Just Cause vs. Employment-At-Will in Employee Termination

Learn the difference between Just Cause and Employment-At-Will.

Employers have two possible methods of operating the personnel side of their business: Employment-at-Will or Just-Cause. The reason for focusing on just-cause employment is that legislation and court decisions, especially in the 1980s, have eroded the concept of Employment-at-Will.

Legal Environment

In recent years, court rulings have made it more difficult for organizations to use an Employment-at-Will policy. If a firm wishes to use Employment-at-Will it is necessary to state that policy both on the employment application and also in the employee handbook. Failure to establish this policy in writing will result in the firm being at the mercy of the courts. Once a firm makes a decision about which approach it is going to use with its employees, it must be very careful to stick to that decision. Look at the following example;

Ed B. was hired by M&H Aluminum Sales as a sales representative. The employee handbook stated that the first 90 days on the job was a probationary period. The employee handbook stated that M&H had an Employment-at-Will policy. A performance appraisal was completed on Ed’s performance at the end of 90 days. He was evaluated favorably. Two months later M&H terminated Ed using the Employment-at-Will provisions of the employee handbook. Ed sued M&H for wrongful discharge and won. Ed’s lawyer argued that M&H’s use of the probationary period coupled with the use of performance appraisals indicated that the firm terminated for cause only. The performance appraisal form did not contain an Employment-at-Will statement and the probationary period was shown to be an implied and accepted contract between employer and employee.

Final resolution of the case was an award of $740,000 for Ed. This award was based on the employee’s projected lost wages plus benefits from the date of termination through retirement age and for economic loss due to the breached implied contract.

Andrew’s Assemblers, a manufacturer of balusters and banisters, had an application for employment and an employee’s manual, which stated that Andrew’s was an Employment-at-Will organization. However, the employee handbook also contained a section, which spelled out a progressive step-discipline system. When Lionel M. was fired after not appearing for work for three days in a row with no explanation, he sued the company and argued that he was improperly terminated because the step system had not been followed. Andrew’s attorney argued that there was no need to follow the step system because the Employment-at-Will policy was in place. The court found that Lionel M. had been improperly discharged and ordered Andrew’s to reinstate him and pay compensatory damages.

Employment-at-Will simply means that the employer and employee have a working arrangement where either party can terminate at any time, with or without cause and with or without notice and regardless of the manner in which wages are paid. On the surface this seems to be the way most employer/employee relationships should be. The California Supreme Court argued when it defined Employment-at-Will in 1910 that, “Precisely as may the employee cease labor at his whim or pleasure, and, whatever be his reason, good, bad, or indifferent, leave no one a legal right to complain; so, upon the other hand, mat the employee discharge, and whatever be his reason, good, bad, or indifferent, no one has suffered a legal wrong. [Union Labor Hospital Association v. Vance Redwood Lumber Co., 158 Cal. 551,112, p.886(1910)] In certain states and to some degree this remains true; however, over the years many exceptions have been made to the rule. Most of the exceptions can be categorized under three broad legal headings: public policy, implied employment contract and covenant of good faith and fair dealings. 

In one area of Michigan the average settlement for a wrongful discharge suit was $440,000. This just underscores the cost when the law is not carefully adhered to for Employment-at-Will. 

Public Policy Exceptions
The termination of an employee based upon requiring the employee to violate a state or federal Law, a state or federal Constitution, or professional regulations or codes of ethics is not allowed. Examples include: 

1. Termination for filing a workman’s compensation claim.

2. Termination for filing a safety complaint with OSHA.

3. Termination because of military requirements.

4. Termination for serving on a jury.

5. Termination for refusing to subject oneself to sexual advances.

6. Termination for “whistle blowing” on an employer’s illegal acts.

7. Termination for discussing one’s salary.

The list above gives a good indication of what is involved. The list is far from complete. Dozens and dozens of public policy exceptions exist. In essence, termination of an employee for exercising his/ her rights in these areas is a specific violation of the law.

Implied Employment Contract
This aspect of personnel relations has given companies trouble for years. If a company does not have a statement about who is authorized to enter into a contract with an employee and a manager tells a new employee that, |“If you do your job, you will be with the company for years.”’ then the company has entered into an implied verbal contract that can be upheld by the courts.

The use of a probationary period in an Employment-at-Will relationship is not advised. Normally, once the employee has completed the probationary period, beware of statements such as the following:

You will be employed by the company as long as your job performance meets the standards of the position.

Such statements by any manager will negate the company’s desire to be an at-will employer. When management makes this type of statement it creates a legally binding situation that the company will only discharge for a performance-related item.

In Employment-at-Will situations, it is of paramount importance not to have a progressive discipline program presented in any official way, such as in an employee handbook. A stated progressive discipline program becomes a contract between the employer and the employee. In the event the employee’s performance is substandard on the job, then the employer must notify the employee of the substandard performance as outlined in its discipline program. This implied contract, of course, precludes summary termination. 

Cases have been argued and won by employees that performance appraisal systems create a perception of continued employment. If a company has a goal-setting exercise, that sets future performance targets for an employee and the employee meets the goals; the company will have a hard time terminating the employee using an Employment-at-Will approach.

Covenant of Good Faith and Fair Dealings
This category of Employment-at-Will exceptions derives from a legal theory of contracts developed in the insurance law arena. Under this theory it is understood that the parties will not treat each other unfairly or act in a manner of malice or bad faith toward each other. This legal argument when brought over to the personnel area is primarily used by terminated employees to bring suit where no employee handbook, no written statements of policies or verbal commitments have been made by the management of the company.

 

Obviously, it tends to be a last gasp measure used by terminated employees. An example of a suit won by an employee under this category of exceptions was in Clearly v. American Airlines, 111 Ca App 3d(1980) where the court ruled that American Airlines acted in |“bad faith”’ when it terminated an employee after eighteen years of satisfactory service. 

The reader of the previous paragraphs will understand that great care must be given to the entire personnel system when an employer wants to follow a policy of Employment-at-Will. Training programs, performance appraisals, hiring practices, and orientation programs all have to be consistent.

Before an employer implements an Employment-at-Will arrangement it is extremely important to have an attorney competent in labor law or a human resource professional review the entire program to be sure that it complies with federal and state law and common law decisions.

Employment-at-Will Specifics
All Employment-at-Will handbooks should include an Employment-at-Will disclaimer. The disclaimer is specific in what needs to be included in it. The two examples, which follow, have been tested and upheld in the courts. The first example states:

Employment-at-Will

ABC, Inc. is an “at-will” employer. What this means is that you or the Company are free to end the employment relationship at any time, with or without notice, with or without cause and that your employment is for no specified period of time.

The second example states:

Employment-at-Will

In consideration of my employment, I agree to conform to the rules and regulations of ABC, Inc., and that my employment and compensation can be terminated with or without cause, and with or without notice by either myself or the Company, at any time.

 

An Employment-at-Will disclaimer must be included on the job application, in the beginning materials of the employee handbook and on the signature page of the employee handbook. In addition to the disclaimer itself, it is essential that the statements explaining that the handbook is not a contract of employment and that management has the right to change policies also be included.

If different terms are used to indicate the company in the body of the employee handbook, e.g. ABC Company, “Company”, Company and company, this information should be included on the disclaimer page.

To be absolutely sure that there is no misunderstanding about the Employment-at-Will policy of the firm, some experts recommend that a disclaimer be included not only in the opening pages and on the signature page but also in the rules of conduct, the performance appraisal and the termination sections.

The following samples show an Introductory Statement page contained in an employee handbook and a sample Acknowledgement of Receipt page for an employee handbook.

Introductory Statements in an Employee Handbook

We have prepared this employee handbook to acquaint you with the policies, procedures, and philosophy that make ABC, Inc. a leader within its field. This handbook is intended to provide you with information about some of the Company’s employment policies, benefits and other general information about the Company’s operations. Please understand that this handbook only highlights the Company’s policies, practices, and benefits for your personal education and therefore cannot be construed as a legal document.

Within the employee handbook, ABC, Inc. also will be referred to as the “Company” or Company. All of the preceding terms are interchangeable.

THIS HANDBOOK IS NOT A CONTRACT OF EMPLOYMENT.

No employee of ABC, Inc. has the authority to enter into a written or oral contract with any employee. Nothing contained in this handbook is intended to alter this fact. Only written contracts of employment executed by the Board of Directors of ABC, Inc. will be recognized by ABC, Inc.

Employees must recognize that circumstances will obviously require that the policies, practices, and benefits described in this handbook will change from time to time. Consequently, the Company reserves the right to amend, supplement or rescind any provisions of this handbook, as it deems appropriate at its sole and absolute discretion.

ABC, Inc. is an “at-will” employer. What this means is that the Company is free to conclude employment of any individual at any time, with or without notice, with or without cause and that an individual’s employment is for no specified period of time.

 

Agreement to Conditions of Employment

I have read and fully understand the rules governing my employment with ABC, Inc. I agree to employment with ABC, Inc. under the conditions explained. I understand these conditions can be changed by the Company, without notice, at any time. I also understand and agree that my employment is for no definite period of time and may, regardless of the time and manner of payment of my wages and salary, be terminated at any time with or without cause, and with or without notice (Employment At-Will) 

I also agree to the Confidentiality statement of ABC, Inc.

In addition, I also agree that upon the termination of my employment I will return all Company property as outlined on my last day of employment.

Employee Name

Employee Signature:

Date:

Witnessed By:

Date:

The Confidentiality Provision and a Provision for the return of Company property on the last day of employment have all been included on the Acknowledgment page. One obvious benefit of including everything together is that there is less chance of losing a record.

When establishing or maintaining an Employment-at-Will personnel system, it is necessary to review the performance appraisal system, hiring process, orientation and training programs to insure that promises of continued employment or the illusion of continued employment are not present.

Goal setting should not be mentioned in any written or verbal discussion of performance appraisal, and no goal setting should be done in the actual performance appraisal itself. The appraisal should be for the period just completed and the employee’s performance compared to the standards for the position. If goal setting is discussed it could be viewed as a promise of continued employment especially if the employee achieves the performance specified in the goals. In addition, an employee history of achieving set goals would create a situation for the company that if the employee were terminated he or she could claim the company was not acting in good faith. Termination could be construed as violating an implied contract of employment.

During the interview and hiring phase, casual statements such as:

“If you do your job, you can look forward to a long relationship with the Company,” or:

“We will tell you what you need to do through the Performance Appraisal system to keep your job,”

can come back and create major problems from a contract of employment basis. It has been successfully argued in the court system that these types of statements constitute an implied contract of employment. Proper training in the interview and job offer process is absolutely essential.

Legal/Professional Review

If a company decides to implement an Employment-at-Will program, it is essential that an attorney or specialist in state labor law check through the program. The differences among the states are immense and confusing. Breach of Contract cases have been ruled upon in all states except Connecticut, New Hampshire, and Puerto Rico. Public Policy cases have been decided in all states except Delaware, Rhode Island, and Puerto Rico. The courts in some states have loosely interpreted the laws; in other states the courts have been more rigorous. Just reviewing state laws will not guarantee that a company has the information it needs to comply with its state’s actual requirements. 

Consistent Approach
One final aspect of Employment “At-Will” concerns discrimination, harassment, and wage and hour complaints. A company’s specific employment policy, whether employment- at-will or just-cause employment, is of no interest to the agencies involved. For example, the federal Equal Employment Opportunity Commission (EEOC) is only concerned with whether or not a company has applied its policies fairly. Did it deal with a situation the same way each time that it came up? Was the discipline invoked of equal nature for every employee involved in the same or similar situations? An employer must be able to show that it has treated all employees involved in a similar situation the same way. Consequently, all terminations or reprimands need to be well documented. If a complaint is filed, documentation will provide substantive evidence to back up an employer on his or her position on the matter. A paper trail is necessary, but employers need to keep in mind that the paper trail must show consistency of approach. Provided that an employer has not committed any errors in the proceeding areas, the Employment-at-Will doctrine is useful in defending a wrongful discharge lawsuit.

If you are not sure of what your employment relationship is, consult a Professional in Employment issues or your Attorney before implementing any policy that can have major legal implications for your business. The information contained in this discussion should not be construed as legal advice as your specific situation and State laws can vary. This provided as a general discussion of the topic area.