Blundering into Liability: Unwitting Creation of Employment Contracts

Employment at will is the traditional rule that the employment relationship operates “at the will” of both the employee and the employer. The employee is absolutely free to leave at any time, without notice (unlike an indentured servant). The employer is absolutely free to discharge the employee at any time, without notice. Neither has any recourse against, or liability to, the other. An employee can be discharged or leave for a good reason, or for no reason at all—that is, “at will.”

A contract does not always have to be a “document.”

Employment at will is recognized in most states. However, it has been restricted to some degree in all jurisdictions. There are four basic restrictions on employment at will: contract; illegality; public policy; and the U.S. Constitution (for public employees).

Contracts

Traditional employment contracts include the following:

• Collective bargaining agreements;

• Individual agreements with key employees;

• Partner/owner/stockholder agreements; and

• Statutory rights (e.g., civil service, annual renewal, property right to job).

Unwitting contracts include:

• Hiring exchange;

• Commission “non-agreements” that create agreements;

• Guarantees in policies or letters;

• Handbooks;

• Abrogating at will;

• Mini-contracts;

• Departmental policies that do not conform;

• Restrictive covenants with “continuing employment” as consideration; and

• “Technology got ahead of us.”

Table 1 lists causes of action and statutes of limitations that apply to each one.

Hiring Documents

A contract does not always have to be a “document.” A series of communications can create a contract, if there are enough clear terms. Letters, e-mails, and text messages between an applicant and a manager can be “stacked” to create all the terms and “guarantees” needed.

The applicant asks questions about wages, hours, terms, and duration of employment. The manager answers, without checking with the human resources (HR) department and without understanding the effects of the communications. The answers may create a contract and guarantees. This can create an individual contract that is not outweighed by the new employee’s signature on the at will statement in the employee handbook. Pay plans and commission “guarantees” and incentive arrangements often create such contracts. Any ambiguity is enforced against the employer.

Handbooks

Policies and procedures also can have legally binding effects on the organization, and an employee handbook can turn into a dangerous instrument to be used against you.

What Is the Danger?

Your written policies on vacation pay, leave-of-absence pay, holiday provisions, or break times will be carefully examined and will be a controlling factor in the government’s decision regarding wage claims or wage and hour disputes. The employee handbook itself can, in whole or in part, create a legally binding contract.

The case of Ferraro v. Koelsch is an example of the handbook creating a contract. The fired employee claimed that the employee handbook formed a binding legal contract between the company and the workforce, just as a collective bargaining agreement with a union contract would. The employee argued that under such a handbook-contract, he could not be fired without “just cause” and that he had a right to bring a contract wrongful discharge suit against the company. The court agreed. It held that the handbook (even though it had an “at will” clause) had the kind of language and provisions to make it a legally binding contract of employment. Since then, the courts have devoted increasing attention to the provisions of employee manuals. The initial employment at will clause in the handbook can be diminished or nullified by statements later in the handbook.

So now if the employee handbook or other “documents of employment” (e.g., job applications, hiring letters) have the right elements to create that contract, any discharged or disgruntled employee can take the organization into any local court and sue for breach of contract. Employees who win can force the business to rehire them with back pay and damages. Even the business that wins will have to spend many thousands of dollars in legal costs to successfully defend the case.

What Makes a Handbook a Contract?

The issue of what makes a handbook a contract is heavily dependent on state law. This article is a general description. Check your state law for specific provisions.

A handbook can be considered a contract if it contains or stipulates:

• Promises of continued employment;

• A probationary period;

• Progressive discipline policies, especially those describing “levels” of discipline;

• Seniority clauses;

• “Just cause” language;

• Grievance policies;

• Acknowledgment of “duty to obey” rules and policies; or

• Penalties for resignation without notice.

Policy Promises that Create Unnecessary Liabilities

There is a growing trend in the courts to look closely at handbook provisions and use poorly drafted or overbroad policies to extend rights to employees who otherwise would not be covered by various laws. Although the whole handbook may not be a contract, the specific policy can be enforced, often with significant liability.

Overly Generous Policy that Creates Extra Causes of Action

In Marini v. Costco Wholesale Corp. (D. Conn., 2014), the company policy specifically stated that “corrective action will be taken regardless of whether the inappropriate conduct rises to the level of any violation of law” and that the policy definition of harassment was broader than “as defined by law.” A former employee filed a claim with the U.S. Equal Employment Opportunity Commission and the state Equal Employment Opportunity (EEO) agency alleging disability harassment, but filed over 300 days after the acts. The EEO cases were dismissed as being beyond the statute of limitations. However, the court ruled that the company’s “progressive policy” exceeded the scope of EEO law, and created an enforceable contract. Under state law the contract statute of limitations was six years; therefore, the employee could pursue the harassment case. The court also found that the company policy had no disclaimer such as “This policy does not create legally enforceable protections beyond the protection of the background laws” (i.e., state or Federal EEO laws). Such a disclaimer would have prevented the policy from becoming an enforceable contract. (One other important issue is that state and Federal EEO laws often “cap” damages, but state contract law may have limitless liability. So a contract action can be much more expensive.)

A Policy that Is Too Broad Gives Rights to an Ineligible Employee

An employee worked in a small unit of fewer than 50 employees, more than 75 miles from any other location of the company. Thus he was not covered by the Family and Medical Leave Act (FMLA), which applies to companies employing 50 or more people within a 75-mile radius. However, the employee handbook’s FMLA policy simply stated that all employees who had worked 1250 hours in a year were covered by FMLA. The employee took leave for a heart condition, submitting an FMLA request. He was fired while on leave, and he sued. The employer requested dismissal because there was no FMLA coverage of the small, remote unit. The court agreed that the FMLA would not normally cover the situation; however, the handbook policy created coverage. The handbook did not have any disclaimer or explanation about the 75-mile radius. It gave a blanket “unqualified assurance” of FMLA rights to all employees. Having created a reasonable reliance on its own policy, the employer could not now deny the employee his full FMLA rights (Tilley v. Kalamazoo Co. Road Comm. (6th Cir., 2015)).

Managers Undermining Official Policy

Companies often have many more “policies” than those listed in the employee handbook. Numerous “protocols,” “guidance,” “procedures,” or “work rules” are spun out by each department. The larger the organization, the more often it happens that managers make their own sets of rules for their own various purposes, often without any central overview, without any thought about what is in the employee handbook, and without the knowledge of HR. They are all “policies” that can bind the company to liability.

Often, more than half of your employment “records” and “policies” are created by department managers and supervisors without the knowledge of HR or central administration. They often contradict official policy, or give additional rights or guarantees to employees. The managers have no idea they are creating legal documents. They are just trying to manage their unit, solve problems they encounter, or find the most convenient process for their operation.

In the case of Hudson v. Tyson Fresh Meats, Inc. (8th Cir., 2015), the company’s employee handbook contained the official policies, enforced by HR and central administration. However, local department directors often set up their own practices, even sending memos to staff, which created a new and contradictory policy. In Hudson v. Tyson, the official attendance policy required a personal call-in for absence. Hudson texted his director his need for several days of FMLA absence. He was fired for policy violation. However, the evidence showed that the department had a practice of letting people text for absence. The supervisors accepted these messages, and also had used texting for their own absences. The court found inconsistent policies and that the discharge was an interference with Hudson’s FMLA rights.

Another example is Quan v. City of Ontario Cal. (U.S. S.Ct.), in which a Manager’s Memo urging quick payment for personal use of cell phones “guaranteed” privacy and undermined the City’s right to monitor employees’ use of its own phones.

Brockbank v. US Bancorp. (9th Cir., 2013) addressed an instance in which a department manager created a “reasonable personal use” of company credit cards protocol, which contradicted the company’s “no personal use-zero-tolerance” handbook policy. The result was reinstatement, back pay, attorney fees, and so forth for those who had been fired for minor personal charges under the zero-tolerance provision, while others got no negative attention at all for “reasonable” personal use.

Restrictive Covenants with “Continued Employment” Consideration

Noncompete agreements and nondisclosure contracts (“restrictive covenants”) generally require “consideration,” defined as something of new value to induce the parties to agree. Many states hold that “continuing employment” is not valid consideration to induce an employee to sign a noncompete agreement. The person already has the job, so something of additional value must be given. However this can change. In Runzheimer International Ltd. v. Friedler (Wis. S.Ct., 2015), the Court changed the rule. It found that continuing employment (i.e., threat of discharge for not signing) was valuable consideration, and the noncompete could be enforced. However, the decision also implied that this form of consideration could alter the traditional employment at will relationship. The company would not be free to discharge the employee, at will, soon after. The “continuing employment” provision implied a real continuation of the job, and the employee may then be protected by general employment contract principles such as just cause and “good faith and fair dealing” in any discharge. One must also be consistent in enforcement. If the company did not fire even one employee who refused to sign, then all those who did sign would also be relieved of their further noncompete obligations. One exception could render everyone’s agreement unenforceable. So the old standard forms of consideration may still be advisable. (This is similar to other states which recognize continuing employment as consideration. Check your state law.)

Technology Got Ahead of Us

Pay arrangements should be clearly documented in writing and signed by the employee. The employee’s understanding of how he or she is to be paid (e.g., salaried exempt) can be crucial. However, sometimes organizations do not review these arrangements and allow things to “slip.”

Software Updates May Void Administrative Exemption for Insurance Claims Staff

Insurance claim adjusters generally meet the administrative salaried exemption. However, that can change, as companies change technology. In Harper, et al v. GEICO (2nd Cir., 2014), the company had employees’ agreements to be paid by salary. However, the court found that the company’s new software system took care of a number of functions the adjusters had always performed. It made their jobs easier and increased efficiency. However, the machine now did significant assessments, and decreased the judgment and discretion of the human beings. The court allowed a class action by the company’s claims adjusters, challenging their exempt status and claiming overtime pay for all time since the new system was implemented. Messages from this case are: (1) do not just adopt new technology without first considering the effects of classification and compensation; and (2) do not assume that “once exempt, always exempt.” Although the Department of Labor may have ruled that a particular job is exempt, things change, especially with software changes.

Bring Your Own Device Practice

Does a bring-your-own-device ( BYOD) practice thwart restrictive covenants (i.e., noncompete, confidentiality, trade secrets, ownership of work product agreements)? Organizations increasingly are not only allowing their employees to bring their own electronic devices to work, but encouraging it. A growing number are requiring it, reimbursing employees for using their own devices while saving the company money.

If all communications take place on the organization’s own electronic devices, then all contents and contacts are property of the organization. The organization can control usage, prohibit any transfer or retention of information, and enforce its ownership regarding later post-employment usage. The organization has the right to monitor usage, enforce security, and seize the device at any time.

Such is not the case with BYOD policies. This obviously creates issues regarding security, confidentiality, privacy, and electronic retrieval, especially regarding former employees. However, one of the major intellectual property issues raised is trade secrets. Does allowing use of BYOD jeopardize trade secret or confidential information protection or void your nondisclosure and ownership of work-product agreements? Do we need to have additional policies or agreements on this issue? Can any policy or agreement give adequate protection?

Before implementing new technology, carefully assess its potential impacts on other policies and processes. There is often a cascading effect that was not foreseen. When this effect has collateral negative consequences, someone in HR, or, more often, the operational level says “well I could have told you that!” However, no one bothered to ask those at that level before implementation. Sometimes we get so excited about and focused on the new tech developments and their obvious advantage that we forget to involve those in other affected parts of the operation.

Technology rapidly has become the way of operation—so rapidly that it often outpaces other aspects. It is important to create an ongoing, multidisciplinary team for assessment and implementation. This has clearly been shown in the area of employment record keeping, which is now largely electronic and even stored off-site by outside vendors. Organizations have suffered huge liability due to not having established a multidisciplinary team to create and coordinate employment and business record keeping.

Such a multidisciplinary standing team should assess all significant technological “improvements” and implementation beforehand.