wrongful termination of employment
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2006 DLA Piper Rudnick Gray Cary US, LLP
WRONGFUL TERMINATION
OF EMPLOYMENT
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TABLE OF CONTENTS
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I INTRODUCTION .................................................................................. 1
II CLAIMS FORBREACH OF CONTRACT ............................................... 1
A. Creating the At-Will Employment Relationship..................... 1
1. The Presumption of At-Will Employment .................... 1
2. The Express, Written Agreement for At-Will
Employment.................................................................... 2
3. Integrating the Written At-Will Agreement .................. 3
4. Establishing At-Will Status for Existing Employees ....55. Where At-Will Language Should Be Included.............. 7
B. Employment Contracts Requiring Good Cause for
Termination.............................................................................. 8
1. Express Contracts to Terminate for Good Cause .......... 8
2. Implied Contracts to Terminate for Good Cause........... 9
C. Consequences of Finding an Implied Contract Good
Cause. ................................................................................... 11
1. The Shifting Definition of Good Cause. .................. 112. Reductions-In-Force.....................................................12
3. Termination for Misconduct ........................................ 12
D. The Wrongful Demotion Claim ............................................15
E. The Implied Covenant of Good Faith and Fair Dealing.......16
III WRONGFUL TERMINATION IN VIOLATION OF PUBLIC POLICY ..... 17
A. General Requirements for Public Policy Claims ..................17
1. The Public Policy Must Be Tethered to a
Constitutional or Statutory Provision........................... 182. The Public Policy Must Benefit the Public at Large ... 18
3. The Public Policy Must Be Well-Established,
Substantial and Fundamental ....................................... 19
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TABLE OF CONTENTS(continued)
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B. Whistleblower Claims ........................................................... 20
1. Claims Based on Complaints of Illegal Activity ......... 20
2. Claims Based on Refusals to Perform Illegal Acts......21
3. California Whistleblower Statute................................. 21
4. Post-Enron Federal Whistleblower Protections........... 22
5. Avoiding Whistleblower Claims..................................22
C. Public Policy Claims That Duplicate Statutory Claims........23
D. Liability for Punitive Damages on Public Policy Claims..... 24IV CLAIMS BASED ON PREEMPLOYMENT AND POST-
EMPLOYMENT CONDUCT ................................................................ 26
A. Fraud in Inducing Employment............................................. 26
B. Withdrawal of Job Offer: Promissory Estoppel................... 26
C. The Letter of Recommendation............................................. 27
V TERMINATION GUIDELINES............................................................. 28
VI CONCLUSION ................................................................................... 30
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I
INTRODUCTION
When bringing wrongful termination lawsuits, terminated employees have avariety of weapons in their arsenal. Breach of contract claims are limited to
economic damages (e.g., lost wages and benefits) so employees often add tort
claims to their lawsuits, which allow for the recovery of emotional distress and
punitive damages. Thus, a terminated employee may (and probably will) bring
several claims, alleging that the termination was in breach of an express or implied
contract, in violation of public policy, discriminatory on the basis of race, sex,
religion, disability or some other protected status, or in retaliation for opposing
unlawful activity. The employee may add other claims as well, such as for
wrongful demotion, harassment, infliction of emotional distress, defamation orfraud.
This article will discuss breach of contract claims that can arise out of
terminations and demotions, as well as tort claims for wrongful termination in
breach of public policy, and tort claims based on preemployment and post-
employment conduct.1 This article will also suggest management practices for
structuring the employment relationship to promote fairness and to avoid potential
legal pitfalls when demoting or terminating employees.
II
CLAIMS FORBREACH OF CONTRACT
A. Creating the At-Will Employment Relationship.1. The Presumption of At-Will Employment.
California law provides a general rule that every California
employee is presumed to be employed at the will of either party: An
employment, having no specified term, may be terminated at the will of either
1 As other DLA Piper Rudnick Gray Cary US LLP Employment Law Briefing articles address statutory claims, such asdiscrimination, retaliation and harassment, these types of claims will not be addressed in this article.
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party on notice to the other.2 In other words, absent an agreement to the contrary,
employers may terminate employees for any reason or no reason so long as the
reason does not violate the law or a fundamental public policy. Likewise, the
employee has the option to quit for any reason or no reason.
However, it is relatively simple to rebut the at-will presumptionand claim that an employer must have good cause to terminate the employment
relationship. Thus, a terminated employee will often include a claim for breach of
contract in a wrongful discharge lawsuit, alleging that there was an employment
contract (either express or implied) requiring good cause for termination and that
the employee was fired for something less than good cause. In the absence of an
express, written agreement for at-will employment, a breach of contract claim is
more difficult to defend.
Thus, employers can and should consider entering into express,
written contracts with their employees that spell out the at-will relationship. As a
general business practice, it is not advisable to terminate employees for no reason.
Instead, as discussed in further detail infra in Part V, entitledTermination
Guidelines, termination decisions should be fair, objective and consistent with
company policies. However, where an enforceable express at-will agreement is in
place, a jury should not be allowed to second-guess whether a termination was for
good cause. In other words, although an express at-will agreement will not prevent
the filing of a breach of contract claim, it will offer a powerful weapon to defeat
such a claim.
2. The Express, Written Agreement for At-Will Employment.A written agreement for at-will employment can be as simple as
a one-page at-will employment agreement. Alternatively, a term for at-will
employment can be incorporated into a more extensive written agreement, such as
a job offer letter or an employment contract. There are many variances in the
written terms for at-will employment that California courts have recognized as
enforceable. The following language is typical:
2 Cal. Lab. Code 2922.
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I understand and agree that my employment with the
Company is at-will and therefore is for an unspecified
period of time and may be terminated at any time, with or
without good cause, and with or without advance notice,
by the Company or by me.
Specific examples of at-will agreements that have been
enforced by the courts are as follows:
(1) Employee acknowledges that there is no
agreement, express or implied, between employee
and the Company for any specific period of
employment, nor for continuing or long-term
employment. Employee and the Company have a
right to terminate employment, with or without
cause.3
(2) My 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.4
The courts are continually determining the enforceability of
new variations of language used in at-will employment agreements. Accordingly,
any use of the above sample clauses by employers should be reviewed by legal
counsel before distribution to employees.
3. Integrating the Written At-Will Agreement.It is important to integrate the at-will employment agreement.
A written agreement is integrated where the parties adopt the writing as the final
and complete expression of their agreement. Where an employer wants to
integrate a written at-will agreement, the integration clause should follow the
clause providing for at-will employment. A sample integration clause is as
follows:
3 Slivinsky v. Watkins-Johnson Co., 221 Cal. App. 3d 799 (1990).
4 Hoy v. Sears Roebuck & Co., 861 F. Supp. 881 (N.D. Cal. 1994).
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I understand and agree that no person other than the
[Chief Executive Officer] of the Company has the
authority to enter into an agreement contrary to my
at-will employment relationship with the Company. To
be valid, any such agreement to the contrary must be
specific, in writing, and signed by the [Chief Executive
Officer] and me. I further understand and agree that all
prior agreements with the Company on this subject,
whether written or oral, are superseded by this
agreement. I understand and agree that this is the entire
agreement between the Company and me on this subject.
(To ensure its enforceability, use of this sample integration clause by employers
should be reviewed by legal counsel prior to distribution to employees.)
A number of courts have examined integrated at-will
employment contracts. In Slivinsky,5 the court held that an employment application
and employment agreement, read together, were sufficient to establish an
integrated agreement for at-will employment. Consequently, the court rejected the
plaintiffs claim for breach of an implied contract requiring good cause for
termination. The court reasoned: There cannot be a valid express contract and an
implied contract, each embracing the same subject, but requiring different results.
The integrated at-will agreement was enough to bar the implied contract claim,
resulting in dismissal of the lawsuit prior to trial.
The integrated employment agreement inAnderson v. Savin6
further illustrates the proper steps an employer should take to retain the at-will
status of employees. InAnderson, the written contract signed by the employee
provided that it constituted the entire arrangement between the parties and could
not be modified except by written approval. The contract also stated that
nothing could interfere in any way with the right of [the employer] to terminate
the [employees] employment at any time, with or without cause, without
liability. Based on that agreement, the court held that the employment
relationship was at-will.
5 221 Cal. App. 3d 799.
6 206 Cal. App. 3d 356 (1988).
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In contrast with the integrated at-will agreements in Slivinsky
andAnderson, the case ofMcLain v. Great American Insurance Companies7
illustrates at-will language, without an integration clause, that was insufficientto
establish that employment was at-will. InMcLain, the court held that an
employment application form containing an at-will clause did not create an at-will
relationship, because other language in the application stated that the terms and
conditions of employment could be changed at any time, with or without notice.
The court reasoned that if the terms of employment could be changed at any time,
an implied contract to terminate for good cause could be created after the
employment application was signed.
Although employers can and should incorporate at-will
language into various employment documents, only one document need be
integrated. In fact, including integration clauses in several documents may be
confusing. An employment contract or job offer letter is the most appropriatedocument for an integration clause.
4. Establishing At-Will Status for Existing Employees.It is uncertain whether the status of a current employee can be
changed to at-will by a written agreement without offering some consideration in
exchange for the employees agreement i.e., something that justifies the
employees forfeiture of the protections of the good cause standard. It is also
unclear whether the consideration offered must be more than mere continued
employment. Thus, simply implementing a new at-will policy with currentemployees as a condition of continued employment may not be enough to create an
enforceable at-will employment agreement.
Modification of a long-term employees status to at-will
employment has been upheld where valuable consideration, in addition to
continued employment, was offered in return for the employees agreement. In
Cruey v. Gannett Co.,8 an employee signed a written agreement with his employer,
nine years after he was hired, in which the employer agreed to subsidize the
employees purchase of a new home following his relocation to a more expensive
7 208 Cal. App. 3d 1476 (1989).
8 64 Cal. App. 4th 356 (1998).
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housing market. The written agreement also stated that the employee was
employed at-will. The court enforced this at-will agreement, dismissing the
employees breach of contract claim. The court reasoned that the housing subsidy
was sufficient consideration for the at-will agreement.
InAsmus v. Pacific Bell,9 the California Supreme Court shedlight on how courts may address the fairness concerns posed by requiring current
employees to agree to at-will employment. AlthoughAsmus did not involve an
at-will policy, the case addressed a related issue whether an employer who has a
written employment security policy can unilaterally modify that policy. InAsmus,
Pacific Bell had a written policy that promised its managers continued employment
absent a specified change in business conditions. After five years, Pacific Bell
notified its managers that the policy might not be continued. Two years later, the
company terminated the policy, replacing its promise of guaranteed employment
with a generous severance program. In response to a lawsuit filed by sixtymanagers, Pacific Bell argued that the policy could be unilaterally modified by the
company.
The California Supreme Court assumed that the written policy
was a contract but concluded that Pacific Bell could unilaterally terminate it. In
reaching this conclusion, the court reasoned that an employer can eliminate or
modify a security policy of indefinite duration so long as certain conditions are
met. These conditions include terminating the policy (1) after a reasonable time,
(2) on reasonable notice and (3) in a manner that does not interfere with
employees vested benefits. The court concluded that because the managers hadreceived the benefits of the policy for more than five years, the policy had
remained in effect for a reasonable time and there was no denial of vested benefits.
In addition, the court found that the two-year notice of the change given by Pacific
Bell was reasonable. The court also concluded that the managers continued
employment following Pacific Bells modification of the policy was sufficient
consideration to constitute their acceptance of the modified policy. However,
the significance of this final ruling is uncertain because Pacific Bell actually
offered the managers enhanced severance benefits, in addition to continued
employment, in consideration of the modified policy.
9 23 Cal. 4th 1 (2000).
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All told, it is probably safest to offer something to current
employees when changing their status to at-will employment. A promotion, a
housing subsidy, stock options, an increase in wages, a bonus or new benefits
(such as enhanced severance benefits) should be sufficient. In addition, pursuant
toAsmus, employees should be given adequate notice of the new at-will policy
(although a two-year notice is most certainly unnecessary). Finally, given the
uncertain state of the law, an employer who wants to implement a new at-will
employment policy should seek advice from legal counsel.
5. Where At-Will Language Should Be Included.At-will language should be included in various employment
documents, such as job applications, offer letters, employment contracts, employee
handbooks, acknowledgment forms for handbooks and personnel policy manuals.
Depending on the type of document, the language used may need to be modified,
and an integration clause may be appropriate. The following guidelines should
help employers incorporate at-will language into various employment documents:
a. Job Application. A statement of the employers at-willpolicy can be placed above the signature line of the job application. Applicants
can be asked to acknowledge by their signatures that they agree that any
employment offered will be at-will.
b. Job Offer Letter. If a job offer letter is used, the at-willemployment policy can and should be clearly stated in the letter, and an integration
clause also should be included. The new employee should be asked to signify his
or her agreement to the terms of the offer letter, including the at-will terms, by
signing and returning the letter.
c. Employment Contract. If a formal written employmentcontract is used, it should include an at-will employment clause and an integration
clause. As written contracts are formal legal documents, they should advise
employees of their right to seek independent legal counsel before signing.
d. Employee Handbook. The employee handbook can andshould set forth the at-will policy and reserve the employers right not only to
terminate the employment relationship at-will, but also to modify or alter an
employees position through actions other than termination, such as demotion,
promotion, transfer, reclassification or reassignment, at the employers sole
discretion. Any discipline policy in the handbook should remind employees that
employment with the company is at-will and that the employer reserves the right to
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exercise its discretion in the imposition of discipline, including determining when
termination, with or without notice, should occur as a disciplinary measure. It is
especially important to expressly reserve this management discretion where there
is a progressive discipline policy.
e. Employee Handbook Acknowledgment Form. A signedemployee handbook acknowledgment form that includes at-will language can
establish at-will employment. The form should also state that the employee
handbook is not intended to conflict, in any way, with the companys at-will policy
nor to create any contractual obligations. In addition, the form should state that,
except for the at-will policy, the employer reserves the right to make changes to
other policies in the employee handbook, with or without notice. If a job offer
letter or employment contract is not used, an integration clause can be included in
the acknowledgment form.
f. Personnel Policy and/or Operation Manuals. If theemployer maintains a separate personnel policy manual and/or operations manual
in addition to an employee handbook, these manuals can also state the at-will
policy. The employer should make sure that all other policies in the manuals are
consistent with the at-will policy, including, for example, any discipline policies
and reduction-in-force policies.
B. Employment Contracts Requiring Good Cause for Termination.Both express and implied contracts can rebut the presumption of
at-will employment under California law. A written employment contract can
expressly agree to require good cause for termination. For example, labor
organizations have traditionally demanded that that a similar just cause standard
be included in collective bargaining agreements. In contrast to an express writing,
an implied contract that rebuts the at-will presumption arises out of the employers
practices and conduct.
1. Express Contracts to Terminate for Good Cause.Express agreements, which are usually written, often explicitly
require that the employer have good cause to terminate an employee or that the
employer terminate only after a particular notice period. An employer using such
an agreement is strongly encouraged to expressly define in the agreement the
grounds that constitute good cause for termination. Examples of conduct
warranting termination for good cause can also be included. An express definition
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will help the employer and employee avoid the misunderstandings that often arise
when the employment relationships is terminated.
2. Implied Contracts to Terminate for Good Cause.Terminated employees often argue that they formed implied
agreements with their employers that could be terminated only for good cause. In
the absence of an express at-will agreement, it is left to a jury to determine whether
an implied contract to the contrary exists. As one might imagine, employee-
friendly juries are generally inclined to find an implied agreement requiring the
employer to have good cause to terminate the employee.
Juries are instructed to consider certain factors in determining
the existence of an implied contract. In the case ofFoley v. Interactive Data
Corp.,10 the California Supreme Court listed several factors that should be
considered (in the absence of an express agreement) in determining the existenceof an implied contract:
a. The personnel policies or practices of the employer;b. The employees length of service;c. Oral or written assurances by the employer of continued
or long-term employment; and
d. The practices of the industry in which the employee isworking.In the case ofGuz v. Bechtel National, Inc.,11 the California
Supreme Court reaffirmed the Foley factors but instructed that every vague
combination of these factors shaken together in a bag will not establish a right to
be discharged only for good cause. In other words, the mere existence of one or
more of these factors is not determinative. Instead, the totality of the facts must
show a mutual understanding between the employer and employee that their
relationship will continue absent good cause for termination.
10 47 Cal. 3d 654 (1988).
11 24 Cal. 4th 317 (2000).
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In Guz, Bechtel did not have an integrated, written at-will
agreement with the plaintiff. However, Bechtel did have an at-will policy stating
that employees have no . . . agreements guaranteeing continuous service and may
be terminated at [the employers] option. The plaintiff was an employee with
twenty-two years of service who was laid off in a company reorganization that
eliminated his work unit. In his lawsuit, the plaintiff claimed that his layoff
violated an implied contract requiring good cause for termination. He argued that
there was no good cause to eliminate his work unit, because Bechtels stated
reason for the reorganization a downturn in workload was not supported by
the facts. He also argued that even if there was good cause for the reorganization,
his termination lacked good cause because Bechtel had violated written personnel
rules governing rankings of employees for layoff and fair consideration of laid off
employees for other available jobs.
The court found Bechtels personnel policies to be thedeterminative Foley factor. The court reasoned that where an employer distributes
written personnel policies, those policies are highly relevant because they evidence
an intent that employees should rely on them. However, the court found that none
of Bechtels written policies limited the companys right to eliminate jobs or work
units, for any or no reason, even if a reorganization would result in the termination
of existing employees. To the contrary, the court concluded that Bechtels at-will
policy was evidence that the company had reserved the right to conduct a
reduction-in-force at its discretion. Thus, the court concluded that Bechtel need not
show good cause for its decision to eliminate the employees work unit.
However, the court found that Bechtel might have violated an
implied contract arising out of its written Reduction-In-Force Guidelines, which set
forth detailed procedures for selecting candidates for layoff and for helping laid off
employees obtain jobs elsewhere in the company. The court instructed the lower
court to reevaluate this secondary claim to determine whether the plaintiff could
establish a breach of an implied contract based on the companys alleged violation
of these detailed guidelines.
Guz makes clear the importance of making sure that written
policies do not conflict with at-will employment. In addition, employers mustensure that their managers conduct does not conflict with at-will employment.
The following guidelines can help establish and maintain at-will employment
relationships:
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Employers should use written, integrated at-willemployment agreements when hiring employees, to avoid confusion about the
terms of employment.
Personnel policies, operations manuals, employeehandbooks and job applications should all state that employment is at-will.
Employee handbooks and personnel manuals should also state that they are not
intended to create any contractual obligations that conflict with company policies
of at-will employment. In addition, reduction-in-force policies should state that
they are guidelines that are not intended to create any contractual obligations that
conflict with at-will employment.
Managers and supervisors should be trained to not makestatements to employees that conflict with the companys at-will employment
policy by promising continued employment absent good cause for discharge, suchas Youll be employed so long as you do a good job, or Continue to do a good
job and your future with the company will be secure.
C. Consequences of Finding an Implied Contract Good Cause.1. The Shifting Definition of Good Cause.
If a court finds that an implied agreement exists and the
employer could terminate the employee only for good cause, the employer is then
saddled with the heavy burden of proving that it had good cause to terminate the
employee. This is an uphill battle, made even more difficult because the good
cause standard for implied contract claims varies from case to case.
InBinder v. Aetna Life Insurance Co.,12 the court opined that
what constitutes good cause in a particular setting can be a function of the parties
mutual agreement. In other words, the good cause standard is relative and must
be implied from the parties conduct and the surrounding circumstances. In
Binder, the court concluded that Aetna could not hold the plaintiff to a high moral
standard, because the company had previously rehired Zoe Baird soon after her
nomination for Attorney General failed amid allegations of tax irregularities.
12 75 Cal. App. 4th 832 (1999).
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As suggested byBinder, when an employee can establish the
existence of an implied contract, it becomes very difficult for the employer to have
the claim dismissed by the court prior to trial. Not only will the good cause
threshold used by the employer be second-guessed, so will the articulated reason
for termination. Generally, courts have found, prior to trial, that good cause for
termination exists in only two situations: (1) layoffs resulting from reductions-in-
force and (2) misconduct that clearly violates an express employer policy.
2. Reductions-In-Force.Courts have found good cause to exist where a termination is
part of a legitimate reduction in an employers work force. For example, in
Clutterham v. Coachman Industries,13 an employee who was laid off sued his
former employer for breach of contract. The court affirmed dismissal of the case
prior to trial, holding that the employers decision to conduct a layoff was good
cause. Similarly, inMalmstrom v. Kaiser Aluminum & Chemical Corp.,14 an
employers business decision to reduce its staff was held to be good cause for
termination.
However, Guz v. Bechtel National, Inc.15 suggests that an
employer may be liable for breach of an implied contract if it does not adhere to its
written reduction-in-force guidelines and procedures. Thus, it is important for
employers not only to have formal reduction-in-force guidelines and procedures,
but to carefully adhere to them as well.
3. Termination for Misconduct.a. Admitted Misconduct. Courts have found good cause
when the employee admits to misconduct that violates an employers express rule.
For example, in Knights v. Hewlett Packard,16 a custodian was discharged after he
was injured at work, failed to return to work as scheduled and thereafter repeatedly
13 169 Cal. App. 3d 1223 (1985).
14 187 Cal. App. 3d 299 (1986).
15 24 Cal. 4th 317 (2000).
16 230 Cal. App. 3d 775 (1991).
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failed to satisfy deadlines imposed by his employer to return to work or request
extensions. The court dismissed the case prior to trial, holding that the custodians
conduct fell into the category of unacceptable performance by any standard.
Similarly, in Gosvener v. Coastal Corp.,17 a refinery
supervisor, who held a safety sensitive position, was repeatedly warned that hisdrug and alcohol use was interfering with his job performance and attendance
record. After repeated warnings, the employer finally terminated the supervisor.
The court upheld the termination in a ruling made prior to trial, finding that the
repeated violations constituted good cause.
b. Investigations of Alleged Misconduct. In Cotran v.Rollins Hudig Hall International, Inc.,18 the California Supreme Court gave
employers who properly investigate allegations of misconduct broader latitude to
terminate employees for good cause. The court held that a decision to terminate
employees for misconduct need only be based on a good faith belief and
reasonable grounds that misconduct has occurred.
Cotran involved a breach of contract claim by an
executive who was terminated due to complaints of sexual harassment. The
employer conducted an investigation of the complaints that was thorough and
included an opportunity for the executive to provide his side of the story. Based on
the investigation, the company concluded that the harassment had most likely
occurred and, therefore, the company terminated the executives employment. In
determining whether good cause for the termination existed, the CaliforniaSupreme Court held that the employer need not prove that sexual harassment had
actually occurred. Instead, the court ruled that the proper inquiry is whether the
factual basis on which the employer concluded a dischargeable act had been
committed was reached honestly, after an appropriate investigation and for reasons
that are not arbitrary or pretextual. UnderCotran, three factual determinations
are relevant to the question of employer liability: (1) whether the employer acted
in good faith in making the decision to terminate the employee; (2) whether the
decision to terminate followed an investigation that was appropriate under the
17 51 Cal. App. 4th 805 (1996).
18 17 Cal. 4th 93 (1998).
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circumstances; and (3) whether the employer had reasonable grounds for believing
that the employee had engaged in the misconduct.
Silva v. Lucky Stores, Inc.19 applied the Cotran standard
to a sexual harassment investigation, thus giving employers guidance on
procedures for investigations of misconduct. Although all investigations will bedifferent, Silva provides several general suggestions for conducting adequate
investigations:
(1) An employer should implement a written policyspecifying how allegations of misconduct will be investigated. The policy can
provide for the following: that complaints will be treated seriously, investigated
immediately and treated with confidentiality; that an attempt to identify all
potential witnesses will be made; and that the accused employee will be allowed to
respond to the charges.
(2) A neutral person should be designated to conductinvestigations. In many cases, either a Human Resources representative or an
outside investigator may be an appropriate investigator. The person selected
should be trained in investigations, which may include training by legal counsel.
(3) Complaints should be investigated promptly.(4) The employee making the complaint should be
interviewed first, and then the accused employee should be allowed to respond.
Other persons who may have witnessed the alleged conduct should also beinterviewed.
(5) Information obtained from each witness should berecorded by the investigator on a witness interview form. In addition, witness
statements should be provided by important witnesses.
(6) Typically, the investigator should use relevant,open-ended, nonleading questions in the interview, and he or she should attempt to
elicit facts as opposed to opinions or supposition. Confidentiality should not be
promised but should be maintained in each interview. Interviewees should be
19 65 Cal. App. 4th 256 (1998).
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encouraged to contact the investigator after the interview if they want to further
discuss the matter.
(7) The accused employee should be afforded ampleopportunity to present his or her side of the story. This may require having more
than one interview with the accused employee, not only at the beginning of theinvestigation but also at the end, giving the employee a final opportunity to
comment on information gathered during the investigation before a conclusion is
reached.
(8) Witnesses can be allowed an opportunity to clarify,correct or challenge information provided by other witnesses which may contradict
their statements or cast doubt on their credibility.
(9) The investigators conclusions should bememorialized in a written document that focuses on factual conclusions rather thanlegal conclusions.
D. The Wrongful Demotion Claim.Breach of contract claims can also be based on personnel decisions
that are less severe than termination. In Scott v. Pacific Gas & Electric Co.,20 the
California Supreme Court concluded that an employee may bring a cause of action
for breach of an implied contract not to demote without good cause. In Scott, the
plaintiffs were long-term employees who alleged that they were wrongfully
demoted. The plaintiffs claimed that the employer had failed to follow its writtenprocedures, which provided for various progressive disciplinary steps to be taken
before demotion was appropriate. Thus, the plaintiffs sued for breach of an
implied contract not to demote them without good cause.
In recognizing a contractual claim for wrongful demotion, the
California Supreme Court held that an employee may rebut the presumption of an
employers right to demote with evidence of a contractual agreement, express or
implied, limiting that power. The court also instructed that employers can limit
their exposure to contractual liability by consistently articulating and implementing
policies designed to maintain their managerial prerogatives.
20 11 Cal. 4th 454 (1995).
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Scotttherefore suggests that it is important for employers with
progressive discipline policies to expressly reserve the right in those policies to
impose discipline at the employers sole discretion, at any time, including
demotion or termination. In addition, employers should expressly reserve the right
to modify the terms of employment, such as through transfers, promotions,
demotions, reclassification and reassignment.
E. The Implied Covenant of Good Faith and Fair Dealing.California law implies a covenant of good faith and fair dealing in
every employment contract. The covenant assumes that employers will act in good
faith and fairly in performing and enforcing the employment contracts terms.
However, in Guz v. Bechtel National, Inc.,21 the California Supreme
Court made it clear that a claim for breach of the covenant of good faith and fair
dealing adds little or no value to a plaintiffs wrongful termination lawsuit. In Guz,the California Supreme Court confirmed that where an employer and an employee
have an enforceable at-will employment agreement, a claim for wrongful
termination in breach of the covenant of good faith and fair dealing will generally
fail. The court reasoned that where there is an at-will agreement, the implied
covenant cannot impose limits on the employers termination rights that are more
restrictive than the express contractual at-will agreement. Alternatively, the court
held that if breach of an implied contract requiring good cause for termination is
established, a claim for breach of the implied covenant of good faith and fair
dealing is superfluous. The court reasoned that plaintiffs are limited to recoveringcontract damages for breach of the implied covenant (generally, back pay plus lost
future earnings, less all interim or reasonably available interim earnings). Tort
damages, such as for emotional distress and punitive damages, are not available.
Because the implied covenant claim therefore provides no remedy in addition to
those remedies available on the plaintiffs contract claim, the implied covenant
claim is superfluous.
As tort damages are not available on claims for breach of an implied
contract or breach of an implied covenant of good faith and fair dealing, few
terminated employees limit their lawsuits to these contractual claims. Instead,plaintiffs often add claims for wrongful termination in violation of public policy,
21 24 Cal. 4th 317 (2000).
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which allow for the recovery of tort damages. This type of tort claim is discussed
below.
III
WRONGFUL TERMINATION IN
VIOLATION OF PUBLIC POLICY
A. General Requirements for Public Policy Claims.To prevail on a claim for wrongful termination in violation of public
policy, a plaintiff must prove that he or she was terminated for a reason that
violates a fundamental public policy. Public policy claims generally fall into two
categories: (1) whistleblower claims and (2) claims that duplicate statutory claims.Because emotional distress and punitive damages are available for such claims
(unlike breach of contract claims), it is not surprising that many terminated
employees bring public policy claims.
Over the years, the California Supreme Court has repeatedly revisited
and developed the doctrine governing claims for wrongful termination in violation
of public policy. Stevenson v. Superior Court22 sets forth the minimum
requirements that a public policy must meet to support a wrongful termination
claim:
The policy must be delineated in either a constitutional orstatutory provision.
The policy must inure to the benefit of the public rather thanserve merely the interest of the individual.
The policy must have been well-established at the time of theemployees discharge.
The policy must be substantial and fundamental.
22 16 Cal. 4th 880 (1997).
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As discussed below, other cases have clarified these requirements.
1. The Public Policy Must Be Tethered to a Constitutional orStatutory Provision.
In Gantt v. Sentry Insurance,23 the California Supreme Courtheld that public policy claims must be carefully tethered to fundamental policies
that are delineated in constitutional or statutory provisions. The Ganttdecision
was important because it required public policy wrongful termination claims to be
carefully tethered to a statutory or constitutional provision. However, following
Gantt, it was still unclear how closely tethered the public policy had to be.
In Green v. Ralee Engineering Co.,24 the California Supreme
Court answered this question, by allowing a public policy claim based on
administrative regulations to proceed to trial. In so doing, the court suggested that
the standard of carefully tethered may be fairly broad. The Green case issignificant because, for the first time, the court recognized a claim based on
regulations that implement statutory provisions.
2. The Public Policy Must Benefit the Public at Large.In Turner v. Anheuser-Busch, Inc.,25 the California Supreme
Court held that a public policy claim must be based upon a violation of a
fundamental public policy that benefits the public at large, not simply private
individuals. In Turner, the plaintiff claimed that he was forced to quit his job after
complaining about suspected illegal acts by his supervisors. The court found theplaintiffs public policy claim to be invalid because his complaints alleged only
violations of the employers internal policies or its collective bargaining
agreements.
However, in some cases, an individuals interests may also
implicate the publics interests. In Gould v. Maryland Sound Industries, Inc.,26 the
23 1 Cal. 4th 1083 (1992).
24 19 Cal. 4th 66 (1998).
25 7 Cal. 4th 1238 (1994).
26 31 Cal. App. 4th 1137 (1995).
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court concluded that an employee may state a public policy claim by alleging that
he was terminated because the employer wanted to avoid paying his or her wages.
Gouldheld that the California Labor Code sections governing an employers
obligation to promptly pay wages due to employees involve a fundamental public
policy that benefits the public at large, even though they appear to relate to a
purely private and individual dispute between an employer and employee.
Thus, at a minimum, plaintiffs must identify something more
than violations that harm a company or an individuals interest. Instead, the
plaintiff must implicate a broader, public interest.
3. The Public Policy Must Be Well-Established, Substantial andFundamental.
Not all public policies are deemed well-established, substantial
and fundamental. Sullivan v. Delta Air Lines27 provides an example of a policy thatdid not meet this requirement. In Sullivan, an employee alleged that he was
terminated in violation of California Labor Code section 1025, which requires the
reasonable accommodation of employees involved in alcohol or drug rehabilitation
programs. The court held that this statute could not support a public policy claim
because the policy in the statute was not fundamental and substantial. The court
reasoned that, although the statute protects an employees right to participate in a
rehabilitation program, the statute does not prohibit discharging an employee who
is unable to perform his duties due to current use of alcohol or drugs. The court
concluded that this conflicting language could not reflect one clear public policythat was fundamental and substantial.
Similarly, inLagatree v. Luce, Forward, Hamilton & Scripps,28
the court rejected an employees claim that requiring compulsory arbitration
agreements at the beginning of employment violated a fundamental public policy
guaranteeing the right to a judicial forum and a jury. The court concluded that the
conflicting public policy favoring the resolution of disputes through arbitration
precluded the employees claim.
27 58 Cal. App. 4th 938 (1997).
28 74 Cal. App. 4th 1105 (1999).
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It should be expected that the courts will continue to clarify the
requirements of the public policy claim. Indeed, the list of statutes that may
support a public policy claim is lengthy and growing. A practical approach to
preventing these claims is to become familiar with the factual circumstances that
commonly give rise to them. Typical circumstances involve alleged
whistleblowers or alleged statutory violations by employers.
B. Whistleblower Claims.Whistleblower claims are the more recognizable public policy claims.
In the typical whistleblower claim, a plaintiff alleges that he or she was terminated
(1) for complaining of some illegal activity that is prohibited by a statute or a
constitutional provision or (2) for refusing to perform some illegal act requested by
the employer. In this way, whistleblower claims are retaliation claims; the
employee alleges that he or she was terminated in retaliation for complaining about
or refusing to engage in illegal activities.
1. Claims Based on Complaints of Illegal Activity.Whistleblower claims that are based on complaints of alleged
illegal activity are common. The general scenario is that the employee is
terminated after complaining about some improper activity prohibited by law.
The case ofGreen v. Ralee Engineering Co.29 provides a prime
example of a whistleblower claim based on an alleged complaint. In Green, a
quality control inspector reported to his supervisors that the company was shippingdefective components to airplane manufacturers. When he was later terminated,
the inspector claimed that he was a whistleblower who was terminated in
retaliation for his reports.
Weinbaum v. Goldfarb Whitman & Cohen30 provides another
example. In Weinbaum, the plaintiff alleged that his former employer and several
individuals participated in an unlawful scheme to misrepresent the financial
condition of six corporations. The plaintiff alleged he was fired for objecting to
these misrepresentations.
29 19 Cal. 4th 66 (1998).
30 46 Cal. App. 4th 1310 (1996).
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Significantly, California courts have recognized public policy
claims based on reports of conduct that the employees made pursuant to their job
duties. For example, inHolmes v. General Dynamics Corp.,31 a business manager
who supervised the analyzing of financial data on government defense contracts
reported to his supervisor that the company was violating various provisions of its
defense contracts, which resulted in excessive billings to the government. After
the employee was terminated, he sued for wrongful discharge in violation of public
policy. The court affirmed the jurys verdict, finding that the employer had
wrongfully discharged the plaintiff.
2. Claims Based on Refusals to Perform Illegal Acts.The second type of common whistleblower claim occurs where
an employee alleges that he or she was terminated in retaliation for refusing to
perform an illegal act. Parada v. City of Colton32 provides an example of this type
of whistleblower claim. The plaintiff in Parada was an Assistant Building
Director who was responsible for managing the citys building inspectors and
ensuring the enforcement of local building codes, ordinances and regulations.
When the employee became aware of garage conversions that violated building
codes, he issued stop-work orders. The employees immediate supervisor was
involved in allowing the illegal garage conversions that the employees conduct
halted. When the supervisor terminated the employee, he responded with a claim
for wrongful discharge in violation of public policy, arguing that he was terminated
for refusing to allow the illegal building to continue.
3. California Whistleblower Statute.California Labor Code section 1102.5 prohibits employers from
making, adopting, or enforcing a policy that prevents an employee from disclosing
information to a government or law enforcement agency, where the employee has
reasonable cause to believe that the information discloses a violation of a state or
federal statute, or a violation or noncompliance with a state of federal rule or
regulation. The statute also prohibits an employer from retaliating against an
employee for disclosing such information. The statute further prohibits an
31 17 Cal. App. 4th 1418 (1993).
32 24 Cal. App. 4th 356 (1994).
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employer from retaliating against an employee for refusing to participate in an
activity that would result in a violation of a state or federal statute, or a violation or
noncompliance with a state or federal rule or regulation. The California Attorney
General is required to maintain a whistleblower hotline to receive calls from
persons who have information regarding possible violations of state or federal
statutes. Lastly, employers are required to post a new workplace poster providing
information on employees rights and responsibilities under Californias
whistleblower laws, including the telephone number of the whistleblower hotline.
4. Post-Enron Federal Whistleblower Protections.While the Enron-driven Sarbanes-Oxley Act of 2002 (the
Act) made sweeping reforms to corporate governance law, the Act also created
federal protection for whistleblowers. The Act provides whistleblower protection
to employees of public companies when they act lawfully to disclose information
(within the corporation or to outside investigators, regulators, etc.) about fraudulent
activities within their company. The Act also provides that an employee claiming
a violation of the Act must file a complaint with the Federal Department of Labor.
Importantly, the Act does not preempt or supplant existing state law tort actions for
wrongful termination in violation of public policy. Thus, the Act provides an
additional statutory basis for public policy whistleblower claims.
5. Avoiding Whistleblower Claims.Steps that employers can take to avoid whistleblower claims are
as follows:
Implement Complaint and Investigation Procedures. Anemployer should maintain an effective complaint policy which provides procedures
for receiving and addressing employee complaints. Alternative persons can be
designated to receive complaints, to address the scenario where an employee fears
retaliation for complaining to an alleged violator of the law. A written policy on
the complaint procedure can be distributed to all employees, and all managers
should be trained on how to facilitate the handling of complaints. Investigations of
complaints should be handled promptly and in a confidential manner, andinvestigations should adhere to the impartial standards discussed above in this
article.
Treat Complaints Seriously. It is important to listen toand seriously consider each complaint made by employees. The employer should
document the complaint, any investigation conducted in response to the complaint
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and any conclusions. The employer should also respond to the employee with its
conclusions.
Beware of Close Timing of Discipline or Discharge.Complaints that are made by an employee shortly before discipline or discharge
are troublesome. Where a complaint is closely followed by an adverseemployment action, such as discipline or termination, there may be a presumption
of a retaliatory motive. In these circumstances, legal counsel should be consulted
before moving forward with any discipline or termination.
C. Public Policy Claims That Duplicate Statutory Claims.An alleged violation of a statute can support not only a statutory claim
for wrongful termination but also a tort claim for wrongful discharge in violation
of the public policy embodied in that statute. For example, public policy claims
brought by terminated employees often supplement statutory race or sexdiscrimination claims brought under Californias Fair Employment and Housing
Act (FEHA) or the federal discrimination statutes, even though the tort and
statutory claims rely on the same facts.
A duplicative public policy claim should fail if the employer is
exempt from the underlying statute. For example, in Kelly v. Methodist Hospital of
Southern California,33 the California Supreme Court rejected a public policy claim
based on alleged age discrimination in violation of the FEHA that was brought
against a Methodist hospital. In rejecting the plaintiffs claim, the court reasonedthat the hospital met the definition of a religious entity under the FEHA, as defined
at the relevant time. The court concluded that as the hospital was exempt from
liability under the FEHA, it could not be held liable on a duplicative public policy
claim. Similarly, inJennings v. Marrale,34 the California Supreme Court held that
a public policy claim based on alleged age discrimination couldnotbe stated
against an employer with less than five employees because age discrimination by
such small employers is not covered by the FEHA.
33 22 Cal. 4th 1108 (2000).
34 8 Cal. 4th 121 (1994).
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In addition, a public policy claim that is based on a discrimination
statute should fail if the employee is unable to prove, under the statutory standard,
that his termination was motivated by unlawful discrimination. For example, in
Nelson v. United Technologies,35 an employee was granted a leave of absence to
care for his sick wife and their child. When the employer discovered that the
employee worked elsewhere during his leave of absence, the employer terminated
his employment. In response, the employee brought a statutory claim for violation
of the California Family Rights Act (CFRA) and a public policy claim based on the
same statute. The court found that no evidence suggested the employers proffered
reason for the termination decision (i.e., the employees work during a leave) was
phony. The court thus concluded that the termination decision did not violate
the employees rights under the CFRA. Accordingly, the court ruled for the
employer on both the statutory and public policy causes of action.
In contrast, where a statutory claim is barred due to the terminatedemployees failure to follow administrative procedures required by statute, the
employee may still be able to bring a public policy claim based on the same
statute. InRojo v. Kliger,36 the California Supreme Court determined that a
terminated employee can bring both a statutory sex discrimination claim under the
FEHA and a public policy claim based upon the same incidents of sex
discrimination. The court also held that employees do not have to exhaust their
administrative remedies under the FEHA before bringing a public policy claim.
This is significant because terminated employees bringing statutory discrimination
claims are normally required to exhaust their administrative remedies. Following
Rojo, terminated employees may sue for wrongful termination based ondiscrimination without jumping through the procedural hoop of filing a charge with
the state or federal administrative agency.
D. Liability for Punitive Damages on Public Policy Claims.An important distinguishing feature between the contract causes of
action discussed earlier in this article (i.e., claims for breach of contract or for
breach of the covenant of good faith and fair dealing) and the public policy cause
of action is that punitive damages may be awarded against an employer in
35 74 Cal. App. 4th 597 (1999).
36 52 Cal. 3d 65 (1990).
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connection with a public policy claim. The purpose of punitive damages awards is
to punish defendants whose conduct is the result of oppression, fraud or malice
and, in so doing, to deter future wrongful conduct by way of example. As punitive
damages awards can be quite significant, exposure to such liability should be
seriously considered by employers making termination decisions.
California Civil Code section 3294 governs awards of punitive
damages against employers. An employer may be held liable for punitive damages
based on an employees conduct if (1) the employer had advance knowledge of the
unfitness of the employee and employed him with a conscious disregard of the
rights or safety of others, (2) the employer authorized or ratified the wrongful
conduct, or (3) the employer was personally guilty of oppression, fraud or malice.
A corporate employer can be held liable for punitive damages if such wrongful
conduct was on the part of an officer, director or managing agent of the
corporation.
In White v. Ultramar, Inc.,37 the California Supreme Court clarified the
definition of managing agent by limiting the term to those employees who
exercise substantial independent authority and judgment over decisions that
ultimately determine corporate policy. The court made clear that this definition
does not include supervisors who hire or fire employees but who have no authority
to make decisions that determine corporate policy.
Given the potential liability for punitive damages awards on public
policy claims, employers should be especially careful to instruct all supervisorswho may qualify as managing agents on preventive measures when disciplining
and terminating employees, especially those employees who have access to
sensitive information concerning the company and employees who have voiced
concerns about company practices.
37 21 Cal. 4th 563 (1999).
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IV
CLAIMS BASED ON PREEMPLOYMENT
AND POST-EMPLOYMENT CONDUCT
An employee who sues for wrongful termination may allege related causes
of action based on the employers actions in inducing his or her acceptance of
employment or in giving employment references after he or she leaves the
company. These types of preemployment and post-employment claims provide
additional avenues of tort relief for terminated employees.
A. Fraud in Inducing Employment.An employer can be held liable for falsely inducing a job applicant to
accept employment in reliance on representations of job security and thenterminating the employment relationship. InLazar v. Superior Court,38 the
California Supreme Court held that a terminated employee may sue for fraud if he
or she was fraudulently induced to accept employment. InLazar, the plaintiff was
induced by falsehood to leave a secure job in New York and uproot his family to
take a job in California. When he was terminated two years later in a management
reorganization, he sued for fraud, along with other claims. The court concluded
that employers were not absolutely shielded from traditional tort liability for fraud
in wrongful termination cases.
To the extent an individual is fraudulently induced to enter anemployment contract, he or she can recover all detriment proximately caused by
the fraud, such as the cost of relocation or loss of job security and income from his
or her former employment. Future lost income is also recoverable provided the
damages are not speculative or remote.39
B. Withdrawal of Job Offer: Promissory Estoppel.An employer may be held liable for failing to fulfill a promise of
employment where an individual relinquishes his or her current job in reliance on
38 12 Cal. 4th 631 (1996).
39 Helmer v. Bingham Toyota Isuzu, 129 Cal. App. 4th 1121 (2005).
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the unfulfilled promise of other employment. In Toscano v. Greene Music,40 the
plaintiff was a manager at Greene Musics competitor. Greene Music offered
plaintiff a manager position and, in reliance on that employment offer, plaintiff
resigned his current employment. However, prior to the date that plaintiff was
scheduled to begin his new job, Greene Music withdrew its offer of employment.
The California Appellate Court held that an employee who resigned an at-will
employment position with a former employer in reliance on an unfulfilled promise
of employment may recover reliance damages, under a promissory estoppel theory,
based on wages lost from the prior employment. However, the lost wages damages
must not be speculative or remote.
C. The Letter of Recommendation.The court inRandi W. v. Muroc Joint Unified School District41 held
that a previous employer can be liable for making fraudulent representations in a
letter of recommendation. InRandi W., an employee worked for three different
school districts before being employed by the school district in which the plaintiff
was a student. The three school districts provided letters of recommendation that
offered general and unreserved praise for the employees character and personality
(e.g., dependable and reliable, pleasant personality, high standards, and
relates well to students), despite their knowledge that he had a history of
sexually assaulting students. After the plaintiff student was sexually assaulted by
the employee, she sued, claiming that the letters of recommendation were
fraudulent misrepresentations that caused her harm. The California Supreme Court
held that the letters of recommendation could create liability for fraud. The courtconcluded that the writer of a letter of recommendation owes a duty not to
misrepresent facts in describing the qualifications and character of a former
employee if making these representations would present a substantial, foreseeable
risk of physical injury to the prospective employer or a third person.
Employers cannot avoid lawsuits by requiring job applicants to sign
releases that authorize prior employers to provide job references. InMcQuirk v.
Donnelley,42 the plaintiff signed a release in which he released the prospective
40 124 Cal. App. 4th 685 (2004).
41 14 Cal. 4th 1066 (1997).
42 189 F.3d 793 (9th Cir. 1999).
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employer and all others from any liability or damage which might result from
references given by his prior employers concerning his work record. Relying on
this authorization, a prior employer gave the plaintiff a bad reference which cost
the plaintiff his new job. The plaintiff sued the prior employer for defamation. In
so doing, the plaintiff sought to invalidate his signed release by claiming that
California law prohibits shielding defendants from future liability for intentional
torts such as defamation. The court agreed with the plaintiff and allowed his
defamation claim to proceed to trial. Thus, underMcQuirk, employers should not
rely on written releases as guaranteed protection against claims associated with job
references.
These cases emphasize the care that employers must take in providing
employment references. Generally, a reference should provide merely the
employees name, job title, and dates of employment. An employer who provides
additional information (1) runs the risk underRandi W. that full disclosure may berequired and (2) runs the risk underMcQuirkof a defamation claim if full
disclosure is provided. As providing explicit references about employees may
pose legal risk, the business benefits of doing so should be weighed carefully
against the risks.
V
TERMINATION GUIDELINES
The cases discussed above emphasize the importance of defining the
employment relationship clearly at its inception in order to avoid problems at the
end of the relationship. It is also important to ensure that termination decisions are
fair and justified. The following guidelines can assist an employer who must
contemplate the termination of an employee. Although an employer who follows
these guidelines may still be sued for wrongful termination, the employer will
decrease the likelihood of such claims being filed and will increase the chance of
defeating such claims if they are filed.
Have all employees sign written, integrated at-will employmentagreements that can be modified only by a subsequent document signed by the
employee and an authorized representative of the company.
Place at-will language on employment applications, in job offerletters, in employment contracts (if used), in employee handbooks and the
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accompanying acknowledgment forms, in personnel policy manuals, in reduction-
in-force guidelines and in operations manuals.
Practice progressive discipline so that employees with performanceproblems are given notice that their performance is unsatisfactory and an
opportunity to improve. However, reserve in writing the right to impose anydiscipline, including demotion and termination, at the companys sole discretion.
Any investigation of a complaint about an employees performanceshould be well-documented. The investigator must be impartial. A paid
suspension of the employee may be appropriate during the investigation.
It is very important to ask for the employees side of the story beforemaking a decision to terminate employment. This should involve a face-to-face
meeting with the employee that is documented. More than one meeting may be
needed.
Have an objective third party review all proposed terminations. Thisneed not be an outsider, but it should not be the employees supervisor. Human
Resources or company counsel are often effective in this role.
Consider all potential issues relating to an employee that is beingconsidered for termination before the termination, including (1) the employees
seniority, (2) the employees past performance appraisals, (3) prior disciplinary
action, if any, (4) whether the termination is in compliance with relevant personnelpolicies, (5) any mitigating circumstances, (6) whether the present termination is
consistent with past terminations, (7) prior complaints or concerns raised by that
employee and (8) any assurances that were initially made to encourage the
employee to accept employment with the company.
When terminating an employee, the decision should be announced tothe employee personally and privately. It is helpful to have a company witness
also attend the meeting, in the event of future litigation. However, having more
than two company representatives present may be overbearing and intimidating.
Consider putting the reason for termination in writing so there is nomisunderstanding. If a reason is given, be sure it is truthful and complete.
Reasons for termination will not be credible to a jury if they change or are
supplemented at a later date.
Do not discuss the reason for an employees termination either insideor outside the company, except with other employees who have a need to know
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that information. If a third party requests information concerning the employee,
confirm only the employees dates of employment and positions held.
VI
CONCLUSION
Wrongful termination litigation is a major area of concern for employers.
The employer who does not meticulously create and maintain at-will employment
relationships will find it more difficult to defeat an employees claim that the
employer promised that he or she could be terminated only for good cause. In
addition, public policy claims are gaining momentum as courts identify new
statutes that provide additional bases for such claims. The California courts are
also loosening their grip on alternative tort claims in the employment context, such
as fraud claims.
Thus, employers must take appropriate preventive measures to enhance their
ability to avoid and defend wrongful termination claims. Employers should also
approach employee terminations with great care in order to avoid the expense,
uncertainty and disruption caused by wrongful termination lawsuits.
top related