FIRING WITHOUT FEAR:
AVOIDING WRONGFUL TERMINATION LAWSUITS
by Beth Schroeder and Andrew Kaplan
Historically, the basic rule in this country has been that an employer could discharge an employee at any time, for any reason or for no reason, with or without giving the employee prior notice. This practice is called 'at-will' employment or is referred to as the at-will employment rule. However, in recent years, legislatures and courts have established a number of exceptions to the at-will employment rule. The adoption of new laws and recent court decisions have radically altered the way an employer may discharge an employee. Even employers with only a few employees can become involved in costly litigation.
LEGAL FRAMEWORK
Statutory Prohibitions
Title VII of the Civil Rights Act of 1964 prohibits discrimination in the discharge of an employee on the basis of race, creed, color, religion, age, sex, or national origin. The Americans with Disabilities Act outlaws discrimination based on an employee's physical or mental disability. The Age Discrimination in Employment Act protects older employees against discriminatory treatment. In addition, the Employee Retirement Income Security Act (which regulates employer-adopted or administered retirement plans) precludes discharge for the purpose of denying an employee his or her vested pension rights or denying an employee the opportunity to vest.
Some states have enacted their own laws that go beyond the federal prohibitions against discrimination. In California, for example, the Fair Employment and Housing Act has added marital status and pregnancy to the list of employee categories protected from discriminatory discharge.
Public Policy
Over the last 15 years, court decisions have further eroded the at-will employment rule. Now employees may sue for wrongful termination if they have been discharged in violation of public policy. The employee may assert that such discharge was in retaliation for the assertion of some statutory right, such as voicing a safety complaint or refusing to submit to a polygraph examination. Or the employee might claim that the discharge resulted from his or her refusal to perform an illegal act on behalf of the employer, or because he or she reported an illegal act by the employer to authorities.
Breach of Contract
The courts also have allowed employees to recover damages for wrongful discharge by finding a contractual commitment between the employer and an employee that overrides at-will employment. It is not necessary that such a contract be in writing or even be expressly stated. Rather, an employee can establish a contractual arrangement implied by something that the employer did or said, indicating that the employee would be discharged only under certain conditions.
An employee may claim that he or she was discharged in violation of employer policies contained in an employee handbook, manual, or work rules. Or the employee may allege a promise, either written or oral, of 'permanent employment,' 'employment as long as he or she does a good job' or 'discharge only for good cause.'
In California, the courts have gone so far as to hold that even in the absence of employer policies or rules, an implied contract requiring good cause for discharge may be based upon the totality of circumstances and employment. Circumstances that may establish the existence of an implied contract can include a long history of employment, commendations and promotions given to the employee, or simply a lack of criticism of the employee's work.
PREVENTING WRONGFUL DISCHARGE SUITS
Specify the Rules
Because the courts have been willing to interpret employee handbooks and written work rules to be contractual commitments, an employer must take care not to promise more than it is willing or able to deliver when developing such documents. Close attention should be paid to all manuals, handbooks, employment application forms and any other documentation that may suggest that employment is permanent or that discharge will only occur for 'good cause.'
An employer might wish to consider expressly defining its employee-discharge policy as being 'at will.' This can be accomplished by including an at-will employment statement as part of the employment application form completed by prospective employees, by requiring employees to sign an at-will employment agreement or by including at-will language in an employee handbook or manual. However, because such a disclaimer can have a negative impact on employee morale, an employer might instead consider adopting detailed rules advising employees of the type of conduct that will result in discharge. But doing so requires the employer to enumerate every conceivable type of conduct prohibited. The obvious problem to this approach is that the employer may inadvertently omit one or more types of conduct that are intended to be grounds for discharge. Regardless of how the rules are stated, the employer must take care that the employee clearly understands those rules.
Many employers require that a newly hired employee serve a probationary period. Such a requirement is thought to give the employee a trial period during which time the employer is free to discharge the employee for little or no reason. The continuing validity of this concept, however, has been brought into question and challenged by a number of court decisions. Once an employee has successfully completed the prescribed probationary period, there may arise an implication that discharge may thereafter be made only for 'good cause.' To avoid this possibility, an employer might wish to consider discontinuing the practice of a formal probationary period and, instead, informally observe new employee's performance and document deficiencies as needed.
Be Candid with Employees
An employer should give employees regular, periodic evaluations of their work performance. Unfortunately, many employers who do evaluate employees sometimes avoid the difficult task of informing an employee of their less-than-adequate performance. What often happens is that, in an effort not to offend or embarrass the employee, the employer overstates the employee's performance during the evaluation. An inflated evaluation can be used against the employer at a later date as evidence that the employee's performance was in fact adequate. Therefore, such practice is strongly discouraged. The employer should be candid with the employee, and any evaluation should accurately reflect the employee's true performance relative to the employer's standards and expectations. An employer must keep in mind that someday it may be necessary to justify the discharge of an employee based upon the contents of an evaluation or other employment documentation.
If an employee's performance is so poor that discipline or discharge is warranted, the evaluation should specify the particular areas of needed improvement, give a specific time frame within which the employee is to demonstrate that improvement, and put the employee on notice as to the consequences of not improving performance.
The employee should be provided with a copy of the evaluation, given an opportunity to comment, and then to sign the evaluation. If the employee chooses not to exercise this right, the employer should have that fact witnessed and documented. The employer should keep the signed evaluation, along with other employment documents, such as employment applications, warning notices, and termination reports, in readily identifiable and confidential employee personnel files. The most comprehensive employment recordkeeping is meaningless unless the employer can locate it when needed.
Put Employees on Notice
Except in rare cases, such as egregious conduct like theft or intoxication at work, progressive discipline should usually precede a discharge. An employee should be given one or more warnings or some form of discipline. Such discipline might include temporary suspension from work, demotion, or transfer prior to being discharged.
A disciplinary notice should be handled like an employee evaluation. The notice should be honest and direct. The employee should be informed of the reason for any warning or discipline and given a specified amount of time to meet the employer's stated standards of performance. The employee also should be made aware of the consequences of not improving performance. The employee, after having an opportunity to comment upon and sign a warning notice, should be given a copy of the notice. The original document should be retained as a permanent part of the employee's personnel file.
Consider the Options
Discharge is often not the only or best course of action to consider when dealing with an employee who is either not satisfactorily performing or has violated employer rules and policies. If the employee has a long record of good service but has recently been promoted to a job that now appears to be beyond his or her ability, the employer might consider reassignment or demotion. This might include returning the employee to a position the employee adequately performed in the past. If the employee's problem arises from a personality conflict with others, counseling may be an effective alternative. Other options might include disciplinary suspension without pay, outplacement assistance, or other benefits in exchange for a written release of claims against the employer.
Discharge
In situations where it becomes necessary for an employer to discharge an employee, the reasons for the discharge should be reduced to writing. Care, however, must be taken when stating the reasons for discharge because in any subsequent administrative or judicial proceedings, an employer can rely only on the grounds originally given to the employee for discharge, even if other grounds for dismissal existed.
During the discharge interview, the employer must be absolutely frank regarding the grounds for dismissal. It is inappropriate for the employer to try to avoid hurting an employee's feelings by being less than candid. This does not mean, however, that the final meeting between the employer and the employee should degenerate into a name-calling session. On the contrary, care should be taken that the discharge interview is handled in as tactful a manner as possible. The discharge interview should be held privately to avoid unnecessary involvement of other employees within the company. While it may be desirable to inform other employees of a termination, it is usually best that detailed explanations not be given.
Often an employer will be approached by a discharged employee or the discharged employee's prospective employer regarding references. The employer may feel some obligation to give a positive reference to help the employee obtain employment; however, an unwarranted positive reference can undermine the justification given for discharge and may be used against the employer in any subsequent litigation. Instead, employers should give a job reference limited to length of service, final position held, and rate of pay at time of termination.
Insurance
Some employers are under the impression that if they are sued by a former employee for wrongful discharge, they will be covered by their general liability, directors and officers, workers' compensation or umbrella liability insurance. Yet virtually all of these policies specifically exclude certain types of employment-related claims from coverage. Even when coverage for an alleged wrongful employment practice is not specifically excluded, coverage may be limited or excluded by other policy provisions.
A relatively recent development, however, has been the introduction of insurance specifically designed to afford coverage for liability arising out of wrongful employment practices. Employment practices liability (EPL) insurance may be available as a stand-alone policy or may be endorsed to other policies such as umbrella or D&O policies. Because of the wide variation in the scope of coverage available, employers are cautioned to examine all options carefully. Some EPL policies and endorsements offer very little actual protection. Also keep in mind that no EPL policy will provide absolute protection, and employers should actively work to reduce their exposure to loss by implementing sound preventive practices like those discussed in this article.
CONCLUSION
The rules surrounding the discharge of employees have changed substantially in recent years and are still evolving. One rule, however, never changes: if an employer demonstrates fairness with its employees, a wrongful discharge lawsuit is less likely to occur and, if such an action is brought, the employer is more likely to prevail. The suggestions made in this article are designed to help an employer develop employment practices that are equitable to both the employer and its employee.
The opinions and ideas contained in this article are offered as general guidelines to employers concerned with the possibility of the wrongful discharge lawsuit, and are not intended as specific legal advice. An employer should consult with a lawyer knowledgeable in the area of employer/employee relations about the particular application of these ideas to its business. The preceding material is excerpted from the Risk Management Letter, a subscription information service of risk and insurance topics. Copyright © 1996 by Griffin Communications, Inc. and Warren, McVeigh & Griffin, Inc.