| May 2007 | Volume 3, Number 1 |
| Table of Contents |
The Basics Of Employment Contracts WESTLAW LAWPRAC INDEX GPR -- General Practice Approaches, Articles & Issues ADV -- Advocacy & Lawyering Skills Employers usually don't intend statements in employment handbooks to create enforceable promises. But that doesn't stop courts from finding contractual relationships in the employment context. Disclaimers often do the job, but they have limits. EMPLOYMENT CONTRACTS raise exceptional concerns, but the basics remain just that: basic. Any contract question can be analyzed by reference to the following six inquiries:
In this article, we will examine each of these points, and give special attention to disclaimers in employee handbooks and the effect of sexual harassment policies in creating a contractual relation between the employer and employee. WAS A CONTRACT FORMED? In the employment context, the formation issue tends to focus on written, distributed employee handbooks or other policy statements. When there is an individual, written, separately bargained contract, the formation issue is easy. But what of handbooks and other policy statements? What of policies and practices? When are they considered contracts? (More on that later, but of course it varies by state.) What of oral assurances or other oral promises? That kind of contractual issue emphasizes problems of proof and also raises statute of frauds issues. Contract Doctrine and the Employment Handbook Beginning in 1980, American courts began to look at the employment relationship through the lens of contract law. The traditional view was that an employment relationship without a definite duration was at-will, with both the employer and the employee having the right to abrogate the relationship at any time, for any reason, without notice. While the relationship was inherently contractual--services in exchange for pay--the relationship could be freely terminated. What began to change was courts' willingness to find promises made by the employer. Identifying the Employer's Promise Since a contract is a legally enforceable promise, the first task is to identify the employer's promise. The promise, to be enforceable, must be a real promise, a commitment. The Restatement (Second) of Contracts (1981) defines promise: "(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made." The types of employment promises commonly found in handbooks that are such commitments include promises to terminate only for cause, or only following progressive discipline, or after after specified pre-termination rights. Likewise, an employer's promise to layoff and recall in a certain order would constitute a commitment. Examples of what are not commitments are opinions, predictions, statements of good will, and the like. Finding an Enforceable Promise The promise, standing alone, will not mandate its own enforcement. Gratuitous promises or naked promises are not enforced. Promises are enforced only if there is something else. The time-honored means of enforcing promises are:
Moral obligation and formality have virtually no role in enforcing promises in the employment context. The hallmarks of enforceable employment promises are consideration and promissory estoppel, although only rarely do courts enforce promises through the device of promissory estoppel. Nonetheless, the spirit animating promissory estoppel is detrimental reliance, and courts commonly look to an employee's reliance when determining whether or not a promise should be enforced. See, e.g., Black v. Baker Oil Tools, Inc., 107 F.3d 1457, 1461 (10th Cir. 1997) (applying Oklahoma law) (no contract based on written policy of non-discrimination because employee did not provide consideration for the promise of non-discrimination, nor did the employee continue in position and not quit "at least in part on his reliance on the employer's promise"). "Promises" in Employer Handbooks Courts began to find enforceable promises in employer handbooks and other policy statements, in past practices, and in oral assurances. Each of these kinds of promises tended to be lumped under the inartful rubric of "implied contract." When employers make promises in handbooks or policy statements, or when they make oral assurances, the employers are making express promises, not implied promises. When the totality of the *48 circumstances of past practices, longevity of service, and reasonable expectations are used to form a promise of job security, such a promise can properly said to be implied and not express. Nonetheless, we seem to be stuck with the rubric of implied contract any time there is an obligation based on an employment contract that has not been individually bargained and reduced to writing. How Do Handbook Promises Become Employment Contracts? There are at least two theories of contract formation when an employer has promised job security in an employer handbook or other policy statement:
How the Unilateral Contract Analysis Works Many courts use the unilateral contract analysis. A common formulation of this analysis is set forth by the Illinois Supreme Court in Duldulao v. St. Mary of Nazareth Hospital, 505 N.E.2d 314 (1987):
The Emergence of Disclaimers It took little time for attentive lawyers to advise their corporate clients to revise their handbooks. A disclaimer would undermine the employee's reasonable belief that a binding commitment had been made. Indeed, many of the courts that enforced promises contained in handbooks were explicit that a disclaimer by the employer would have avoided the litigation: "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 promises nothing and remains free to change wages and all other working conditions without having to consult anyone and without anyone's agreement; that the employer continues to have the absolute power to fire anyone with or without good cause." Woolley v. Hoffmann-La Roche, Inc., 491 A.2d 1257, 1271 (N.J. 1985), modified, 499 A.2d 515 (N.J. 1985). There were the predictable rounds of litigation determining just how clear and conspicuous a disclaimer had to be-- and how consistent it had to be with the remainder of the document--to be effective. When the dust had settled, more or less recently, employers were pretty confident that they could draft effective disclaimers. As discussed later in this article, this confidence was soon to be undermined. 2. IF A CONTRACT WAS FORMED, WHAT ARE ITS TERMS? • What constitutes the contract? Certain documents, words, or actions (even inactions!) may manifest the assent to contract. Which ones? In the employment setting, the focus is on the precise promise: Was it a promise that the employer would terminate only for cause? If so, what are the standards for cause? And what is the role of the jury in determining whether the termination was for cause--is the jury to second-guess the employer, *50 or merely review the employer's decision for indicia of good faith based upon objective evidence obtained through an appropriate investigation? Early 1998 witnessed a decision profoundly important under California law--but, it says, a mere borrowing of established law from sister jurisdictions. What Does "Just Cause" Promise in the Implied Contract Context? In Cotran v. Rollins Hudig Hall International, Inc., 948 P.2d 412 (Cal. 1998), the California Supreme Court adopted what it called the "Scott-Pugh standard" for jury determinations in a particular species of wrongful discharge litigation, the implied agreement not to be dismissed except for "good cause." This decision remanded for retrial a case in which a jury had awarded $1.78 million to an executive terminated for sexual harassment. The jury did not believe the sexual harassment had occurred. The California Supreme Court said that was not enough for a finding of breach of contract. When a discharged employee denies committing the acts that provoked the decision to terminate employment, the jury's role is to decide whether the employer acted with "'a fair and honest cause or reason, regulated by good faith."' Id. at 95-96, 99. Two concerns informed this decision. First, the court believed that canons of contract construction dictate the outcome. Second, and perhaps more important, were practical considerations involving the workplace. While recognizing that the employer's belief "is not a substitute for good cause," the nature of the implied contract--the promises made--demands a focus on the employer's reasonable belief. The formal contract analysis utilized by the decisions relied on by the Cotran court is this: the implied contract not to terminate except for good cause is a promise not to terminate for good cause as objectively determined by the employer acting in good faith. That is the employer's promise. How Does Implied "Just Cause" Differ from Express "Just Cause?" Seen in this light, the Cotran decision, and the decisions upon which it relies, distinguish the promises made in the collective bargaining setting from the decisions made in the implied contract not to terminate except for good cause. The different institutional arena gives rise to different promises. "Good cause" in the union contract means good cause as measured by the seven well-known tests, ultimately reviewable by an arbitrator selected by both parties. Likewise, where the contract of employment is an express,written contract for a definite duration that states that the employee may be terminated for misconduct, the parties are agreeing to something different than in Cotran. They are agreeing that the employee cannot be terminated unless the employee is "actually guilty." Scherer v. Rockwell Int'l Corp., 975 F.2d 356, 59 FEP 1301 (7th Cir. 1992) (summary judgment to employer upheld because employee did not raise genuine issue of material fact regarding his innocence; he was unwilling or unable to deny the allegations upon direct inquiry). Interpretation of the contract, including "good cause" or "misconduct" will depend upon the means of contract formation. How the contract was formed helps tell what the terms promise. The public policy of the state helps, too. 3. DID A DUTY OF PERFORMANCE ARISE? There can be no breach of contract until one party is supposed to perform but refuses. (We are leaving aside the question of breach by anticipatory repudiation, which if material, operates as an ordinary breach and allows the non-breaching party to cancel and sue immediately). In other words, all conditions to one party's performance must "occur" before that party has a duty to perform. Any express conditions to party A's duty to perform must precisely occur or be excused before A has a duty to perform. Any constructive conditions to A's duty to perform must occur through substantial performance before A has a duty to perform. 4. ARE THERE ANY DEFENSES TO ENFORCEMENT? Not all contracts will be enforced. Some people have contractual incapacity, such as infants (usually those under 18) and mental incompetents. Some contracts will not be enforced unless they are evidenced by a sufficient writing, such as contracts for the sale of goods for $500 or more, and contracts that could not possibly have been performed within one year of their making (the one-year rule). Some contracts will not be enforced because they are against public policy, or are unconscionable. Contracts that were procured by fraud or duress can be avoided by the injured party. Sometimes contract performance can be excused because of impossibility or impracticability caused by unanticipated circumstances, the risk of which was not borne by the party seeking excuse. In the employment context, the most usual defense to enforcement is the statute of frauds. 5. WAS THE CONTRACT BREACHED? If all conditions have occurred (either express conditions have occurred precisely or constructive conditions have been substantially performed), then the promisor's duty becomes absolute. If the promisor doesn't do what the promisor promised, and when it was promised, then there is a breach. In the employment context, the claim of breach usually arises from an employee's termination, alleged to be in violation of contract, but it could arise from the breach of any promise. 6. IF THE CONTRACT WAS BREACHED, WHAT IS THE APPROPRIATE REMEDY? The typical remedy for breach of contract is expectancy, also known as benefit of the bargain: the injured party gets the end product (net) of what she would have obtained had the promise been performed. Note that the injured party doesn't come out ahead. She gets no windfall, only what she would have obtained (net) had performance occurred. Nor does the injured party normally get emotional distress damages or punitive damages for breach of contract. There's an exception for emotional damages when the nature of the contract contemplates that the injured party will suffer emotional distress in the event of a breach, such as where the contract is for handling the corpse of a loved one, or at the other end of the scale, a contract for entertainment at a wedding reception. Courts do not allow emotional distress damages for breach of an employment contract. That's why plaintiff's lawyers want to find a tort. Reliance and Restitution When expectancy is inappropriate for some reason, usually some public policy reason, there are two other measures of relief: . Reliance (what did the injured party lose by relying on the unperformed promise?); and . Restitution (the breaching party must restore to the injured party any net benefit the injured party conferred on the breaching party). Sometimes the breaching party is required to specifically perform the promise (an "extraordinary" equitable remedy). But courts do not require specific performance of personal service contracts, for this raises 13th Amendment concerns, as well as problems of court supervision. Sometimes the employee seeks reinstatement as a remedy for breach of an employment contract. Some courts will not allow this, either. The type of breach is important for determining whether or not the non-breaching party may suspend all further contractual performance. Breaches may be material, in which case the non-breaching party is off the hook and need not perform. Or breaches may be immaterial (the breaching party did breach, but also substantially performed), in which case the non-breaching party must continue performance but may claim a monetary remedy to compensate for the breach. JUST SAY NO? WHEN WON'T DISCLAIMERS WORK? • The point of an effective disclaimer is to notify employees that the handbook statements do not constitute binding promises or enforceable commitments. An effective disclaimer undermines contract formation. An effective disclaimer clearly proclaims: "We make no promises. This is not a contract. You may quit or be terminated at any time with or without notice. Nobody has the authority to modify this disclaimer." A clear disclaimer is one that a reasonable employee will understand, and the understanding will be that the employer has not made a commitment to employee job security. Ineffective Disclaimers An ineffective disclaimer does not defeat contract formation. An ineffective disclaimer leaves employees with contract rights to job security, as set forth in the handbooks or other policy statements. Ambiguities in the document will be construed against the drafter--the employer. Inconsistencies between the disclaimer and other language of promise in the handbook may create a jury question of whether a reasonable employee would understand that a promise has been made. For these reasons, employers who wish to issue handbooks that do not give rise to contractual obligations are urged to use language in the handbook that is not language of promise--that is language of discretion or guideline, but not language that is mandatory. These employers are further urged to use clear and conspicuous disclaimers that are attached to every policy to which they apply. A record of the employee's understanding of the disclaimer is advised. Caution: Even Clear Disclaimers May Not Be Given Effect Mercurio v. Therm-O-Disc, Inc., 634 N.E.2d 633 (Ohio Ct. App. 1993) demonstrates that disclaimers are no panacea. In Mercurio, an Ohio employer issued a handbook with a disclaimer. Later, the employer issued a separate document containing a progressive discipline policy. The progressive discipline policy did not contain a separate disclaimer. An employee who was terminated claimed that she had not received the benefits of the progressive discipline policy. The employer argued that the disclaimer defeated the former employee's breach of contract claim. The court held that the disclaimer in the handbook applied, by its terms, only to statements in the handbook. It did not reach the separate progressive discipline policy. The plaintiff's favorable jury verdict was affirmed. See also Black v. Baker Oil Tools, Inc., supra (no separate disclaimer in EEO policy promising non-discrimination on the basis of disability gave rise to promise). The lesson is that you can't have too many disclaimers. What Happens if the Handbook Has Attained Contractual Status? It may be impossible to disclaim an employment handbook that has attained contractual status without offering employees fresh consideration--and it may not be worth it! Courts have been struggling with employers' attempts to withdraw job security that has already been provided through a contractual personnel policy. If the employer unilaterally modifies such a contract by, in effect, revoking contractual obligation, will such a unilateral modification be given effect if the employees get no new consideration in exchange for their relinquishment of contract rights? In other words, once a handbook has achieved contractual status--usually by surprise owing to a court decision finding undisclaimed promises in handbooks or other policy statements to be contracts--can the employer try to take back its handbook promises by means of a subsequently issued handbook that contains a clear and conspicuous disclaimer? The disclaimer would say, in effect, "What used to be a contract isn't one anymore. We are disclaiming all contractual liability and we can fire you anytime by mere whim." Ever since the '80s, this is exactly what employers have been doing, although in more measured language. Subsequent Disclaimer May Be Impossible Several recent cases say that subsequent disclaimers won't work:
Although the Michigan Supreme Court answered to the contrary *55 in In re Certified Question (Bankey v. Storer Broadcasting Co.), supra, this issue has demanded renewed attention. Courts throughout the country are either split or uncertain about this issue. See, e.g., Demasse v. ITT Corp., 111 F.3d 730 (9th Cir. 1997) (certifying the question to the Arizona Supreme Court); Toth v. Square D Co., 712 F. Supp. 1231, (D.S.C. 1989) (applying South Carolina law) (contract modification requires mutual assent, so employer cannot unilaterally eliminate from a contractual handbook a provision regarding layoffs). Why It Works This Way: Rules About Contract Modification There are two basic approaches to contract modification: the pre-existing duty rule and the Restatement approach. The Pre-Existing Duty Rule The pre-existing duty rule says that doing what you are already obligated to do is not consideration. Therefore, if only one party to a contract obtains changed obligations through a contract modification, there is no consideration from the other party to support that change. There must be changes on both sides for there to be consideration from both sides. This view animates the cases holding that a subsequently issued disclaimer is ineffective if the employees do not get consideration for their relinquishment of contract rights. The Restatement View The Restatement view of contract modification is more tolerant of one-sided changes. This view is set forth in the section 89 of the Restatement (Second) of Contracts: "A promise modifying a duty under a contract not fully performed on either side is binding
Courts that countenance subsequently issued disclaimers are guided by issues of fairness, at least to the employer. These courts are concerned with saddling employers with contractual obligations of infinite duration, or of saddling employers with different obligations to different employees. Limited Disclaimers Some courts limit the meaning of the disclaimer. The disclaimer means that there is no guaranteed duration to the employment relation. The employees remain at-will except for certain promises made in the handbook. For example, in Southwest Mississippi Regional Medical Center v. Lawrence, 684 So.2d 1257, (Miss. 1996), the Mississippi Supreme Court held that a hospital's disclaimer did not vitiate the handbook promise to compensate employees for on-the-job injuries. The hospital was not covered under the state workers' compensation plan, but was rather self-insured. The handbook contained at least two disclaimers which forcefully stated, "Nothing in this booklet should be considered a guarantee of continued benefits or employment by Southwest Mississippi Regional Medical Center." The employee successfully sued when Southwest would not compensate her for her on-the-job injuries. The promise of benefits was an enforceable promise, notwithstanding the disclaimer against continued benefits. Hindsight is a wonderful thing. Employers would not face this problem if they had given clearly and conspicuously disclaimed handbooks to employees when--not after--they were hired. The clear and conspicuous disclaimers should have been combined with non-promissory language in the handbook. That is, statements regarding job security should contain discretionary and permissive language, not mandatory language of promise. This tactic should prevent a handbook from being viewed as a legally enforceable contract. How To Undo the Handbook-as-Contract So what is an employer who wishes to undo a handbook-as-contract to do? Here are some suggestions:
The lesson for employees and their attorneys is to examine all handbooks and policy statements that the employee received during her entire tenure with the employer or its successors. Those prior handbooks may be contracts, and they may not have been successfully disclaimed by a subsequently issued disclaimer. THE CONTRACTUAL EFFECT OF SEXUAL HARASSMENT POLICIES A sexual harassment policy, undisclaimed and containing mandatory language, may constitute a contract that will be difficult to disclaim. How Can a Sexual Harassment Policy Have Contractual Status? Few cases hold sexual harassment or other EEO policies to be contracts. The usual reason that an EEO policy is not considered a contract is that it contains guidelines rather than rules, language of aspiration rather than promise. That may not be the result with regard to sexual harassment policies. These policies often contain: Mandatory language;
Corluka v. Bridgford Foods: Unilateral Contract Analysis In Corluka v. Bridgford Foods of Ill., 671 N.E.2d 814 (Ill. App. Ct. 1996), leave to appeal denied, 689 N.E. 2d 1138 (Ill. 1998), the employer distributed an undisclaimed sexual harassment policy. The policy promised non-retaliation, a thorough investigation, and prompt corrective action. The court held that this policy constituted a contract under the Illinois rules of contract formation, which was the unilateral contract analysis. The court also noted that the employee who reported sexual harassment was fulfilling his obligation under the sexual harassment policy. That, too, sounds like consideration. The court further held that the contract claim was not pre-empted by the exclusivity provisions of the state anti-discrimination statute, the Illinois Human Rights Act: "nothing in the Act or caselaw . . . suggest it was meant to preempt contract law." The case was remanded for a trial in which the trier of fact must determine whether the employer breached the contract by discharging Corluka in retaliation for reporting sexual harassment. Black v. Baker Oil Tools, Inc.: EEO Policy a Promise, but not a Contract In Black v. Baker Oil Tools, Inc., supra, 107 F.3d at 1462, the Tenth Circuit Court of Appeals, applying Oklahoma law, found that the following EEO statement in a manual contained a commitment, a promise: *59 "We believe the promise that '[a]ll relations and decisions pertaining to employment . . . [and] terminations . . . will be executed without regard to . . . physical . . . handicap . . . ' is more than a mere 'vague assurance' or 'puffery,' but rather is a 'substantive restriction' on [the employer's] ability to terminate its employees." Disclaimer Did NotApply to EEO Policy The employer argued that the policy could not be a contract because there was a clear disclaimer of contractual liability in the employee handbook as well as in the policy manual. But the EEO policy was in neither the employee handbook nor in the policy manual. The disclaimer applied to "this handbook" and to "this manual." The disclaimer did not apply to nor appear in the supervisory manual, which contained the EEO statement. The disclaimer was consequently ineffective. Id. at 1463. Consideration Lacking Although the EEO policy contained a clear and definite promise, and was undisclaimed, it did not constitute an enforceable contract because, according to the Tenth Circuit, the employee had given no consideration for the promise. Id. at 1463-1464. The plaintiffs' bar, in jurisdictions that use a unilateral contract analysis, can look to this Oklahoma case to strengthen the argument that an EEO policy is an undisclaimed promise that should be enforced under the law of unilateral contract analysis. The reason for this is that the unilateral contract analysis assumes that continued employment by the at-will employee constitutes consideration to make the employer's promise binding. Bookman v. Shakespeare Co. EEO Policy a Promise, but At-Will Status not Otherwise Changed In Bookman v. Shakespeare Co., 442 S.E.2d 183, (S.C. Ct. App. 1994), a South Carolina court of appeals held that the defendant's sexual harassment policy created a binding promise, but did not otherwise change the at-will relationship. The employer's promise was not to terminate an employee in retaliation for filing a harassment claim. The employer retained the right to terminate for any other reason. What Can the Employer Do About Potential Breach of Contract Claims Based on Sexual Harassment Policies? If a sexual harassment policy constitutes a contract because it is undisclaimed, employers must anticipate breach of contract claims *60 for sexual harassment. The claim could be for failure to promptly investigate, or failure to take prompt corrective action. The claim could be, as in Corluka, for breaching the promise of non-retaliation. Although few employees would gain much by adding a breach of contract count to a statutory claim for sexual harassment, the employee who has not made a timely filing with local, state, or federal anti-discrimination agencies, or who has not otherwise complied with the administrative prerequisites of discrimination statutes, may nonetheless have a valid claim against the employer for breach of contract. Contract Disclaimers of Sexual Harassment Policies Can Be Tricky Disclaimer of sexual harassment policies is tricky. As a threshold, if the employer has already issued the policy and it will be viewed as a contract, then a subsequent disclaimer may require fresh consideration. Any attempt to explicitly ask your employees to take money in exchange for a disclaimer of a sexual harassment policy may create employee morale problems, if not material for David Letterman. ("Here's $10 if you don't mind if we fire you for reporting sexual harassment.") There is another reason that it is tricky to disclaim sexual harassment policies: The disclaimer might have the effect of chilling employee willingness to report harassment. The employer wants an effective policy to prevent and remedy harassment. (After Burlinton Industries, Inc. v. Ellerth, 118 S.Ct. 2257 (1998) and Faragher v. City of Boca Raton, 118 S.Ct. 2275, it must have one if it expects to make an affirmative defense to a claim of harassment by a supervisor.) An important feature of such policies is a user-friendly reporting procedure designed to encourage meritorious claims of harassment. The employer will wish to rely on these policies to show that it had a serious, well-understood policy to address harassment. So any disclaimer should not in any way chill employees in reporting sexual harassment. How To Craft an Appropriate Disclaimer One way to manage a disclaimer of contractual liability while at the same time provide assurances against reprisals would be to make clear that federal law (and where appropriate, local and state law) prohibits retaliation for exercising rights protected by the discrimination statutes. It may be effective for the sexual harassment policy to state that it is part of the employment handbook, and is subject to the terms therein. And the terms therein would include the appropriate disclaimer. It may be a good idea to refer to the page in the handbook that contains the disclaimer. CONCLUSION The presumption that employers and employees enter into the employment relationship on an at-will basis remains very much alive. However, courts have displayed a willingness to interpret the provisions of employment handbooks as making enforceable promises. Disclaimers can prevent this from happening, but the disclaimers must be clear and unambiguous. For the attorney advising the employer, the key is to keep the fundamentals of contract law in mind at all times. Practice Checklist For Employers who hire and retain employees on an at-will basis are often surprised when courts find that a contractual relationship exists. The key to assessing whether the relationship is something more than at-will is to evaluate the fundamentals of contract law.
Was there a duty to perform? Any express conditions to party A's duty to perform must precisely occur or be excused before A has a duty to perform. Any constructive conditions to A's duty to perform must occur through substantial performance before A has a duty to perform.
Christine Godsil Cooper is professor of law at Loyola University Chicago School of Law. This article is based on a paper the author prepared for an August 1998 seminar sponsored by the ABA's Labor Law section. Professor Cooper can be reached at ccooper@luc.edu. |