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At-Will Employment -- Part 2

Filed under Office & HR.

As we mentioned in part one of this two-part look at employment-at-will relationships, the freedom to fire at-will employees (generally, those who don't have an employment contract) at any time has been eroded in recent years by the federal and state governments and by the courts.

In part one, we looked at the exceptions created by federal and state laws; in this column, we'll look at how the courts have eroded the relationship.

The courts, of course, cannot "write" the rules for at-will employment relationships or create exceptions to those rules. That task is left to the legislatures. But they can interpret the facts of a particular case in such a way that other rights granted to employees by the legislatures are triggered, and they can award damages to fired employees on the basis of those other rights.

When courts have granted relief to employees, they have generally relied on one of the following theories:

  • Some statement by or document from the employer effectively created a formal employment contract where none previously existed. This is known as the implied contract theory.
  • The firing violates a "public policy" by infringing on some right granted employees by federal or state law, or because it is otherwise morally or socially wrong.
  • A few courts have relied on a bad faith limitation to presume that employers are generally obligated to deal fairly and in good faith with all their employees.

Implied 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 isn't an agreement that you knowingly enter into. 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. Even though the employer may not have intended such a contract to exist, the court finds that the implications of the employment arrangement are such that there is, in fact, a contract.

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

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.)

Be careful about making any employment promises, or statements that can be interpreted as being promises, that you don't intend. 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.

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

Public policy. Courts in virtually every state have imposed "public policy" limitations on an employer's right to fire. In the following situations, employers were found to have illegally violated employee rights protected by statute or by public policy when they took retaliatory action against employees who:

  • filed claims for workers' compensation benefits
  • filed a workplace safety complaint
  • appeared as a witness in response to a subpoena
  • refused a superior's sexual advances
  • reported an employer's illegal acts to appropriate authorities
  • filed criminal charges against a fellow employee for acts in the course of employment
  • engaged in pro- or anti-union activities.

Claims 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, are the most common. In essence, be aware that if a firing is inconsistent with any stated federal or state policy or interest, the fired employee has a potential claim.

Bad faith. Can a 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.

If, however, you do business in Alaska, Arizona, California, Idaho, or Massachusetts, 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.

Currently, courts in a majority 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.

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