl- vania, and Texas. In Muller v. Stromberg Carlson Corpora- tion,28 a Florida appellate court rejected the exception because of fear that it would lead to uncertainty in the application of the law. Walter H. Muller sued Stromberg Carlson following his termination and alleged that, pursuant to the company’s merit pay plan that required an annual review of an employee’s performance and a recommendation as to pay increases based on that performance, he had an annual implied-employment contract. The Florida court rejected Muller’s claim, finding no justification to depart from the “long established principles that an employment contract requires definiteness and cer- tainty in its terms.”29 The court reasoned that, if indefinite terms or assurances were used to imply an employment con- tract, the courts in Florida would be “flooded with claims that judicial discretion be substituted for employer discretion.”30 Addressing the arguments made by the Michigan Supreme Court in Toussaint, the court said that the longstanding view in Florida, contrary to that in Michigan, was that beneficial social or economic policy should not be advanced by judicial decisions. The Florida court believed the judicial function to Monthly Labor Review January 2001 9 be advancing certainty in business relationships by provid- ing meaningful criteria that lead to predictable consequences. The court had “serious reservations as to the advisability of relaxing the requirements of definiteness in employment con- tracts considering the concomitant uncertainty which would result in the employer-employee relationships.”31 The court added that the inequality of bargaining power between em- ployers and their employees was not a sufficient basis to cre- ate implied contracts of employment based on oral or written assurances. Texas refused to recognize the implied-contract exception in the 1986 case Webber v. M. W. Kellogg Company.32 In that case, the court found that a letter offering a position of employ- ment, the classification of an employee as “permanent” rather than “temporary,” and the identification in company docu- ments of a scheduled retirement date for the employee some 22 years after employment was initiated were insufficient in sum to create an implied contract of employment for a specific duration. Likewise, in Richardson v. Charles Cole Memorial Hospital,33 the Supreme Court of Pennsylvania rejected the implied-contract exception, finding that policies published in an employee handbook did not create a “meeting of the minds,” one of the traditional standards for evaluating whether a contract has been created between two parties. Because the terms of the handbook were not bargained for in the tradi- tional sense, the court reasoned, the benefits conferred upon the parties by the handbook were mere gratuities and not rights that were contracted for. To summarize, then, employers’ oral or written assurances regarding job tenure or disciplinary procedures can create an implied contract for employment under which the employer cannot terminate an employee without just cause and cannot take any other adverse employment action without following such procedures. Employers can prevent written assurances from creating an implied contract by including a clear and unambiguous disclaimer characterizing those assurances as