The Basics Of Employment Contracts
By Christine Godsil Cooper
WESTLAW LAWPRAC INDEX
GPR -- General Practice Approaches, Articles & Issues
ADV -- Advocacy & Lawyering Skills
Employers usually don't intend statements in employment handbooks to create enforceable promises. But that doesn't stop courts from finding contractual relationships in the employment context. Disclaimers often do the job, but they have limits.
EMPLOYMENT CONTRACTS raise exceptional concerns, but the basics remain just that: basic. Any contract question can be analyzed by reference to the following six inquiries:
Was a contract formed?
If a contract was formed, what are its terms?
Did a duty of performance arise?
Are there any defenses to enforcement?
Was the contract breached?
If the contract was breached, what is the appropriate remedy?
In this article, we will examine each of these points, and give special attention to disclaimers in employee handbooks and the effect of sexual harassment policies in creating a contractual relation between the employer and employee.
WAS A CONTRACT FORMED? In the employment context, the formation issue tends to focus on written, distributed employee handbooks or other policy statements. When there is an individual, written, separately bargained contract, the formation issue is easy. But what of handbooks and other policy statements? What of policies and practices? When are they considered contracts? (More on that later, but of course it varies by state.) What of oral assurances or other oral promises? That kind of contractual issue emphasizes problems of proof and also raises statute of frauds issues.
Contract Doctrine and the Employment Handbook
Beginning in 1980, American courts began to look at the employment relationship through the lens of contract law. The traditional view was that an employment relationship without a definite duration was at-will, with both the employer and the employee having the right to abrogate the relationship at any time, for any reason, without notice. While the relationship was inherently contractual--services in exchange for pay--the relationship could be freely terminated. What began to change was courts' willingness to find promises made by the employer.
Identifying the Employer's Promise
Since a contract is a legally enforceable promise, the first task is to identify the employer's promise. The promise, to be enforceable, must be a real promise, a commitment. The Restatement (Second) of Contracts (1981) defines promise:
"(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made."
The types of employment promises commonly found in handbooks that are such commitments include promises to terminate only for cause, or only following progressive discipline, or after after specified pre-termination rights. Likewise, an employer's promise to layoff and recall in a certain order would constitute a commitment. Examples of what are not commitments are opinions, predictions, statements of good will, and the like.
Finding an Enforceable Promise
The promise, standing alone, will not mandate its own enforcement. Gratuitous promises or naked promises are not enforced. Promises are enforced only if there is something else. The time-honored means of enforcing promises are:
Consideration (the bargained-for exchange, the mutual inducement, the price of the promise);
Promissory estoppel (reasonable reliance on a promise where the reliance was foreseeable to the promisor, and an injustice would result if the promise were not enforced);
Promise to pay for an antecedent material benefit where moral obligation substitutes for consideration; and
Formality, such as a writing.
Moral obligation and formality have virtually no role in enforcing promises in the employment context. The hallmarks of enforceable employment promises are consideration and promissory estoppel, although only rarely do courts enforce promises through the device of promissory estoppel. Nonetheless, the spirit animating promissory estoppel is detrimental reliance, and courts commonly look to an employee's reliance when determining whether or not a promise should be enforced. See, e.g., Black v. Baker Oil Tools, Inc., 107 F.3d 1457, 1461 (10th Cir. 1997) (applying Oklahoma law) (no contract based on written policy of non-discrimination because employee did not provide consideration for the promise of non-discrimination, nor did the employee continue in position and not quit "at least in part on his reliance on the employer's promise").
"Promises" in Employer Handbooks
Courts began to find enforceable promises in employer handbooks and other policy statements, in past practices, and in oral assurances. Each of these kinds of promises tended to be lumped under the inartful rubric of "implied contract." When employers make promises in handbooks or policy statements, or when they make oral assurances, the employers are making express promises, not implied promises. When the totality of the *48 circumstances of past practices, longevity of service, and reasonable expectations are used to form a promise of job security, such a promise can properly said to be implied and not express. Nonetheless, we seem to be stuck with the rubric of implied contract any time there is an obligation based on an employment contract that has not been individually bargained and reduced to writing.
How Do Handbook Promises Become Employment Contracts?
There are at least two theories of contract formation when an employer has promised job security in an employer handbook or other policy statement:
The first is the unilateral contract theory, first proposed by a state supreme court in 1983 in Pine River State Bank v. Mettille, 333 N.W.2d 622, 115 L.R.R.M. 4493 (Minn. 1983), a seminal opinion not only for Minnesota but for the entire country. See, e.g., Ex parte Graham, 702 So. 2d 1215 (Ala. 1997) (unilateral contract analysis made personnel policies manual an enforceable contract, where there was an offer which provided specific disciplinary actions and the manual contained no disclaimers);
The second is the "instinct with obligation" theory set forth by the Michigan Supreme Court in In re Certified Question ( Bankey v. Storer Broadcasting Co.), 443 N.W. 2d 112 (Mich. 1989). The idea is that the employer gains benefits from issuing the handbook in the form of a more loyal and productive workforce, thereby justifying legal enforcement of the handbook promises. I include in this second theory the cases which find a contract, but by using a variety of factors--not often clearly delineated. See, e.g., Black v. Baker Oil Tools, Inc., supra (Oklahoma law finds "an implied contract right to job security by balancing several relevant factors, including: '(a) evidence of some separate consideration beyond the employee's services to support the implied term, (b) longevity of employment, (c) employer handbooks and policy manuals, (d) detrimental reliance on oral assurances, pre-employment interviews, company policy and past practices and (e) promotions and commendations."')
How the Unilateral Contract Analysis Works
Many courts use the unilateral contract analysis. A common formulation of this analysis is set forth by the Illinois Supreme Court in Duldulao v. St. Mary of Nazareth Hospital, 505 N.E.2d 314 (1987):
First, the language of the policy statement must contain a promise clear enough that an employee would reasonably believe that an offer has been made;
Second, the statement must be disseminated to the employee in such a way that the employee is aware of its contents and reasonably believes it to be an offer;
Third, the employee must accept the offer by commencing or continuing to work after learning of the policy statement. It is the commencement or continuation of work by the employee that constitutes both the acceptance of the employer's offer and the consideration to make the employer's promise legally binding.
The Emergence of Disclaimers
It took little time for attentive lawyers to advise their corporate clients to revise their handbooks. A disclaimer would undermine the employee's reasonable belief that a binding commitment had been made. Indeed, many of the courts that enforced promises contained in handbooks were explicit that a disclaimer by the employer would have avoided the litigation:
"All that need be done is the inclusion in a very prominent position of an appropriate statement that there is no promise of any kind by the employer contained in the manual; that regardless of what the manual says or provides, the employer promises nothing and remains free to change wages and all other working conditions without having to consult anyone and without anyone's agreement; that the employer continues to have the absolute power to fire anyone with or without good cause."
Woolley v. Hoffmann-La Roche, Inc., 491 A.2d 1257, 1271 (N.J. 1985), modified, 499 A.2d 515 (N.J. 1985). There were the predictable rounds of litigation determining just how clear and conspicuous a disclaimer had to be-- and how consistent it had to be with the remainder of the document--to be effective. When the dust had settled, more or less recently, employers were pretty confident that they could draft effective disclaimers. As discussed later in this article, this confidence was soon to be undermined.