When it comes to protecting yourself against lawsuits from your employees, generally the best practice is to treat them decently and fairly. Still, that's not an absolute guarantee, particularly when the issue is termination, a difficult and painful experience all around. The issue of employee lawsuits may be brought into even sharper focus as work forces are pared to meet the threat of lean times. And the picture is complicated further by laws and court decisions over the past few years that have altered the traditionally understood relationships between employers and employees.
In most cases, of course, you and your employees are free to establish and end working relationships to best suit your needs. But times are changing, and to protect your company, you should at least be aware of recent legal trends.
Traditionally, the most common contract between U.S. employers and employees, whether oral, written, or implied, established an at-will relationship. The employee was free to quit at any time, and the employer could fire at any time, for any or no reason and without obligation for severance pay or any other benefits. Grounds for successful lawsuits were few, and courts routinely dismissed lawsuits brought by at-will employees who charged they had been fired without reason.
Today, most of the work force are still at-will employees, but court decisions and statutes from 43 states have put new limits on what their employers can do. Now, lawsuits from fired at-will employees, far from being dropped, are increasingly being decided against employers. For example, in recent years, close to 70% of California's wrongful-discharge cases were decided against employers.
Wrongful-discharge cases can be a legal wild card. Since in many cases employees can also file such claims as intentional infliction of emotional distress, invasion of privacy, and defamation -- and seek punitive damages -- these lawsuits create substantial financial risks.
While the decisions and statutes governing at-will employment vary from state to state, the new underlying asssumption is that such employees may gain at least limited rights to job security. The decisions fall into a few broad legal categories: good faith and fair dealing; the public interest; and implied contracts.
Good faith and fair dealing
Many judges don't require specific promises of job security, oral or written, to uphold the claims of a fired employee. Instead, they have ruled that at-will employment contracts contain implied promises to deal fairly and in good faith, as does every other commercial contract.
Perhaps the most notorious breaches of good faith and fair dealing are the horror stories we've all heard about employees who work years for a company and then are fired just months before their pensions are vested. But most cases are far less dramatic. For you as an employer, the thing to remember about good faith and fair dealing is this: you can't enter into a bargain with employees and then prevent them from getting what they bargained for, whether pensions, sales commissions, warnings of poor performance, vacation days, stock options -- whatever. And the bargain need not be in writing.
Even employers with legitimate concerns about employee performance may run afoul of a court-imposed requirement of dealing fairly and in good faith with at-will employees. American Airlines, for example, dismissed Lawrence M. Cleary, an at-will employee, for three instances of misconduct: leaving his work station without permission, harassing another employee, and stealing. But it acted contrary to its expressed policy of giving employees an impartial hearing before dismissal. When Cleary sued to get his job back, the court, noting his 18 years of apparently satisfactory service and American's dismissal policy, said this combination created a right to job security and told the company it had to give Cleary a chance to prove, in court, that he was fired without good reason. Every business contract, the court ruled, implies a promise to deal fairly and in good faith. American had led Cleary to expect that impartial hearing, so he should have received it.
Restrictions in the public interest
Your prerogative to fire at-will employees is limited by a number of public policy considerations. An increasing number of statutes concerned with health and welfare create broad areas of protection for employees. Federal and most state antidiscrimination laws, for example, say you can't fire someone for filing a discrimination complaint.
Many states also have statutes that make it illegal to fire employees because their wages are garnished, because they refuse to work under conditions they believe unsafe, insist on time off to vote, or demand to be paid at the minimum wage. In many states you aren't permitted to fire employees for exercising the right to file a workers' compensation claim, say, or promote a union, or ask for information about hazards in the workplace. While these rights may seem undeniable, a surprising number of employees are fired for exercising them. And when they sue, they often win. Now, many courts go beyond the statutes and find that a vaguer concept of public policy or the public interest can prevent employers from dismissing at-will employees egen when there is no specific statute prohibiting it.
In an Oregon case, for example, jury duty was the issue. Vickie Nees, a clerk at Hocks Laboratories, was called for jury duty. Her boss gave her a letter addressed to the court asking that she be excused. Nees wanted to serve, however, and ignored his request. Soon after she was seated on the jury, her boss fired her. And although she was an at-will employee, Nees sued Hocks. She claimed that the company had fired her only because she wanted to serve as a juror, not because her work was poor, as it claimed. She demanded punitive damages for the emotional distress she had suffered, as well as her lost wages. The jury awarded her $3,000 in punitive damages and $650 in compensatory damages. Although an appellate court reversed the punitive damages award because the Nees case created new law, the judge indicated that punitive damages could be available in the future. He ruled that there are some public policy issues so important that an employer who tries to interfere with them will be held liable for all the harm it causes -- even if the employer's actions do not violate a private contract with the employee.
Not surprisingly, the courts also have ruled that an employee can't be fired for refusing to do something that is clearly illegal -- such as committing perjury, or fixing prices as part of a marketing strategy.
The best general guide when it comes to issues of public interest is to rely on your business judgment and sense of community ethics.
Many employers believe that they have an at-will employment policy but lose wrongful-discharge cases in court because their practices have created unintended obligations -- what the courts consider implied contracts. As you've no doubt read, these unintended obligations often are spelled out in personnel manuals or other management communications.
In a case that Blue Cross & Blue Shield of Michigan lost, Charles Toussaint was told during an initial interview that his job would be secure if he performed adequately. When Toussaint pressed the interviewer to find out just how secure his job would be, the interviewer told him that as long as his work was OK, he would never have to look for a job again. In fact, the interviewer said, he couldn't remember Blue Cross ever firing anyone. Five years later, Blue Cross fired Toussaint. He successfully sued, and the company appealed, arguing that Toussaint had no written contract and could be fired at any time. Michigan's highest court ruled that the promises Blue Cross made during the interview created an enforceable oral contract and upheld the decision.
The other side of the coin, however, is that well-though-out personnel manuals and other employee communications can protect you rather than create unintended commitments. In a case brought by an employee of Sears, Roebuck & Co., for example, the company's employment contract and personnel manual became key issues. The contract contained a clear statement that the company reserved the right to dismiss an employee at any time, without any reason. The personnel manual specified that employees could be dismissed for such reasons as disorderly conduct, excessive tardiness, and damaging company property, then went on to say the company wasn't limited to these reasons. Thus, the court ruled, Sears had explicitly reserved its right to fire at will.
If you, too, value maximum flexibility in hiring and firing, you'll want to maintain at-will employment relationships -- within the limits allowed by statutes and court decisions. You're probably safest to incorporate a clear policy statement in your employment contracts or employee handbooks. The law doesn't require any such written statement for at-will employees, but as the Sears case suggests, it can short-circuit litigation that might otherwise be costly. You might also consider using written employment contracts of only a year's duration, which must be renewed to remain effective. If you're rigorous about keeping your contracts up to date, you can effectively limit your liability for claims of permanent employment.
The policies you establish for hiring and firing obviously go far beyond the legal issues. Still, by carrying out a clear, consistent policy on job tenure -- and communicating it to your employees -- you can avoid providing grounds for a lawsuit. If a dismissed employee should sue, such a practice would put you in a good position to defend yourself successfully.