At-Will Employment: When Can “No Cause” Become A Mandatory “Good Cause?”

Clearly an employer can contract out of at-will employment if it so chooses. But can a written employment contract that explicitly provides that employment is at-will be modified without the employer’s intent to do so? Yes, and at quite an expense in some cases.

Courts have found a number of ways around explicit at-will provisions. Some have found writings and oral statements to an employee to be contractual modifications altering the employment contract so as to require good cause to terminate. Others have held that employers have waived at-will provisions on the basis of oral statements or conduct directed towards an employee. And still others have held that employers were estopped from relying on an at-will provision on the basis of earlier statements and conduct. The Oregon Supreme Court’s recent decision in Bennett v. Farmers Insurance Co. of Oregon (2001) is illustrative of all three avenues and the potential liability to which an employer may be exposed.

In Bennett, a District Manager terminated without good cause sued his employer for, among other things, breach of his employment contract. He succeeded despite the fact that his contract explicitly stated that he was employed at-will and that no alterations could be made to the contract without the written agreement of both sides. Unsure of exactly which contract theory the jury based its decision, the Court examined all three and determined that each was a sufficient basis.

The court found that representations made to the manager by several higher up employees concerning their opinion of the need for “good cause,” other verbal assurances given to the manager, and a “shape up or ship out” letter concerning his performance had modified his contract to replace the explicit at-will provision with a mandatory “good cause” requirement.

The court also found that the same representations, assurances, and writings rose to the level of a clear, unequivocal waiver of the at-will provision of the manager’s employment contract. Thus, the employer was required to show good cause to terminate the manager.

In this same vein, the Oregon Court has held that an employer’s “Policy Handbook” may be evidence of the modification of a written contract term whether intended or not. The court allowed a case to proceed where a probationary at-will employee of less than three months, who was hired orally, sued for breach of contract based on statements concerning termination procedures found in her handbook. Like Oregon, numerous Washington courts have held that employee handbooks may lead to binding obligations whether or not there is an at-will contract provision.

Even if the intent to waive a contract provision cannot be shown, an employer may be estopped from relying on an at-will provision if it somehow led an employee to believe that the provision had been waived and the employee relied on that belief. Thus, in Bennett, the Court found the “shape up or ship out” letter and verbal assurances sufficient to support the claim that the employee reasonably believed there to be a “good cause” requirement. Relying on this belief he continued to expend money and time in developing his district business. The employer was therefore prohibited from relying on the at-will provision and in breach of the contract.

Besides cases where conduct and statements have removed an at-will provision, courts unanimously hold that a contract for a fixed term or a specific time period imposes implied limitations on the employer’s right to fire, limiting it to good cause or those reasons expressed in the contract. But when the parties intend the duration to depend on specific conditions, e.g., “as long as work is satisfactory,” courts will generally defer to an employer’s judgment as to the discharge.

Where an employment contract does not state whether employment is at-will, courts fall back on the at-will presumption. Both Oregon and Washington, however, recognize that this presumption may be overcome by the parties’ course of conduct if it evidences a mutual intent to alter the presumption. Likewise, where there is no written contract but one is inferred, the specific terms of the contract, e.g., whether it is terminable at-will, will be also inferred from such conduct. Here again, statements from management, written communications, and handbooks have all been used to prove that employment was terminable only for good cause despite employers’ protests to the contrary.

Another way courts work around the at-will presumption is to find a covenant of “good faith and fair dealing” implied in the employment contract. This covenant operates to make bad faith action on an employer’s part a breach of contract. The general rule is that an employer may not act in bad faith so as to defeat the objectively reasonable expectations of an employee. In one case, an employer terminated a salesman to avoid paying him a $92,000 commission soon to be due under his at-will contract. The court held the employer liable for breach of this implied covenant of good faith and fair dealing.

Oregon, however, is among the states that have never held that a duty of good faith and fair dealing applies to at-will employment contracts. Sheets v. Knight. Rather, it has explicitly held that either party to an at-will contract may terminate it, “even for a bad cause.” Of course, there are numerous “bad causes” that are prohibited by statute and common law doctrines, violations of which may result in substantial liability and legal fees.

Washington, too, has thus far declined to adopt the good faith and fair dealing exception to the employment at-will doctrine. On two occasions the state’s highest court has specifically stated that this exception does not strike the proper balance between an employer’s interest in running his business as he sees fit and an employee’s interest in maintaining his employment. One note of caution however, in neither of those cases was the Washington Court presented with an egregious abuse such as defeating a lofty commission. The possibility remains open that it could in the future imply this covenant into employment contracts given facts more like those mentioned above.

Contract damages are generally limited by an employee’s duty to mitigate. Thus, where an employee is terminated, he is obligated to make reasonable efforts to obtain new employment as soon as possible to limit his damages. Should he find a new job one week after termination, an employer’s liability is limited to one week’s salary. This rule minimizes an employer’s exposure concerning low-level employees, but does far less where the employer has terminated a high-level employee in breach of contract. There just aren’t as many openings available for a CTO. On top of the difficulty of finding comparable employment, executives obviously command higher salaries and other costly benefits (e.g. stock options). For instance, the cost to the employer in Bennett was $3.5 million-and that was only the contract damages.

Thus, while contract damages are often minimized by an employee’s duty to mitigate, Bennett is a prime example of the potential liability an employer faces when a simple contract provision is unintentionally altered or actions are taken which preclude reliance on the provision.

How can I ensure that I won’t breach an employment contract?
To help insure against breach of contract liability employers should take a number of steps. First, carefully draft employment contracts to make clear that nothing contained therein or stated earlier could be construed as limiting the employee’s at-will status. If the employer can succeed in drafting a completely unambiguous document, then a court will generally refuse to examine any other evidence, such as handbooks and manuals, which might contradict the unambiguous contractual provisions. Drafting an unambiguous contract is very important because basic contract law presumes that ambiguities are resolved against the party choosing the words of the contract. This is generally the employer.

Second, train all managers and executives to avoid making verbal or written assurances of continued employment to any employee. Where employment-related information is communicated to the employee, preferably in writing, include a disclaimer to the effect that nothing in the communication should be construed as altering the at-will status of the employee.

Although such a disclaimer carries significant weight, both Washington and Oregon hold that inconsistent representations on the part of the employer can negate the effect of the disclaimer. Thus, thorough and continuous training to avoid assurances and other comments contrary to the at-will status of an employee is vital.

Third, avoid unwritten policies whenever possible. For instance, in Bennett it appeared to be common knowledge that the company had an unwritten policy of only firing for good cause. It was this knowledge that was passed on to the plaintiff several times, giving him a justifiable basis on which to continue his efforts and expenditures. Had this policy not been in existence, it is far more likely that the court would not have modified the contract, waived the at-will provision or precluded the employer from relying on the at-will provision.

Fourth, because handbooks and manuals have become such a source of controversy, an employer is wise to take careful steps in drafting them. An employer should explicitly and conspicuously state in its materials that nothing contained in the handbook, manual, or similar document is intended to be part of the employment relationship and that such statements are instead simply general statements of company policy. Also, be sure that each employee has notice of the materials in the handbook, specifically the disclaimer, from the moment they are hired. Finally, require that each employee sign the materials prior to beginning employment. In the great many of cases where disclaimers were upheld, the employee had signed the documents, evincing notice and knowledge of everything contained therein.

Finally, if you intend to terminate an employee be sure to have sufficient records to make a good cause showing if required. This avoids the possibility of breaching an implied covenant of good faith and fair dealing, provides a possible defense for any discrimination claim and, even if the at-will presumption is defeated, reduces the likelihood of liability on a breach of contract.

II. When can “bad cause” become an illegal cause?
While an employer may generally discharge an at-will employee at any time for any reason, it may not terminate an employee for pursuing publicly recognized rights and obligations. Such an action will expose the employer to tort liability for wrongful discharge. Thus, where an employer terminated an employee for refusing to perjure himself before a state legislative committee, the employer was held liable for the tort of wrongful discharge.

Both Oregon and Washington recognize public policy wrongful termination claims in at least two categories of cases. The first category involves the discharge of an employee for fulfilling a societal obligation such as serving on a jury. The second involves an employer who terminates an employee for pursuing a right that is of important public interest as indicated by a constitutional or statutory provision or case law, and that is related to his or her role as an employee. Thus, where an employer discharged an employee for refusing to give in to sexual advances, it was liable in a tort action based upon federal and state prohibitions against sexual harassment. Likewise, where an employee was discharged for reporting her suspicions about her union employer’s accounting practices to the US Department of Labor, the employer was held liable based on the public policy of protecting “whistleblowers” as evidenced by a state statute. Conversely, where an employee was discharged for refusing to end a social relationship with a fellow employee, the employer was not liable because there was no public policy that recognized the employee’s “inalienable human rights” to socialize with whomever he wished.

The key is that there must be a codified public policy on which to base the claim. Courts in each state, however, have made recent exceptions that may expand an employer’s liability. In Gardner v. Loomis Armored Inc. (1996) the Washington Supreme Court held an employer liable for terminating an armored car driver who left his truck unattended to aid a hostage in a bank robbery. Although his act was a clear violation of one of the companies “fundamental” policies, the court found that termination for such an act violated a public policy of protecting human life. Rather than cite a specific statute or regulation, as required by previous case law, the court found its policy base in a number of criminal and constitutional law exceptions. The lesson employers need to take from Gardner is that in some cases there need not be a crystal clear policy mandate in order to impose liability. Thus, predicting which actions might result in such liability is more difficult than under previous case law.

In Sims v. Besaw’s Café (2000) an Oregon Court of Appeals held an employer liable for terminating an employee based on his sexual orientation. This result runs counter to all previous cases in both Washington and Oregon. Noting the two general categories of cases- “fulfilling a societal obligation” and “pursuing a right”-the dissent failed to see how the plaintiff’s claim fit into either. The majority, however, found the employer liable for violating a public policy. This case is of special importance to employers in Portland, Eugene, Corvallis, and Medford, all of which have ordinances prohibiting discrimination based on sexual orientation.

Unlike Washington courts, which have refused to find a state public policy based on similar local ordinances, Besaw’s signals a willingness of Oregon state courts to impose liability based on policies found in local ordinances.

Almost every jurisdiction holds that a public policy claim is based in tort, as opposed to contract. This is important because it exposes an employer to the full range of damages proximately caused by the wrongful discharge. The employee may still recover loss of income and fringe benefits and the damages recoverable in a breach of contract action. But in addition to these contract remedies, a successful employee may also recover an award for pain and suffering, emotional distress and, in some instances, punitive damages and attorneys’ fees. The threat of possible punitive damages alone should be reason for most employers to avoid terminations that run contrary to public policy.

An employer’s best defense to a public policy tort claim is fairly obvious-don’t terminate employees in bad faith. Although recent Oregon and Washington cases have signaled a possible expansion of this narrow cause of action, the potentially tortuous actions are relatively easy to identify. Don’t terminate for fulfilling public obligations such as jury duty. Don’t terminate for pursuing rights that are, or arguably may be, statutorily protected such as filing worker’s compensation or discrimination claims or even for actions such as instituting accounting procedures that comply with federal or state statues. If you must terminate an employee, build a good cause showing that forms a solid basis for termination. Substantiate poor performance, absenteeism or insubordination.

In addition to possible tort claims, employers must be aware of federal, state, and local laws that may make a “bad cause” an illegal cause. For instance, Title VII of the Civil Rights Act of 1964 protects individuals who are discriminated against because of race, religion, sex (including pregnancy and sexual harassment), color, and national origin. Although direct proof of intent is a more sure way of proving such discrimination, the Supreme Court has developed frameworks for proving intent through circumstantial evidence. In addition, a plaintiff can prove discrimination based solely on the disparate impact of a neutral policy. Title VII authorizes a host of remedies, including back pay, front pay, reinstatement, injunctive relief, compensatory and punitive damages, and attorneys’ fees.

The Age Discrimination in Employment Act protects individuals who are discriminated against because of age. It covers employers with 20 or more employees. While the ADEA only protects employees over 40 years old, analogous state laws in both Oregon and Washington protect employees over 18 years of age. Age discrimination is proven primarily through evidence of intentional disparate treatment, thus, a policy such as releasing only employees with high salaries will generally not be discriminatory even if it primarily affects employees over a certain age. Potential damage awards are similar to Title VII, with the exception of compensatory and punitive damages.

The Americans with Disabilities Act protects “qualified individuals with a disability” from discrimination based on that disability. In addition, it also protects employees with a “record of” or who are “regarded as” having such a disability. It covers employers with 15 or more employees. Both Oregon and Washington have analogous state laws. Remedies under the ADA are identical to those under Title VII, but also include the possibility that an employer may have to make a “reasonable accommodation” for a disabled employee. (For more on the ADA, read Du Val Business Law’s article “How do I determine if someone is ‘disabled’ under ADA standards?”)

These are only a sample of the many federal and state statues and the major protected classes. There are many others, including local ordinances whose protection goes beyond that of the federal and state laws. For instance, a number of Oregon and Washington municipalities and counties have ordinances protecting individuals on the basis of sexual orientation, a class unprotected by other statutes. Should you have concern that an employee whom you intend to treat adversely may be a member of a protected class, contact an attorney for guidance.

In sum, the common law employment at-will doctrine, which allowed an employer to terminate an employee for no reason, has lost much of its power. In taking any termination action an employer must carefully analyze employee behavior and consider all the reasons for termination. Is there “good cause?” The laws change rapidly in this arena and it is always best to consult an attorney if there is any question about an employee’s behavior and what legal action the employee could take. Once again, prevention is the best medicine.