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Navigating the Complex Rules Governing Employee Termination

Filed under Managing the Workplace. Fact checked on May 25, 2012.

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Although the employment-at-will doctrine allows most employers to fire employees at their discretion, this does not mean that you can fire anyone, anytime just because you feel like it. To the contrary, various federal and state laws as well as public policy put serious limitations on employee terminations. On the other hand, employers should be aware that under certain circumstances the failure to fire an employee can result in legal ramifications.

Most employers dread firing employees but as careful as you may be to select the best employees available and to manage them well, at some point it's likely that you'll have to do it. Making an unpleasant task worse is the fact that there is a growing body of law that limits your right to fire workers, and that more and more workers seem to be filing (and winning) lawsuits against their former employers.

Before taking steps to limit your risks when you fire someone you should educate yourself regarding the major laws and legal restrictions that limit your right to fire and when you may be required to fire a worker or suffer legal repercussions.

Employment Contracts

If you enter into a formal employment contract with an employee (or a union contract with a group of employees), you'll frequently specify in the contract the proposed length of the employment relationship and the reasons for which either party can end the relationship. In other words, the contract's terms will generally govern your ability to fire the employee, as well as the employee's ability to quit. If either party attempts to terminate the relationship in violation of those terms, a potential breach of contract claim arises.

Assuming that a formal contract does not govern your employment relationships, as is generally the case, the employment-at-will doctrine is likely to apply.

Employment-At-Will Doctrine

In all states other than Montana, employment relationships where there is no contract in place are governed by the "employment-at-will" doctrine. "Employment-at-will" means that there's a presumption that the employee is employed at the employer's will for an indefinite period rather than for a fixed term.

Montana law has abolished the "employment-at-will" status. In Montana, an employer can fire an employee who has completed a probationary period only for good cause. "Good cause" is defined as reasonable job-related grounds for dismissal based on a failure to satisfactorily perform job duties, disruption of operations, or other legitimate business reason.

Traditionally, both the employer and the employee have had the ability to end an at-will relationship at any time and for any reason. However, at least from the employer's perspective, the unlimited freedom to fire at-will employees at any time for good cause, bad cause, or no cause at all has been eroded in recent years by the federal and state governments and the courts. The exceptions that these institutions have carved into the employment-at-will doctrine form the foundation for most wrongful discharge claims, in which employees sue you for lost wages, punitive damages, and occasionally, reinstatement in their job.

Warning

Don't assume that you're free from a wrongful discharge type lawsuit merely because an employee quits. Courts will frequently treat an employee who quits in order to escape illegal or intolerable employment practices or conditions (for example, sexual harassment or other discriminatory conduct) the same as though he or she were fired.

Limitations in written laws. Numerous federal and state laws potentially restrict an employer's ability to fire at-will employees. These laws fall into two general categories. The first category consists of those laws that make it illegal for employers to discriminate against certain individuals. The second category consists of laws that make it illegal for an employer to retaliate against employees who exercise rights conferred by the laws or who take steps to see that the laws are enforced.

Limitations applied by the courts. Courts, too, have taken steps to limit an employer's ability to fire at-will employees. In doing so, they generally rely on one of the following theories:

  • The implied contract limitation: A statement or document from the employer effectively created a formal employment contract where none previously existed. For example, stating that employees will be fired only for good cause in your handbook may form the basis for such an "implied" contract.
  • The public policy limitation: The firing goes against public policy by infringing on some right granted employees by federal or state law or because it is otherwise morally or socially wrong. For example, firing an employee merely for filing a workers' compensation claim is illegal.
  • The bad faith limitation: The few courts that have relied on this theory presume that employers are generally obligated to deal fairly and in good faith with all their employees. For example, firing an employee for the sole purpose of denying the employee a bonus that the employee has earned but not yet received may be unlawful in some states.

Firing Restrictions in Written Laws

What's one of the easiest ways to find yourself defending a wrongful discharge lawsuit? Fire an employee under circumstances that violate a fair employment law. Numerous federal, state, and even local laws restrict an employer's right to fire an employee for discriminatory or retaliatory reasons.

Warning

Many fair employment laws exempt certain businesses. For example, it is not uncommon for such laws to provide exemptions for employers having some minimum number of employees. However, merely because you qualify for a law's exemption does not mean that you're free to fire those employees whom the law was designed to protect without any risk of being sued. Courts can, effectively, extend the law to you under the "public policy" theory. The fact that a law protecting a certain class of employees was adopted generally indicates a public policy in favor of that protection.

Federal fair employment laws protect employees against various forms of discrimination in the workplace. This protection lasts throughout the entire employment relationship, including the period leading up to and ending with an employee's separation from the business. Thus, for example, you could run afoul of federal law if you fire an employee solely on the basis of the employee's race, color, religious preferences, gender, national origin, disabilities (including substance abuse problems), or age.

In addition, every state has its own laws that make it unlawful for an employer to fire an employee under certain circumstances.

Federal Fair Employment Laws

The following table shows some of the federal fair employment laws that are of general application. Normally, the effect of these laws starts with the hiring process and continues through the termination of the employment relationship.

Federal Law Employment-Related Prohibition Who's Subject
to the Law?
Title VII of the Civil Rights Act Prevents discrimination against employees on the basis of race, color, religion, sex or national origin. Employers having at least 15 employees.
Age Discrimination in Employment Act Prevents discrimination on the basis of age against employees who are over 40 years old. Employers having at least 20 employees.
Americans with Disabilities Act Prevents discrimination against disabled employees. Employers having at least 15 employees.
Immigration Reform and Control Act Prevents discrimination against employees on the basis of national origin or citizenship status. Employers having at least 4 employees.
National Labor Relations Act Prevents discrimination against employees who engage in or who refuse to engage in union activity. Also protects nonunion employees who act together in an effort to improve or protest working conditions that affect them on the job. Employers whose business has a significant impact on interstate commerce.
Employee Retirement Income Security Act Prevents employees from being discharged solely to prevent them from vesting or qualifying for benefits under qualified pension plans. Employers who maintain qualified pension plans for their employees' benefit.

Retaliatory discharge laws. Apart from anti-discrimination laws, a number of federal laws make it unlawful for an employer to fire an employee merely for asserting rights under those laws. For example, the federal law providing minimum wage and overtime rules (the Fair Labor Standards Act) protects from discharge employees who start proceedings or who take other actions in an attempt to have the law enforced. Similar restrictions on so-called "retaliatory" discharges are provided under the Occupational Safety and Health Act, the Employee Polygraph Protection Act, various environmental protection laws such as the Clean Air Act, and several other federal laws.

Firing substance abusers. If alcohol or drug use has caused one of your employees to have a dangerous accident, endanger another employee, or not show up for work frequently, you may be tempted to eliminate the "problem" by simply firing the employee. However, before doing so, you should keep in mind that federal and state laws that protect disabled employees against discrimination may apply to alcoholics or drug users. In other words, it may be unlawful for you to fire an employee for a substance abuse problem unless you have first given the employee a reasonable chance for rehabilitation.

State Firing Restrictions

Many states have their own versions of civil rights laws, and impose them on employers who are too small to be covered by the federal anti-discrimination laws. For example, state laws, unlike their federal counterparts, may protect employees from discrimination on the basis of sexual orientation or personal appearance. Furthermore, many state laws apply to employers that corresponding federal laws exempt from their coverage. Other frequently encountered limitations prevent employees from being fired merely because they file claims for workers' compensation benefits, report an employer's illegal activity, serve on jury duty, or refuse to take a lie detector test.

The state laws that govern the hiring process apply to firing and termination as well.

Consult our state map for the laws that restrict firing in your state.

Implied Employment Contracts and Public Policy Firing Restrictions

You may be surprised to learn that a fired employee may be able to sue you for violating the terms of an employment contract that you didn't even know existed. As a matter of fact, employers in virtually every state have been forced to incur tremendous legal costs in defending and paying damage awards in connection with lawsuits brought under so-called "implied" employment contracts.

When you and an employee enter into a formal agreement, whether written or verbal, specifying the terms of the employment relationship, you have an "express" employment contract. In contrast, an implied employment contract is not an agreement that you knowingly enter. Rather, an implied employment contract arises when a court agrees with a fired employee that the employer effectively made some promise that was broken when the employee was fired. In other words, the court implies that there was a contract, even though the employer may not have intended such a contract to exist.

The promise underlying an implied employment contract is usually a statement that you made, either in an employee handbook or orientation materials, or orally, that the fired employee claims defined the term or length of employment or established the procedures you would follow before firing the employee.

Example

Examples of statements that may be found to constitute an implied contract:

"The company's policy is to treat employees in a fair manner and to release employees for just cause only." (Implies that the company must have a reason to fire an employee.)

"Upon completing a six-month probationary period, an employee can expect to be employed as long as his or her work is performed satisfactorily." (Implies that an employee who has completed the probationary period cannot be fired without some warning that his or her work performance was poor.)

"An employee will be dismissed following a third warning that the employee has failed to meet performance standards or has violated company policy." (Implies that an employee will not be fired prior to receiving a third warning.)

Choose your words carefully--written and spoken! Be careful about making any employment promises, or statements that can be interpreted as being promises, that you're not prepared to keep. Written statements are particularly troublesome, so you should review job application forms, employee handbooks, and any other documents that you may distribute to your employees. Look for any statement that may restrict your right to fire your employees and decide if you really want to live with that restriction. If not, delete the statement.

Work Smart

You may even want to include on your job application forms an affirmative statement to the effect that an applicant, if hired, will be subject to employment-at-will.

Your spoken words also can get you into trouble. Although you need to watch your words at all times, you need to be especially careful during job interviews and performance reviews when statements about an employee's future with your business tend to naturally come up.

Public Policy Limitations on Firing

Numerous federal and state laws provide employees with certain rights, such as to be free from workplace discrimination or to refuse to take lie detector tests. Many of these laws specifically limit an employer's ability to fire employees merely for exercising or enjoying the rights granted.

However, other laws grant rights without specifically limiting an employer's ability to fire employees who attempt to exercise or enjoy the rights. In this latter situation, are employers free to fire employees without risk of being sued? Not necessarily. Courts in virtually every state have acted to fill this loophole and to address other discharges they perceive as being morally or socially wrong by imposing a "public policy" limitation on employers' ability to fire.

Wrongful discharge claims. Fired employees have relied on the public policy limitation in winning wrongful discharge lawsuits in several situations. Perhaps most common is the claim that a public policy embodied in a federal or state law was violated when an employee was fired for attempting to exercise a statutory right, such as a right to work in a smoke-free area. A firing also may involve public policy when it is based on an employee's opposition to illegal conduct. In essence, if a firing is inconsistent with any stated federal or state policy or interest, the fired employee has a potential claim.

Example

Employees who were fired for the following reasons successfully argued that their firings violated public policy:

  • filing claims for workers' compensation benefits

  • appearing as a witness in response to a subpoena

  • serving on jury duty

  • refusing a superior's sexual advances

  • being served with a wage assignment order for child support payments

  • refusing to commit perjury

  • reporting an employer's illegal acts to appropriate authorities

  • filing criminal charges against a co-employee for acts committed in the course of employment

Wrongful discharge cases that are based on public policy grounds are especially difficult for employers. For one thing, public policy is not uniformly defined across the states. A firing that violates California's public policy will not necessarily violate Mississippi's.

Emotional distress claims. Furthermore, a fired employee will frequently accompany a public policy claim with an assertion that the employer's conduct was so improper as to cause the employee mental and emotional anguish. The addition of the emotional distress claim creates the possibility that you may be held liable for monetary damages not only for lost wages and benefits associated with the wrongful discharge, but also for any physical or emotional toll resulting from the discharge that can be translated into money. In addition, if the employer's conduct is found to be particularly offensive, the employee may be entitled to receive punitive damages.

Bad Faith Firing Restrictions and Liability for Failure to Fire

Courts in several states have added firing based on bad faith to the list of prohibitions for employers. What does this mean? Let's assume an employer fires an employee who is about to close a sale that will entitle her to a substantial commission. Assume also that the firing violates no federal or state statute, public policy, or provision of an express or implied employment contract. Can the fired employee successfully sue for wrongful discharge if the employer's sole reason for firing her was to avoid having to pay the commission? In many states, the answer probably is no. Courts have generally been hesitant to expand the public policy or implied contract theory in wrongful discharge cases to reach every instance when an employer may have acted in bad faith in firing an employee.

However, if you do business in Alaska, Arizona, California, Connecticut, Delaware, Idaho, Kansas, Massachusetts, Nevada, Utah, or Wyoming, you should be aware that courts in those states have ruled that employers are generally obligated to deal fairly and in good faith with their employees. In theory, this obligation may cause legal problems not only employers who fire employees for improper reasons, but also those who fire employees for no reason at all. So far, however, the courts that have acknowledged a bad faith limitation on firings have primarily applied the limitation to prevent employers from using discharges to deprive employees of compensation or benefits that have already been earned.

Tip

Currently, courts in a some of the states have yet to decide whether a fired employee's argument that the firing was done in bad faith will be sufficient to support a wrongful discharge claim. Accordingly, it's difficult to say what steps, if any, you should take to limit your potential exposure to bad faith claims. Obviously, if you fire an employee in an attempt to retain commissions, bonuses, or other compensation the employee has rightfully earned, you're probably asking for a lawsuit. Beyond that, the best advice for avoiding trouble is to try to be fair and to treat your employees as you yourself would want to be treated.

Employer Liability Can Arise For Not Firing

Not only can employers be sued for improperly firing employees, they also can be sued for failing to fire employees. This problem arises when an employer becomes aware or should have become aware that an employee may cause harm to others, yet fails to take any action to prevent the employee from in fact causing harm.

If the employee should subsequently injure another employee, a customer, or other person, the injured party may sue the employer for being negligent in retaining the dangerous employee. An employer's continuing obligation to guard against employing individuals with dangerous propensities is one that first arises during the hiring process.

Steps employers should take. Clearly, you need to screen people carefully before you hire them to find out if they have a past history of violence or erratic behavior.

Example

A laundromat employee with a known history of drug use, extreme violence, and sexual offenses assaulted a female customer. The employer was liable for negligent retention because it was reasonable for the employer to know that a customer using the laundromat at night might be in danger in the presence of an employee with such a history.

To limit your risk of being sued for negligently retaining a dangerous worker, watch for any signs that an employee is unstable or unfit to remain in his or her position. Danger signals include stress, fatigue, mental illness, carelessness, aggressive or abusive behavior, and drug or alcohol use.

Investigate thoroughly complaints of employee misconduct. In some situations, you may be able to effectively deal with the problem through training or by changing the employee's responsibilities. In others, however, your safest recourse may be to fire the employee. This is especially true with respect to employees who threaten or harass others.

Your problems with a potentially dangerous employee do not necessarily end when you fire the employee or the employee quits. You need to be especially careful about what you say about the firing to prospective employers who contact you for an employment reference or to others. An uncertain line exists between what you may be obligated to disclose about the former employee's dangerous propensities, and what you cannot disclose without running the risk of the former employee suing you for defamation.

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