Your employee handbook: is it an enforceable contract?

Hoft, John

ABSTRACT

The employment "at will" doctrine means that an employee who does not have an employment contract for a specific duration can be discharged for any reason or no reason at all. "At will" is justified as a two way street. It permits either the employee or the employer to sever the employment relationship without incurring liability. Many employers use employee handbooks to communicate policy. In circumstances where the handbook specifies discipline and discharge processes the handbook may be deemed an enforceable contract and modify the "at will" doctrine. The language in the handbook is key. If the terms of the handbook are unequivocal and manifest to a reasonable person that the employer intends to be bound then the handbook may be an enforceable contract. In order to avoid this interpretation, many employers include a handbook disclaimer that disavows contractual intent. A clear and forthright disclaimer will prevent a handbook from being ruled an enforceable contract. Disclaimers, however, must meet certain criteria in order to be effective. The purpose of this paper is to identify the circumstances under which a handbook may be held to constitute an enforceable contract and to discuss the requirements necessary to effectively disclaim contractual intent.

INTRODUCTION.

On November 1, 1989, Wayne D. Norton, an "at will" employee, was discharged by his employer. Before his termination, Norton had been general manager of the Minneapolis office of Caremark, Inc., a pharmaceutical services company. In Minnesota, employment for an indefinite term is considered "at will" and terminable by either party for no reason without legal liability. Mr. Norton's vice-president said Norton was fired for poor performance. Norton sued his employer over the discharge and won. A jury awarded him $305,000 in back pay. How could this happen in a state that recognizes that an employer is free fire an employee at will and for no reason without legal consequences? The answer lies in the treatment afforded the company handbook. In Mr. Norton's case, Caremark promulgated a document entitled Disciplinary Action Guidelines and distributed and explained the policy to him. The Guidelines set forth a process for discharging an employee. Norton's supervisor failed to follow the Guidelines or the discharge process. The court held that the Guidelines were an enforceable contract between the company and Norton and that the company had breached its promise. As a result, Caremark was liable for damages (Norton v. Caremark, Inc., 1994). The issue to be discussed in this article is when the provisions of an employee handbook that is disseminated to employees may modify the "at will" employment doctrine and create duties upon an employer that are not present in an ordinary "at will" employment relationship.

THE "AT WILL" EMPLOYMENT DOCTRINE.

Under the employment at will doctrine an employer may fire an employee for good reason, bad reason, or no reason at all unless prohibited by law or public policy (Monaco v. American General Assurance Company, 2004). Employment for an indefinite term with no specific duration is considered to be "at will" and terminable at the discretion of the employee or the employer without legal consequences (Wojcik v. Commonwealth Mortgage Corporation, 1990). The "at will" employment doctrine is settled law in most states and in the District of Columbia (Autor, 2006). The "at will" employment doctrine is often justified as being a two way street. The rationale is that it permits either the employee or the employer to terminate the employment relationship for any reason without liability to the other (Mizell v. Sara Lee Corporation, 2005). The result of this doctrine is to allow an employer to terminate an employee without fear of a successful wrongful discharge lawsuit (Eckhardt v. Yerkes Regional Primate Center, 2002).

THE EMPLOYEE HANDBOOK.

Over the past two decades many courts have modified the traditional "at will" employment rule when an employer's handbook or policy manual contains language that provides that discharge will occur for cause or only after certain conditions have been met (Meier v. Family Dollar Services, Inc., 2006). The terms of the handbook, however, must set forth discharge procedures in positive and mandatory language in order to be ruled contractual (Nickum v. Village of Saybrook, 1997). Use of the terms "must" and "will" may likely result in the handbook promises being enforced (Campbell v. Northwester Memorial Home Health Care/Services, Inc., 1998). Handbook terms that are couched in an informational tone that are discretionary and not promissory will not result in an enforceable contract (St. Peters v. Shell Oil Co., 1996). In the case of mandatory handbook language the fundamental nature of the "at will" doctrine is not changed but courts have ruled that the employer must follow the handbook's disciplinary and discharge procedures or face litigation for damages (Deutsch v. Chesapeake Center, 1998). The effect of this line of court cases, then, is to place more requirements upon an employer that promulgates an employee handbook containing mandatory discharge procedures than would have existed in the absence of such handbook language.

THE CONTRACT.

The imposition of contractual duties arising from handbook terms is not without structure. The courts have utilized various contract theories to impose on employers the obligation to follow the procedures set forth in their employee handbooks. The three most common contract theories are: unilateral contract; implied contract; and traditional contract. A brief review of these contract theories will be helpful in understanding when handbook language may be deemed to be contractual.

Unilateral Contract Theory

Under the unilateral contract theory a company handbook must first meet certain requirements before it is deemed to be an enforceable unilateral contract. First, the handbook language must be sufficiently definite in its terms to create an offer. Second, the handbook must have been communicated to the employees. Third, the employee must have commenced or continued work after the handbook was disseminated (Duldulao v. Saint Mary of Nazareth Hospital Center, 1987). The key to determining if a contract has been created by the language of the handbook is whether a reasonable employee would believe from such language that the employer guaranteed him certain protections (Meier v. Family Dollar Services, Inc., 2006). In determining if an employee is reasonably justified in understanding that the employer through the language of the handbook has made a commitment the courts look at three factors. One, whether the handbook sets forth general guidelines or whether the language constitutes a directive. Two, whether the language is detailed or vague. Three, whether the policies are discretionary or mandatory (Kartheiser v. American Nat'l Can Co., 1999). Detailed and mandatory sounding handbook language is likely to form a contract under this theory. Therefore, a handbook that stated that permanent employees "are never dismissed without prior written admonitions and/or an investigation that has been properly documented" was deemed contractual and enforceable against the employer (Duldulao v. Saint Mary of Nazareth Hospital, 1987).

Implied Contract Theory

Under the implied contract theory, the employee must show that the employer's actions or the language of the handbook manifest to a reasonable person an intent to be bound by the provisions of the handbook (Anderson v. Regis Corporation, 2006). Courts find the existence of an implied contract in the circumstances surrounding the employment relationship, including assurances of job security in company handbooks (Huey v. Honeywell, Inc., 1996). Implied contracts arise from the promissory language of the handbook. Thus, a handbook that stated: "... discharges must be approved in advance by the director of employee relations or designees, and are subject to employee appeal through established grievance procedures" was deemed to be unequivocal language that created an enforceable contract (Perman v. Arcventures, Inc., 1990).

Traditional Contract Theory

The third handbook theory that has been held to modify the "at will" employment doctrine assumes a more traditional contract analysis and has been used by courts where the language of the handbook constitutes terms that are (1) definite; (2) communicated to the employee; (3) are accepted by the employee; and (4) where consideration has been furnished by the employee (Norton v. Caremark, Inc., 1994). Usually, acceptance of employment or continuation of employment after the handbook is promulgated is deemed to be acceptance of the handbook offer and sufficient consideration to support an enforceable contract.

Commonalities

The three theories identified above are not exhaustive. Some courts employ standards that seem vague as in the case of New Jersey courts that recognize that the "at will" doctrine can be modified when the language of the handbook is construed according to the reasonable expectations of the employees to whom it is directed (Schlichtig v. Inacom Corporation, 2003). An analysis of the more common theories, however, demonstrates certain commonalities. An employee handbook is more likely to be found to be an enforceable contract and modify the "at will" employment doctrine when the language of the handbook is definite; when the handbook is widely disseminated to employees; and when the handbook language manifests to a reasonable person that the employer intends to be bound by the handbook's provisions (Anderson v. Regis Corporation, 2006).

THE DISCLAIMER

In light of the foregoing erosion of the formerly formidable "at will" employment doctrine, many employers include a disclaimer in the company handbook. A typical disclaimer may provide: "This handbook is not an employment agreement, a contract of employment, or a guarantee of continued employment with--and/or its subsidiaries, foreign or domestic. Employment with--is 'at will' which means that you or the Company may terminate the employment relationship at any time". And, "DISCLAIMER: This employee handbook has been drafted as a guideline for our employees. It shall not be constructed to form a contract between the Company and its employees. Rather, it describes the Company's general philosophy concerning policies and procedures." (Black v. Baker Oil Tools, Inc., 1997).

Courts have ruled that a clear and forthright disclaimer, in general, will prevent the handbook's terms from being deemed an enforceable contract and will afford an employer a complete defense to a suit for breach of contract based on the handbook (Workman v. United Parcel Service, Inc., 2000). The rationale for this rule is that no reasonable employee would believe that the handbook constitutes a promise or contract in light of a clear disclaimer to the contrary (Boulay v. Impell Corporation, 1991). Nevertheless, the presence of a disclaimer in the company handbook will not always prevent the handbook from modifying the "at will" employment doctrine or prevent the handbook from being deemed an enforceable contract. The courts have required that disclaimers meet certain requirements in order to be effective.

INEFFECTIVE DISCLAIMERS

Disclaimers have failed to achieve the desired result in cases where the disclaimers were ambiguous; or, where the disclaimers were not apparent and were essentially "hidden"; or, where the disclaimers were not reasonably conspicuous; or where the disclaimers were not communicated to the employee.

Ambiguity

Ambiguity arises when the employer uses a multitude of documents to communicate company policy. In such cases, the courts have held that while the handbook did contain a disclaimer the employer created ambiguity by providing employees with other policy documents without a disclaimer. The policy documents without a disclaimer were held to constitute enforceable promises that modified the "at will" doctrine. This is especially true when the other policies contradicted the handbook terms (Allabashi v. Lincoln National Sales Corporation of Colorado-Wyoming, 1991). Sometimes the handbook and subsequently issued policy papers merely conflict. In such cases a disclaimer in one document will be ruled not to apply to another policy document that contains no disclaimer (Swanson v. Liquid Air Corporation, 1989). In an illustrative case involving a disputed lay off, the employer included a handbook disclaimer that its policies were not part of any employment contract. At the same time company supervisory personnel repeatedly assured the terminated employee that lay offs would occur in accordance with the handbook which specified layoff by seniority. When the terminated employee was dismissed without regard to his seniority he sued claiming that the handbook was an enforceable contract which had been breached by the employer. The employer asserted that employee's job was terminable at will and that the handbook did not amount to an enforceable contract because of the inclusion of a disclaimer. The company lost. The court ruled that supervisory employees modified the disclaimer by informing the terminated employee that lay offs would occur according to the handbook which specified layoff by seniority. Here, the terms of the handbook were enforced despite the disclaimer because of the ambiguity created by the handbook's terms, the contrary discharge action taken by the employer and the reassurances given by company supervisory personnel (Clay v. Horton Manufacturing Co., Inc., 1992).

The rule that ambiguities will be construed against the language drafter holds true in handbook disclaimer contests (Long v. Tazewill/Pekin Consolidated Communication Center, 1991). In short, disclaimers must be clear and unambiguous in order to negate the contractual effect of an employee handbook (Johnson v. Nasca, 1990).

Placement

The placement of the disclaimer in the handbook has also been scrutinized by the courts. Faulty placement can occur and defeat the intent of the disclaimer when the disclaimer is not placed in a prominent place in the handbook and could easily be overlooked by a reasonable employee (Perman v. Arcventures, Inc., 1990). The courts have found a disclaimer to be ineffective when it was not distinctly set out separate and apart from the handbook text and is effectively hidden (Long v. Tazewell/Pekin Consolidated Communications Center, 1991). For example, a disclaimer placed on page 38 of a 39 page handbook under a subtopic entitled "Revisions" was criticized by the court (Hicks v. Methodist Medical Center, 1992).

Conspicuity

In order to be effective a disclaimer must be conspicuous. Lack of conspicuity occurs when the disclaimer is of insufficient size or appearance that an ordinary reasonable employee would not see and note its contents. Where a handbook disclaimer was not set off in any way, was placed under a general subheading, was not capitalized and was of the same type size as another provision on the same page it was held to be not adequately conspicuous (McDonald v. Mobil Coal Producing, Inc., 1991). In order to be effective, a disclaimer should be prominently displayed (Hicks v. Methodist Medical Center, 1992), and not buried in a glossary (Durtsche v. American Colloid Company, 1992). In short, the promissory terms of an employee handbook can only be negated by a conspicuous disclaimer prominently displayed in a typeface different from the ordinary text (Wheeler v. The Phoenix Company of Chicago, 1995).

Notice

Failure to show that the disclaimer was communicated to the employee may be fatal to its enforcement. An employer must bring its handbook disclaimer to the personal attention of its employees (Morriss v. Coleman Company, Inc., 1987). For example, when an employer changed its company handbook to include a disclaimer, the handbook also contained a receipt form and a place for an employee signature. The form was to be placed in the employee personnel file. When the disclaimer was contested the employer was unable to produce evidence that the employees had received the new handbook with disclaimer. The employees testified that they were not aware of the changes made to the handbook and were ignorant of the existence of the contract disclaimer. The court ruled that while an employer retains the right to change employee policy if such a change is to be effective it must be communicated to the employees (Crain Industries, Inc. v. Cass, 1991).

SUMMARY AND IMPLICATIONS.

The "at will" employment doctrine enables an employer to fire an employee at any time for no reason without fear of legal consequences. "At will" was, and continues to be, settled law in most jurisdictions in the U.S. However, in the past 25 years this bright line rule has begun to dim and has been modified by the courts when confronted with company handbooks that contain mandatory sounding discharge and discipline language. In such cases the courts have frequently found that the terms of the company handbook formed an enforceable contract and that discharge of an employee without following the procedures set forth in the handbook amounted to a species of breach of promise and subjected the employer to a judgment for money damages. Therefore, in order to avoid unintended exposure to liability, the author of an employee handbook should first assure that the language used will not manifest to a reasonable employee an intention by the company to be firmly bound by the policy expressed. Second, the handbook author can include a contract disclaimer to the effect that the handbook terms do not create a contract between the company and its employees. A clear and forthright disclaimer can be a complete defense to a suit for breach of contract based on the terms in an employee handbook. However, in order to be effective, the handbook disclaimer must be forthright; conspicuous; distinctly placed; distinguished from the rest of the text by capitalization or bold face type; and be conscientiously disseminated to all employees who will be subject to the handbook's terms.

REFERENCES

Allabashi v. Lincoln National Sales Corporation of Colorado-Wyoming, 824 P.2d 1 (Colo.App. 1991).

Anderson v. Regis Corporation, 185 Fed.Appx. 768 (10th Cir. 2006).

Autor, D.H. (2006). The Costs of Wrongful-Discharge Laws. The Review of Economics and Statistics, 88 (2), 211-231.

Black v. Baker Oil Tools, Inc., 107 F.3d 1457 (10th Cir. 1997).

Boulay v. Impell Corporation, 939 F.2d 480 (7th Cir. 1991).

Campbell v. Northwestern Memorial Home Health Care/Services, Inc., 1998 U.S. Dist. LEXIS 7083 (1998).

Clay v. Horton Manufacturing Co., 493 N.W.2d 379 (Wisc.App. 1992).

Crain Industries, Inc. v. Cass, 810 S.W.2d 910 (Ark. 1991).

Deutsch v. Chesapeake Center, 27 F.Supp.2d 642 (D.C. Md. 1998).

Duldulao v. Saint Mary of Nazareth Hospital Center, 505 N.E.2d 314 (Ill. 1987).

Durtsche v. American Colloid Company, 958 F.2d 1007 (10th Cir. 1992).

Eckhardt v. Yerkes Regional Primate Center, 561 S.E.2d 164 (Ga.App. 2002).

Hicks v. Methodist Medical Center, 593 N.E.2d 119 (Ill.App. 1992).

Huey v. Honeywell, Inc., 82 F.3d 327 (9th Cir. 1996).

Kartheiser v. American National Can Co., 84 F.Supp.2d 1008 (S.D. Iowa 1999).

Long v. Tazewell/Pekin Consolidated Communication Center, 574 N.E.2d 1191 (Ill.App. 1991).

McDonald v. Mobil Coal Producing, Inc., 820 P.2d 986 (Wyo. 1991). Meier v. Family Dollar Services, Inc., 443 F.Supp.2d 1036 (N.D. Iowa 2006).

Mizell v. Sara Lee Corporation, 2005 U.S. Dist. LEXIS 36988 (E.D. Va. 2005).

Monaco v. American General Assurance Company, 359 F.3d 296 (3rd Cir. 2004).

Morriss v. Coleman Company, Inc., 738 P.2d 841 (Kan. 1987).

Nickum v. Village of Saybrook, 972 F.Supp. 1160 (C.D. Ill. 1997).

Norton v. Caremark, Inc., 20 F.3d 330 (8th Cir. 1994).

Perman v. Arcventures, Inc., 554 N.E.2d 982 (Ill.App. 1990).

St Peters v. Shell Oil Company, 77 F.3d 184 (7th Cir. 1996).

Schlichtig v. Inacom Corporation, 271 F.Supp.2d 597 (D.C. N.J. 2003).

Swanson v. Liquid Air Corporation, 781 P.2d 900 (Wash.App. 1989).

Wheeler v. The Phoenix Company of Chicago, 658 N.E.2d 532 (Ill.App. 1995).

Wojcik v. Commonwealth Mortgage Corporation, 732 F.Supp. 940 (N.D. Ill. 1990).

Workman v. United Parcel Service, Inc., 234 F.3d 998 (7th Cir. 2000).

John Hoft, Columbus State University