The employment-at-will doctrine governs employment contracts of an unspecified duration. The doctrine’s classic formulation holds that absent a clear intention to contract for a term or other employment protections, the employee-employer relationship can be severed for any reason. As the Tennessee Supreme Court famously declared in Payne v. Western Atlantic R.R. Co. in 1884, an at-will employee may dismissed for “a good reason, a bad reason, or no reason at all.” The rule is of course symmetric: Unless specified otherwise, an employee may leave without liability. The doctrine is a common-law rule, meaning that it was adopted by judges without legislative intervention.
Scope of the Doctrine
Though it is now circumscribed by statutory and judge-made limitations, the rule remains one of the most important legal doctrines in employment law, governing the contractual relationships of almost all nonunion, nongovernment employees (roughly 85 percent of the labor force). The doctrine, which is unique to the United States, emerged in the late nineteenth century and is widely regarded as a legacy of the laissez-faire attitudes prevailing at the time. By the early twentieth century, it was adopted in every state with surprisingly little controversy.
The employment-at-will doctrine is a judge-made rule; its purpose is to fill in gaps when the terms of the relationship are unspecified. Courts frequently face contracts with gaps that must be filled in during the course of litigation. The general rule is that courts will read in terms (or “default” to terms) that represent a best guess as to what the contracting parties would have wanted had they thought to contract for it. When faced with an unspecified employment contract, then, courts assume that the parties wanted an at-will relationship and place the burden on the plaintiff (almost always the employee) to show that a contract for term or just-cause protection was intended.
If a term of employment is specified, either in writing or orally, courts presume that the contract contains a promise of employment for the duration specified, provided the employee performs satisfactorily. In some cases, the employer could offer an indefinite-term contract in which dismissal may occur only for just cause, creating just-cause employment for life. Prior to the recent innovations discussed below, these cases were limited almost solely to well-specified contracts for academic tenure. Courts were once unwilling to find that oral assurances or statements in employee handbooks created a just-cause relationship. Since the 1970s, the trend has been toward a more liberal interpretation of assurances and a greater willingness to find just-cause employment.
In the case of a term contract, the employee must show only that the dismissal occurred within the covered term, and then the employer may defend by showing that he or she had a good reason to dismiss the worker. Courts have been careful to note that provisions stating salaries on a yearly or monthly basis do not create a term of employment and are therefore insufficient to rebut the presumption of employment at will. In addition, an employee may also be liable if he or she leaves the relationship prior to the expiration of the term, although courts will require greater clarity in this regard. Litigation in this vein is far less frequent, likely because employers do not wish to retain employees who want to leave and damages may be harder to calculate. Of course, employers can also protect themselves by delaying compensation until the end of the employment term, in the form of a bonus.
Courts did not adopt the at-will rule because no other default was tenable. Indeed, the at-will rule, when adopted, was a rejection of an English rule that held that employment contracts for an unspecified duration would generally be read as a contract for one year of employment. The rule was often justified by the courts with reference to seasonal variations in labor demand and the fear that employers would opportunistically dismiss workers when agricultural conditions were unfavorable. The rule, however, was not limited to farmhands but applied generally, although English courts would impute a shorter term if the situation seemed to call for it.
Erosion of the At-Will Rule
The first chips at the rule came in the form of statutory limitations on specific “bad reasons” for dismissal. The National Labor Relations Act of 1935 forbade discharge (and other discriminatory practices) based on an employee’s participation in collective action. In addition, it facilitated the creation of explicit labor contracts to govern the employment relationship, and these contracts typically provide a term of employment or just-cause provisions for dismissal and a procedure under which dismissals are to be governed.
The next major limitations on the actions of employers came in the form of antidiscrimination laws, most prominently Title VII of the 1964 Civil Rights Act, which forbids discrimination in employment on the basis of race, sex, national origin, and religion. Age discrimination (in 1967) and disability discrimination (in 1990) were later prohibited under separate statutes. With the exception of disability discrimination, which requires employers to make accommodations for the disabled, the most common cause of action under these statutes is for wrongful termination, and hence they operate as a check on the at-will rule. Other federal statutes also limit dismissal, and many state statutes offer employment protection along similar lines.
The federal government and the states have provided a cause of action to at-will employees dismissed for specific reasons, but the legislatures have generally not altered the employment-at-will default rule. Only Montana has a statute that mandates a just-cause presumption, and recovery under the statute appears to be fairly limited. Courts, however, have been much more active, and most states now recognize at least one of three exceptions to the at-will rule.
Public Policy Exception
In 1959, California became the first state to recognize a common-law exception to employment at will, in Petermann v. International Brotherhood of Teamsters. Petermann, an employee of the Teamster’s Union, sued for wrongful termination, alleging that he had been fired because he refused to perjure himself for his employer’s benefit. The union claimed that there were no grounds for recovery because Petermann was an at-will employee, and the trial court agreed. The appellate court reversed, declaring that some terminations are limited by public policy considerations. The court relied heavily on the fact that perjury is illegal.
Roughly 42 states have recognized the public policy exception. Most of the claims involve some sort of illegal action on the part of the employer. Many states require that the public at large be affected by the motive behind the discharge or that the employee was trying to assert a statutory or constitutional right. For example, courts have held that the exception applies when the discharge resulted from the refusal to participate in a price-fixing scheme, the assertion of workmen’s compensation claims, or complaints to the employer about inappropriately labeled products. It should be noted that many states have codified at least part of the public policy exception in the form of so-called whistle-blower statutes. For example, New York courts reject the public policy exception, but New York has a very narrowly tailored whistle-blower statute.
Because it relies on particularly egregious conduct, the public policy exception is limited in scope. Two much more important exceptions sprang into existence in the 1970s and 1980s: the good-faith exception and the implied-contract exception.
Courts will read a “duty of good faith” into most commercial relationships, mainly as a weapon against opportunistic behavior by one party. It is interesting, then, that only 11 states have accepted good-faith limitations to the doctrine of employment at will.
The paradigmatic case here is one in which an employee is terminated prior to the receipt of a bonus or a commission. For example, in the case of Fortune vs. National Cash Register in 1977, the Massachusetts Supreme Court held that it was a violation of an implied agreement of good faith when an at-will salesman was terminated after making a large sale for which he would have received a commission. Thus, the good-faith exception focuses on whether or not the termination was opportunistic—an attempt to prevent the employee from obtaining benefits to which he or she would have been entitled had he or she remained employed. (As a side note, federal statutory claims may exist for a termination motivated by a pension vesting.)
Perhaps the most important exception to the employment-at-will rule is the implied-contract exception, which is recognized in 42 states to varying degrees. Under the exception, courts will allow the statements in employee handbooks, oral assurances of employment, and even the conduct of the parties, such as an employee declining other job opportunities, to constitute evidence of a just-cause relationship. Prior to the exception, these factors, even though not in dispute, would have been insufficient to rebut the presumption of employment at will.
Of course, state courts vary in how willing they are to recognize the implied-contract exception. For example, California courts tend to construe the evidence liberally to find an implied contract. On the other hand, New York courts emphasize that the implied-contract exception is narrow, requiring that an employee handbook contain a clear just-cause provision and that the employee relied on that provision in some way, for example, by leaving his or her previous job.
In general, contract damages are limited to the value of the contract itself (the so-called expectation interest). Thus, under the implied-contract exception, employees may receive the value of back wages and benefits plus interest, as well as the going-forward loss caused by the termination, known as front pay. The law requires that the employee mitigate by trying to find comparable employment, and if the employee finds a comparable job, his or her recovery may well be limited to back wages and benefits. Front-pay awards are also subject to attack as being too speculative, and courts have reduced them accordingly.
On the other hand, courts have often characterized the public policy exception as a tort action. A tort is an action that exists independent of a contractual obligation; thus, the characterization of the action as a tort helps the court avoid the at-will designation. In tort, back pay and front pay are available, as well as punitive damages and pain and suffering. In some states, claims under the good-faith exception may proceed in contract or tort, depending on the factual situation. Others, such as California, have limited tort claims to public policy exceptions.
Employer Response to Exceptions to the At-Will Rule
Employers are famously sensitive to employment litigation, and the at-will rule provides them with cover. On its face, the implied-contract exception is easiest for employers to get around, because they may simply require workers to sign at-will statements or insert at-will provisions into employee handbooks.
Almost all contract rules are simply default provisions from which the parties may contract out. Survey evidence indicates that over half of all employers insert at-will provisions into handbooks or other writings such as offer letters.
Such alterations do not amount to blanket protection for employers, however, if courts allow later oral assurances or conduct of the parties to trump the handbook provisions. In addition, courts have split over whether an employee hired under a just-cause handbook can later be turned into an at-will employee when the handbook is amended to include an at-will provision. Employers can limit their liability to some extent by providing severance packages in consideration for an employee’s waiver of legal claims. Arbitration clauses in employment contracts have also become increasingly popular and are generally enforced.
Employers can also respond by decreasing their use of labor or favoring states that have stronger at-will presumptions. Law and economics scholars have provided evidence that this has, indeed, happened. Among the findings are that in states that adopt at-will exceptions, employers retain current workers longer and offer lower wages to new workers; employers hire more temporary help employees; and there is slower employment growth. These findings are all consistent with the argument that exceptions to the at-will rule make employers less likely to both hire and discharge workers. As with many employment protections, they benefit those currently with jobs; those on the outside are damaged. The implied-contract and good-faith exceptions are the most salient in these studies. The public policy exception is generally found to have little or no effect, which is not surprising given its limited scope.
Implications for Employees
Employment at will is widely regarded as a harsh doctrine because it leaves the employee with little recourse in the courts. To escape this doctrine, an employee must have a statutory claim or meet the burden of demonstrating that he or she fits an exception. A few states do not recognize any exceptions, and others have very narrow exceptions. In addition, survey evidence indicates that the rule comes as a surprise to most workers, who have very different understandings of their legal rights. Some have argued that courts should flip the default rule and presume employment for just cause or revert to the old English rule. Employers could still contract for an at-will labor force; they would just have to place employees on notice by explicitly stating that the relationship is at will.
There is a contrary view, however, that argues that the law is fairly unimportant to the employment relationship. First, employees do not in general rely on legal protections. Indeed, even when employees have well-known statutory protections, as in the case of Title VII, the conventional wisdom is that they are hesitant to assert these rights. Second, the market disciplines employers who dismiss workers (or permit supervisors to dismiss workers) arbitrarily. They lose valuable employees. They face the cost of replacing employees. They demoralize their workforces, making other employees more likely to leave. Third, America’s consistently low unemployment rate provides a built-in protection for workers. When they are dismissed unfairly, they are likely to find new work, which makes it harder for employers to replace good workers with those equally qualified.
Whether the market’s regulation may be improved on is a tricky issue. For example, there may be times when the benefits to firing an employee for a bad reason are large enough to overcome the market-imposed costs of such an action. Consider again the example case of the dismissal of an employee prior to a large pension or bonus vesting. Even more complicated are cases of so-called implicit labor contracts, in which the employer offers lower wages at the start of employment but high seniority-based pay later on. These contracts are offered in the hopes of retaining workers and encouraging good performance. The extra effort and retention are valuable to the employer, who gets a more productive workforce and saves training and recruiting costs. Even though the employer profits from this deal over time, longtime employees may eventually earn more than they are currently “worth” to the firm (similar to the case of dismissal motivated by a pension vesting). The firm has an incentive to terminate this employment opportunistically. Some have argued that the regulation of such arrangements is a justification for limiting the at-will rule. But any of these benefits must be weighed against the empirical evidence that alterations to the rule make employers less willing to hire, which in the long run is not good for employees.
The doctrine of employment at will remains surprisingly intact, even after the creation of many important statutory and judge-made exceptions. After the revisions to the rule during the 1970s and 1980s, many predicted its demise. In the end, the nineteenth-century doctrine, though modified, appears to have survived into the twenty-first century, and it remains a distinguishing feature of the U.S. labor market.
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