(Week 10) Two set of discussions questions to post for MBA level Business Employment Law Online!

Breach of an Implied Contract

A small number of employees including professional athletes, high-level managers like Dov Charney (see the “Clippings” feature), and entertainers have “express” (i.e., explicit, mutually acknowledged) contracts of employment that are negotiated, executed in writing, signed, and specify a particular term of employment (or specific grounds under which the contract can be terminated). If an employee with an express contract is terminated prior to the expiration of the contract, the employer will be liable for damages for breach of contract unless the employer can show that there was cause to terminate. Most often, contractual disputes of this type are settled by negotiations between the parties.

But the vast majority of employees do not have express contracts of employment and are employed at will. Nevertheless, under the implied contract exception to employment at will, the right of employers to terminate at will can be limited by promises of job security. Even in the absence of an express contract of employment, written or oral statements by employers—and their entire course of conduct in dealing with employees—can give rise to enforceable contractual rights to something other than employment at will. The “something other” might be employment for a specified term, termination only for certain reasons (e.g., “for cause”), or use of specified procedures when making termination decisions (e.g., progressive discipline). If an implied contract exists, discharged employees can sue for wrongful termination based on breach of the implied contract.

Criteria for Determining the Existence of an Implied Contract

Most statements made by employers, whether orally or in writing, are not contractually binding. However, the following factors point to the existence of an implied contract:

• A specific promise was made.
• The promise was made frequently and consistently.
• The source of the promise was someone with sufficient authority to offer it.
• The promise was communicated to the employee.
• The promise was not highly conditional (i.e., dependent on the employer’s own judgment).
• The employer’s entire “course of conduct” (e.g., policies, practices, statements, industry practices, employee tenure) was consistent with the promise.
• There was an exhaustive listing of dischargeable offenses in a handbook (and the offense for which termination occurred was not included in that list).
• A change to a less protective policy was not communicated to employees.
• There was no effective disclaimer.

Vague, stray, or highly conditional promises do not evidence intent to depart from employment at will. Statements such as “you have a promising future with the company” (lack of specificity) or “you will have a job here for as long as we are pleased with you” (conditionality) are unlikely to be enforceable. The statements relied on must be sufficiently specific to constitute “offers,” rather than mere general statements of policy. Thus, inclusion of a general nondiscrimination provision in an employee handbook did not create an implied contract because it “was not specific and did not make any promises regarding disciplinary procedure or termination decisions.11 In contrast, an employee handbook that labeled its provisions as “binding” and that outlined specific disciplinary procedures was sufficiently specific and authoritative to form the basis for an implied contract.12Listings of dischargeable offenses can limit employment at will if they can fairly be read to restrict terminations to those based on the stated set of reasons.

To understand whether a promise was made, some courts look not only at statements spoken by managers or written in documents but also to the entire course of an employer’s conduct. The course of conduct relevant to determining the existence of an implied contract includes the employer’s informal policies, past practice (e.g., practice of not terminating without cause), industry customs, and treatment of the individual employee. However, although longevity, consistent raises, promotions, and positive performance appraisals can bolster an employee’s claim that employment is not strictly at will, “they do not, in and of themselves, … constitute a contractual guarantee of future employment security.”13

Practical Considerations

Should employers issue employee handbooks? If so, how should handbooks be constructed? Disseminated to employees?

Specific promises made to employees regarding their term of employment, permissible reasons for termination, or termination procedures must be honored. Employers that do not want to limit their prerogative to terminate at will should refrain from making such promises. Because they are often cited by plaintiffs as sources of implied contracts, handbooks, application forms, and job offer letters should be carefully written and vetted (reviewed) by people with legal expertise before they are put into use.

If contractual rights limiting employment at will can stem from employers’ statements in handbooks and other sources, what happens if modifications are made that adversely affect those rights? Many courts permit employers to unilaterally make such changes, provided that employees are given reasonable notice.14 However, other courts require more. The Arizona Supreme Court, for example, has held that merely providing employees with new handbooks is not legally adequate. Instead, employees must be specifically informed of any new terms, made aware of their effect on the preexisting contract, and affirmatively consent to modifications. Modifications must be supported by separate consideration—that is, some benefit to employees beyond simply being allowed to continue their employment. The court explained its reasoning as follows:

To those who believe our conclusion will destroy an employer’s ability to update and modernize its handbook, we can only reply that the great majority of handbook terms are certainly non-contractual and can be revised, that the existence of contractual terms can be disclaimed in the handbook in effect at the time of hiring and, if not, permission to modify can always be obtained by mutual agreement and for consideration. In all other instances, the contract rule is and has always been that one should keep one’s promises. 15

If changes are made that lessen employees’ rights not to be terminated at will, employees should be clearly informed of those specific changes. Employers should not try to just “slip them by.” Some states require employers to obtain a clear indication of employees’ assent to those changes and to provide some benefit in exchange.

In Dillon v. Champion Jogbra, the court must decide whether an implied contract to use specified termination procedures exists, despite the presence of a “disclaimer.”

Dillon v. Champion Jogbra

819 A. 2d 703 (Vt. 2002)

OPINION BY JUSTICE MORSE:

Plaintiff Linda Dillon appeals an order of the superior court granting summary judgment to defendant Champion Jogbra, Inc. in her action for wrongful termination. Dillon contends that the trial court erroneously concluded as a matter of law that Dillon’s at-will employment status had not been modified by Jogbra’s employment manual and employment practices, and that the undisputed material facts failed to give rise to a claim for promissory estoppel supporting a claim for wrongful discharge. We affirm with respect to Dillon’s claim for promissory estoppel, but reverse and remand on her breach of contract claim. * * *

Jogbra has an employee manual that it distributes to all employees at the time of their employment. The first page of the manual states the following in capitalized print:

The policies and procedures contained in this manual constitute guidelines only. They do not constitute part of an employment contract, nor are they intended to make any commitment to any employee concerning how individual employment action can, should, or will be handled.

Champion Jogbra offers no employment contracts nor does it guarantee any minimum length of employment. Champion Jogbra reserves the right to terminate any employee at any time “at will,” with or without cause. During the period from 1996 to 1997, however, Jogbra developed what it termed a “Corrective Action Procedure.” This procedure established a progressive discipline system for employees and different categories of disciplinary infractions. It states that it applies to all employees and will be carried out in “a fair and consistent manner.” Much of the language in the section is mandatory in tone.

Linda Dillon … was hired on as a full-time employee in August 1997 in the position of “chargeback analyst.” In the summer of 1998, the position of “sales administrator” was going to become vacant. Dillon was approached by Jogbra management about applying for the position. * * * In the course of interviewing for the position, Dillon recalls that she was told that she would receive “extensive training.” More specifically, she was told by the human resources manager that she would overlap with her predecessor who would train her during those days. Originally, her predecessor was scheduled to leave August 15. In the course of Dillon’s interview with the vice president of sales, who would be her immediate supervisor, he informed her that her predecessor was actually leaving earlier and would be available for only two days of training before Dillon started the job. He reassured her, though, that the predecessor would be brought back sometime thereafter for more training. Dillon also recalls that he told her that “it will take you four to six months to feel comfortable with [the] position,” and not to be concerned about it. Dillon was offered and accepted the position. She spent most of her predecessor’s remaining two days with her. Her predecessor then returned in early September for an additional two days of training. Dillon stated that she felt that, after the supplemental training, she had received sufficient training for the job.

On September 29, Dillon was called into her supervisor’s office. The human resources manager was also present. They informed Dillon that things were not working out and that she was going to be reassigned to a temporary position, at the same pay and benefit level, that ended in December. She was told that she should apply for other jobs within the company, but if nothing suitable became available, she would be terminated at the end of December. According to Dillon, her supervisor stated that he had concluded within ten days of her starting that “it wasn’t going to work out.” Prior to the meeting, Dillon was never told her job was in jeopardy, nor did Jogbra follow the procedures laid out in its employee manual when terminating her. Dillon applied for one job that became available in the ensuing months, but was not selected for it. She left Jogbra in December when her temporary position terminated. * * *

In the implied contract context, we have noted … that … when an employer takes steps to give employees the impression of job security and enjoys the attendant benefits that such an atmosphere confers, it should not then be able to disregard its commitments at random. * * * [W]e have noted repeatedly that the presumption that employment for an indefinite term is an “at-will” agreement … “imposes no substantive limitation on the right of contracting parties to modify terms of their arrangement or to specify other terms that supersede the terminable-at-will [arrangement].” Additionally, an employer may modify an at-will employment agreement unilaterally. When determining whether an employer has done so, we look to both the employer’s written policies and its practices. An employer not only may implicitly bind itself to terminating only for cause through its manual and practices, but may also be bound by a commitment to use only certain procedures in doing so. * * *

When the terms of a manual are ambiguous … or send mixed messages regarding an employee’s status, the question of whether the presumptive at-will status has been modified is properly left to the jury. This may be the case even if there is a disclaimer stating employment is at-will, as the presence of such a disclaimer is not dispositive in the determination. “The mere inclusion of boilerplate language providing that the employee relationship is at will cannot negate any implied contract and procedural protections created by an employee handbook.” Furthermore, an employer’s practices can provide context for and help inform the determination. * * *

In this case, we cannot agree with the trial court that the terms of Jogbra’s manual are unambiguous such that, as a matter of law, Dillon’s status was not modified, especially considered in light of the conflicting record before the court regarding Jogbra’s employment practices. Notwithstanding the disclaimer contained on the first page of the manual quoted above, the manual goes on to establish in Policy No. 720 an elaborate system governing employee discipline and discharge. It states as its purpose: “To establish Champion Jogbra policy for all employees.” It states that actions will be carried out “in a fair and consistent manner.” It provides that “the Corrective Action Policy requires management to use training and employee counseling to achieve the desired actions of employees.” It establishes three categories of violations of company policy and corresponding actions to be generally taken in each case. It delineates progressive steps to be taken for certain types of cases, including “unsatisfactory quality of work,” and time periods governing things such as how long a reprimand is considered “active.” All of these terms are inconsistent with the disclaimer at the beginning of the manual, in effect sending mixed messages to employees. Furthermore, these terms appear to be inconsistent with an at-will employment relationship, its classic formulation being that an employer can fire an employee “for good cause or for no cause, or even for bad cause.”

With respect to the record before the court on Jogbra’s employment practices, Dillon herself was aware of at least one employee whose termination was carried out pursuant to the terms set forth in the manual. She also testified in her deposition to conversations with the human resources manager, with whom she was friendly, in which the manager had described certain procedures used for firing employees. She stated that the manager had told her that Jogbra could not “just get rid of ” people, but instead had to follow procedures. The human resources manager herself testified that, although the progressive discipline system was not generally applied to salaried employees, it was “historically” used for nonsalaried employees. She could only recall two instances in which the portion of the manual providing for documentation of progressive action was not followed, one of which resulted in a legal claim against the company and the other of which involved an employee stealing from the company. In fact, the manual specifically provides that stealing “will normally result in discharge on the first offense.” Thus, it is not clear how that discharge deviated from the provisions of the manual.

In conclusion, the manual itself is at the very least ambiguous regarding employees’ status, and Jogbra’s employment practices appear from the record to be both consistent with the manual and inconsistent with an at-will employment arrangement. Therefore, summary judgment was not proper on Dillon’s breach of implied contract claim.

Dillon also argues that the trial court’s grant of summary judgment on her claim of promissory estoppel was erroneous. Dillon based her claim on two separate statements: the assurance that she would receive training and the assurance that it would take her four to six months to become comfortable with the sales administrator position. We have held that, even if an employee otherwise enjoys only at-will employment status, that employee may still be able to establish a claim for wrongful termination under a theory of promissory estoppel if that employee can demonstrate that the termination was in breach of a specific promise made by the employer that the employer should have reasonably expected to induce detrimental reliance on the part of the employee, and that the employee did in fact detrimentally rely on the promise. We agree with the trial court in this case, however, that essential elements of promissory estoppel are absent with regard to both statements.

With respect to Jogbra’s promise to Dillon that she would receive training, Dillon specifically conceded that, upon her predecessor’s return in September, she had received adequate training to perform the job. In other words, Jogbra had delivered on its promise. Furthermore, even assuming that Jogbra failed to provide the full extent of promised training, Dillon has failed to explain how, as a matter of law, the promise of training modified her at-will status. * * * With respect to the assurance that it would take four to six months to become comfortable with the position, the statement cannot be reasonably relied upon as a promise of employment in the sales administrator position for a set period of time. Courts have generally required a promise of a specific and definite nature before holding an employer bound by it. An estimate of how long it would take a person to adjust to a job cannot be converted into a definite promise of employment for that period of time. Thus, the vague assurance given to Dillon is not sufficient to support her claim of promissory estoppel. * * *

CASE QUESTIONS

What were the legal issues in this case? What did the court decide?

What was the implied contract in this case? How did the employer breach it?

Why does the disclaimer in the employee manual not have the effect desired by the employer?

Why does Dillon’s promissory estoppel claim fail?

Effect of Disclaimers

Employment at will is a harsh arrangement. It is difficult to put a positive “spin” on the message that “We can fire you at any time for any reason not specifically prohibited by law and without even the most elementary procedural safeguards.” Most employers prefer to gain the motivational and employee relations benefits that come from communicating the desire to treat employees fairly. Most employers probably also intend to treat employees fairly. But employers do not want to be bound by promises of fair treatment and liable for breaches. In short, most employers would like to have it both ways: basking in the warm glow of assurances of fair treatment and remaining entirely free to depart from any self-imposed limitations on the right to terminate at will.

Disclaimers are used to this end. Disclaimers are written statements incorporated into employee handbooks, employment applications, or other important documents that “disclaim” or deny that any statements in those documents create contractual rights binding on the employer. Language disclaiming the existence of a contract is typically combined with notification to employees in clear terms that their employment is at will. The statement (capitalized) on the first page of the employee manual in Dillon informing employees that the manual’s provisions constituted guidelines only and that no commitment was being made to employees about how terminations and other decisions would be handled is a good example of a disclaimer. As another example, a bank included the following in its employee handbook:

[T]he contents of this handbook DO NOT CONSTITUTE THE TERMS OF A CONTRACT OF EMPLOYMENT. Nothing contained in this handbook should be construed as a guarantee of continued employment, but rather, employment with the bank is on an “at will” basis. This means that the employment relationship may be terminated at any time by either the employee or the Bank for any reason not expressly prohibited by law. 16

Disclaimers also frequently include language denying the contractual effect of any conflicting statements made elsewhere, reserving the right of the employer to modify policies, and placing that authority solely with designated individuals. For example:

[M]y employment and compensation can be terminated, with or without cause, and with or without notice, at any time, at the option of either the company or myself. I understand that no store manager or representative of Sears, Roebuck and Co., other than thepresident or vice-president of the Company, has any authority to enter into any agreement for employment for any specified period of time, or to make any agreement contrary to the foregoing.17

But do disclaimers, inserted in the midst of statements and other facts suggesting a departure from employment at will, actually shield employers from wrongful discharge suits based on implied contract? In many cases, the answer is yes. Thus, employers that desire to maintain employment at will should incorporate disclaimers into employee handbooks and other important documents defining the employment relationship. As the New Jersey Supreme Court put it in a leading implied contract case:

[I]f the employer, for whatever reason, does not want the manual to be capable of being construed by the court as a binding contract, there are simple ways to attain that goal. All that need be done is the inclusion in a very prominent position of an appropriate statement that there is no promise of any kind by the employer contained in the manual; that regardless of what the manual says or provides, … the employer continues to have the absolute power to fire anyone with or without good cause. 18

Disclaimers often defeat contractual rights flowing from handbooks and other sources if the disclaimers themselves are clear and unequivocal and if they are presented to employees in a prominent and conspicuous manner. Fine print buried in lengthy documents is not sufficient. A disclaimer placed on the first page of an employee manual, capitalized, and printed in bold is both prominent and conspicuous.19 An employee’s implied contract claim was defeated despite having been terminated in violation of specific company policies prohibiting retaliation against employees raising ethics concerns because the employer clearly alerted its employees to their “at will” status (on their application forms and elsewhere) and had a disclaimer stating that “none of the Company’s policies, procedures, or practices should be viewed as creating promises or any contractual rights to employment for a specific duration of time or to any specific benefits of employment.”20 It did not matter that the disclaimer appeared in a different document than the promises of nonretaliation. Disclaimers should be communicated to employees, and employees should be asked to acknowledge receipt in writing. Disclaimers that are included on applications for employment, so that employees know the terms of the relationship up front, appear to be especially effective.

However, disclaimers—even those carefully crafted and prominently displayed—are not foolproof. Some courts have taken the position that the interspersing of disclaimers and statements that appear to confer rights is inherently ambiguous. Rather than simply allow a disclaimer to override everything else, the case is given to a jury to decide what the contract, as a whole, means.21 This is precisely the approach that the court took in Dillon. The “mixed messages” sent by the disclaimer, the specific “Corrective Action Policy,” and the employer’s practices created ambiguity as to whether an implied contract existed.

If it is determined that contractual rights limiting an employer’s ability to terminate at will do not exist, an implied contract wrongful discharge claim will fail. However, if contractual rights exist, it still remains to be proven that the employer violated those rights in terminating an employee. In a case involving an employee who was hired under an implied contractual agreement to terminate only for “good cause” and who was subsequently fired for sexual harassment, the California Supreme Court held:

[T]he question critical to defendant’s liability is not whether plaintiff in fact sexually harassed other employees, but whether at the time the decision to terminate his employment was made, defendants, acting in good faith and following an investigation that was appropriate under the circumstances, had reasonable grounds for believing plaintiff had done so. 22

Thus, under this view—shared by most other courts—the role of the courts in implied contract cases is not to start with a blank slate and decide whether the employer’s judgment was correct, but instead to determine whether the employer’s decision was reasonable under the circumstances. In one relevant implied contract case,23 the court upheld a jury’s verdict that the employee was not discharged for good cause, as company policy prescribed. The employee had been terminated for violating a strict policy against taking “anything, large or small.” His offense was retrieving expired meat that had been disposed of in a barrel for pickup by a salvage company, cooking the meat on a grill, and (along with coworkers) eating it for lunch. The jury determined that the employer violated the implied contract by terminating the employee without a “fair and honest” reason.

Other Contract-Related Claims

Courts have long read into contracts an implied covenant of good faith and fair dealing. As a type of wrongful discharge claim, the covenant of good faith and fair dealing pertains to terminations that are undertaken in bad faith and that have the effect of denying employees the benefits of their contractual employment relationship. The term is potentially misleading. It does not amount to a general requirement that employers operate with good faith or terminate employees only for cause. Instead, in most of the states where it is recognized, the covenant applies only where there is an express or implied contract and the employer has used a termination to deprive an employee of an already-earned benefit. For example, a wrongful discharge in violation of the covenant of good faith and fair dealing was recognized where a long-term employee was fired immediately after obtaining a large order, for the purpose of depriving him of his commission.24 Some uncertainty remains about the reach of the covenant of good faith and fair dealing and a few states, particularly Alaska, have given it a broader reading. According to the Alaska Supreme Court, the covenant of good faith and fair dealing applies to at-will employment contracts in the following manner:

The covenant … generally requires employers to treat like employees alike and act in a manner that a reasonable person would regard as fair. The covenant has both a subjective and an objective component: the subjective component “prohibits an employer from terminating an employee for the purpose of depriving the employee of the contract’s benefits,” and the objective component “prohibits the employer from dealing with the employee in a manner that a reasonable person would regard as unfair.” 25

Although this formulation of the covenant of good faith and fair dealing stops little short of establishing a just cause requirement for terminations, it is the exception to the rule. In most states where this type of wrongful termination claim is recognized, it adds little protection beyond that already available under the implied contract theory.

Another contract-related claim occasionally raised in discharge cases is promissory estoppel. We previously considered this legal claim in the context of a job applicant accepting employment and then having the offer withdrawn prior to commencing work (see Chapter 7). The key elements are reasonable and detrimental reliance on a clear promise. If, for example, an employee remains on the job because of reasonably relying on an employer’s promises of job security, turns down lucrative alternative employment offers or incurs expenses relocating to a new assignment, and is then terminated, promissory estoppel might be invoked by the courts to redress the harm to the terminated employee—even in the absence of an express or implied contract. An employer who reneged on an offer to reinstate an employee if he was found innocent of criminal charges was liable for damages based on this theory.26 In Dillon, the employer’s statement that it would probably take four to six months for an employee to become comfortable in her new position was not a sufficiently clear promise of job security to support a promissory estoppel claim when Dillon was terminated for unsatisfactory performance shortly following acceptance of the job.

A third contract-related claim (but one for which tort damages are available) is intentional interference with a contractual relationship. This occurs when intentional, improper interference causes a third party to breach or not enter into a contractual relationship (the latter is sometimes referred to as “interference with prospective business advantage”) with the plaintiff. In this context, “contractual” means any type of employment relationship, including at-will employment. The interference must be improper or without justification. Additionally, there must be a third party that is induced to breach or not enter into a contractual relationship. Cases where a former employee is blacklisted to prevent him from obtaining other employment clearly fit this requirement. The application of this claim to terminations in which agents of an employer (e.g., supervisors) use improper means to get employees fired is less clear. Is the employer a third party in such cases? The answer depends on whether the supervisor was acting within the scope of employment when the interference occurred. An intentional interference claim was allowed to proceed to trial in the case of a manager who took actions that led to the constructive discharge of an employee who opposed his romantic relationship with a married female subordinate. Evidence that the manager was acting from the purely personal motive of maintaining his affair made it plausible to argue that he was a separate party from the employer.27 Likewise, allegations that the chief of schools for a school district terminated a school principal for the purpose of installing one of his girlfriends in the position were sufficient to avoid summary judgment in an intentional interference with a contractual relationship claim.28 If the allegations are proven, the chief of schools was acting as a third party when he injured the plaintiff in the pursuit of personal goals that were contrary to the employer’s best interests.