The term wrongful dismissal (or discharge) describes those instances where an employer illegally chooses to terminate (including a constructive discharge, forced resignation, elimination of the job, permanent layoff, or failure to recall or rehire) the employment of an employee. There are a number of factors to take into account in attempting to determine whether the dismissal of an employee is illegal. Many of the issues relating to wrongful dismissal depend on whether the employee is working under an employment contract or not. In situations where the employee has an employment contract, questions may arise as to what constitutes “good cause,” “just cause,” or simply “cause,” under the terms of the contract. The law provides that an employment contract for a definite term may not be terminated without cause before the expiration of the term, unless the contract provides otherwise. Where a union is involved, collective bargaining agreements generally contain prohibitions on discharge except for just cause. However, courts in nonunion situations have generally ignored the extensive body of arbitration agreements that have addressed this situation in collective bargaining.
Generally speaking, just cause may be of two types: (1) economic reasons unrelated to the employee or (2) employee misconduct or inadequate performance. Just cause may be established for economic reasons if the employment agreement does not have a definite term and the reason for termination is a bona fide reduction in force, plant closing, or reorganization. If the agreement does have a definite term, these situations may not establish just cause, unless the contract defines it as such. The second type, employee-based reasons, may include inadequate performance or misconduct, such as providing fraudulent background information, sexual harassment, or mistreatment of customers.
If the employee does not have an employment contract, the so-called at-will doctrine applies. Under the modern interpretation of this doctrine, absent an agreement to the contrary, the common law gives employers the legal right to dismiss employees without having a good cause, or any cause at all, except if one of the exceptions to the doctrine applies. These exceptions are (a) the termination was contrary to an important public policy, (b) the employer broke an implied contract of continued employment, or (c) the termination violated an implied covenant of good faith and fair dealing.
The roots of this doctrine can be traced back more than 100 years. In the nineteenth century, jobs were plentiful, labor was scarce, and national prosperity was thought to depend on the elimination of all barriers to the process of free exchange. This background led American courts, toward the latter part of that century, to adopt the at-will doctrine. Horace Wood, an author of legal textbooks, is generally regarded as the authority upon which courts relied for creation of this doctrine in 1877. In his Treatise on the Law of Master and Servant, he consolidated the legal presumption in the United States that an indefinite contract was terminable at will and without notice, for any reason or no reason at all. Gradually, the courts refined the doctrine to the modern understanding discussed above.
Public Policy Exception
The major exception to the at-will doctrine is the public policy exception. Courts have typically held that it is illegal, even where employment is for an indefinite term, for an employer to discharge an employee when the employer’s intent is to violate an important and clearly mandated public policy. The public policy exception is generally interpreted narrowly. So, for example, as set forth in Stephenson v. Litton Sys., Inc., (646 N.E. 2d 259), an employee who was discharged for reporting to police that it was likely that his or her superior was going to be driving while intoxicated was illegally discharged in violation of the public policy exception, since the policy was sufficiently clear and compelling and the employee had a reasonable basis for their suspicion. The policy involved must be clearly defined and involve an important public purpose and not merely a private or proprietary interest. Courts try to balance the interests of employers, employees, and public. Not all socially desirable duties are protected. A discharge is not illegal merely because an employee’s conduct is praiseworthy or because the public may have derived some benefit from it. The infringement must be a substantial one on an important public policy.
Public policy may be found in state or federal constitutions, statutes, regulations, judicial decisions, and sometimes in ethical codes. The judge usually determines whether the plaintiff-employee has identified an important public policy. Once identified, it is up to the fact finder, usually a jury, to determine whether a discharge violates the particular policy. States vary in terms of permissible sources for public policy. For example, Illinois has a fairly broad interpretation of public policy and may include the state constitution, statutes, and some judicial decisions. By contrast, however, some states, such as California, limit their interpretation of public policy to statutes or constitution (see, for example, Gantt v. Sentry Ins., 1 Cal. 4th 1083, 1992).
Although there are many types of public policy exceptions, most of the cases fall into four major categories: (1) refusal to perform unlawful acts, (2) reporting illegal activities, (3) exercising a right under state law, and (4) performance of a civic duty. Almost all states recognize an exception to the at-will doctrine when an employee is discharged for refusing to commit a criminal act. A seminal case, Peterman v. International Brotherhood of Teamsters, Local 396, illustrates this exception. In this case, the employer ordered an at-will employee to give false testimony at a legislative hearing, that is, perjure himself, and then fired the employee for refusing to do so. Notwithstanding the above delineation, the term public policy remains ill-defined.
The second major category of public policy exception relates to employees who are discharged because they have reported illegal or improper activity (e.g., whistle-blowing). About three-fourths of states have some sort of statute protecting employee whistleblowers.
However, even where no statute exists, a number of states permit employee whistle-blowers to bring retaliatory charges against employers. In these cases, the courts seem to afford much more protection to so-called external whistle-blowers who report illegal employer activities to organizations outside the employer; courts are much more hesitant to protect employees who report employer wrongdoing only within the organization, so-called internal whistle-blowers.
The third type of public policy exception involves exercising a right provided to employees under state law. Generally, the courts interpret this right to relate specifically to the employee’s right as an employee (and not as a right as a citizen). A frequent case of this type involves workers’ compensation claims. Almost all states recognize protection for employees terminated for filing a proper claim under workers’ compensation laws. A number of state statutes permit employees the specific right to file suit for retaliation if the employer terminates them for filing such a claim. Where such a statutory right does not exist, the courts in the remaining states almost always permit the employee to file a claim under the public policy exception. However, few states protect employees who claim that they were fired in anticipation of filing a workers’ compensation claim.
The final type of public policy exception involves performance of a civic duty. When courts have found in favor of employees for employer violation of this type of public policy exception, it has generally been when the employee is involved in some sort of obligation with respect to a legal proceeding, including such particular examples as jury duty or obeying the terms of a subpoena.
Implied Contract Exception
A second exception to the at-will doctrine is triggered when an employer breaks an implied contract of continued employment. Sometimes, even in the absence of an express (written or verbal) employment contract, an employee is able to argue that the termination was in violation of a contract that should be “implied” because of the employer’s conduct (words or actions that a reasonable person would rely upon). If such conduct exists, the legal issue then becomes whether those expectations can be enforced as an implied-in-fact promise. A number of cases in this area involve employer letters to employees strongly suggesting (i.e., implying) a specific term of employment, which is later violated when the employer terminates the employee. For example, in a classic case, the court held for the employee when the employer wrote a letter to the then prospective employee saying that the corporation would employ and compensate the employee for two years (Hillman v. Hodag Chem. Corp., 96 Ill. App.2d 204, 206, 238 N.E. 2d 145, 147, 1968). Sometimes seemingly minor details can be construed by the courts to infer an implied contract. As an example, a court held that a letter to a prospective employee indicating that half of his moving expenses were to be paid immediately and the other half one year later indicated an implied contract of at least one year (Miller v. Community Discount, 228 N.E. 2d 113, 1967).
Good Faith and Fair Dealing
The final major exception to the at-will doctrine involves violation of an implied covenant of good faith and fair dealing during an employee dismissal. In these cases (which, by some accounts, about a fifth of states recognize), courts take the position that the employer should not be allowed to deprive employees of benefits already earned. For example, it has been used to prevent an employer from firing a 25-year at-will salesperson the day after it received a $5 million order from a customer in that employee’s sales territory. The court concluded that the dismissal was an attempt to avoid paying a commission to that employee (Fortune v. National Cash Register Co., 364 N.E. 2d 1251, 1977). However, most states do not permit enforcement of this exception to the at-will doctrine under the theory that its adoption would impose a “just cause” standard for at-will employment, which would be an inconsistency.
In addition to protection afforded directly by the courts (at-will protection), various legislative branches have provided protection for employees wrongfully dismissed for various reasons. Perhaps the most frequent protection claimed by employees in this regard is that provided by Title VII of the Civil Rights Act of 1964, as amended in 1991. If a worker believes they have been discriminated against (basically, treated differently) because of membership in a “protected group,” they can file a charge with the federal Equal Employment Opportunity Commission (EEOC) or, in many cases, with similar state or local agencies. Generally, protected class membership is based on some demographic characteristic such as race, sex, national origin, or, in separate statutes, age and disabilities.
Certain dismissals for employee activities that a reasonable person would consider as involving a privacy interest may also be protected. For example, dismissals based on private items seized by an employer from areas the employee intends to keep private (such as a locked drawer in a locked office) may provide an employee with a remedy. Moreover, dismissals based on false information that damages an employee’s reputation might also lead to grounds for recovery under defamation.
In terms of compensatory damages (basically, damages to compensate the injured employee for the damages sustained because of the injury), the remedy for wrongful discharge depends on whether the court infers there to be a contract between the employer and discharged employee. If the court determines there was an actual or implied contract, then they would likely award the employee with damages equivalent to those necessary to complete the contract. So, for example, if an employee were terminated after three months and the court determined there to be a oneyear contract for $40,000, the employee would get $30,000 (plus perhaps some miscellaneous charges). However, if the basis for the court’s award to the employee were not based on a contract claim (e.g., public policy), then it would award what is called “tort” remedies. Of states that recognize the implied covenant of good faith and fair dealing, most would permit only contract damages. Frequently, but not always, tort remedies can be greater than contract remedies. A major difference between contract and tort remedies is that contract remedies do not permit recovery for emotional distress and punitive damages (both of which can, at times, be substantial).
In either case, the employee can recover back pay to the extent that will put the employee in the same position her or she would have been in had the employer not engaged in the wrongful dismissal. Back pay would include compensation (wages, salary, commissions, or other payments, plus fringe benefits) the employee lost because of the wrongful dismissal. On the other hand, the employer has the right to have the amount of the back pay reduced (mitigated) by the amount of other compensation received by the terminated employee until the date of the trial. Plaintiff employees often also seek compensation for future damages for periods beyond the trial date. Often this is based on inference of a “just cause” relationship based upon reasonable expectation of continued employment grounded in assurances in an employee handbook or other enforceable promises.
Occasionally, employees claim damages not directly based on their compensation but based on a reasonable reliance on promises from the employer, which later hurt them. For example, an employee who sold his house, bought a new house, and took out a loan was awarded damages equal to the losses when the court held that he reasonably relied upon the employer’s assurances of continued employment (Pearson v. Simmonds Precision Products, Inc., 160 Vt. 168, 624 A.2d 1134, 1993).
As noted, for those legal grounds based on tort recovery, courts permit recovery for emotional distress and punitive damages. Emotional distress involves not merely employer conduct that hurt the employee’s feeling or made them upset; it must involve intentional or reckless conduct by the employer that must also be extreme or outrageous. Punitive conduct, if awarded, can result in large amounts of money to a plaintiff-employee. In part, this is the case, because, at least in theory, it is not related to the harm the employee suffered but to the outrageousness of the conduct by the employer. It is intended to punish the wrongdoer-employer and to discourage such conduct in the future.
Beyond the threat of employee reprisals and claims, wrongful dismissals have significant performance implications for organizations and the employees who remain. Social science researchers have identified the effects of employee distrust and organizational reputation on employee performance, recruitment, and well-being. Workers often react strongly to wrongful acts by employers, and these reactions may have long-term financial consequences for companies that engage in wrongful dismissal.
Any unjust act by an employer, and particularly one that strikes at the heart of the employee/employer relationship such as a dismissal, may be a violation of the psychological contract between the organization and worker. A psychological contract can be defined as an expectation of an organization to attend to the employee’s psychological needs in return for meeting the organization’s requirements. Employees invest time, effort, skills, and trust in an organization and expect compensation in addition to pay in the form of respect and fair treatment.
Psychological contract violations are related to decreased trust in an employer. Trust is forward looking and involves a willingness to be vulnerable, and once that trust is lost, employees no longer feel bound to live up to their end of the psychological contract. Fundamental violations of trust by organizations have been shown to lead to negative expectations of future employer conduct and to employee cynicism. Moreover, researchers have found a consistent relationship between employee perceptions of unfair treatment (also known as injustice) and reprisals and claims by employees. This line of research has focused primarily on employee perceptions of three types of organizational justice: distributive justice, the fairness of outcomes; procedural justice, the fairness of procedures that lead to outcomes; and interactional justice, the fairness of interpersonal treatment.
Closely aligned with distrust and perceived injustice, cynicism has been defined as an attitude associated with disillusionment and negative feelings toward an organization. Psychological contract violation has been viewed as a primary determinant of employee cynicism. Cynicism develops through the failure of organizations to meet employee expectations and the subsequent disillusionment that results. Cynicism carries a host of attitudinal and behavioral consequences, including poor effort and performance, a lack of willingness to engage in organizational citizenship behaviors, resistance to change, emotional withdrawal, absenteeism, job hunting and turnover, worry, stress-related health problems, and possible future protests, retaliations, and claims against the employer. As well, research has shown that worrying about future job insecurity leads to negative work attitudes and lack of trust in organizations.
As wrongfully dismissed employees, and the surviving employees who witnessed such dismissals, communicate with or move on to other firms, an organization’s reputation can be quickly tarnished with customers, suppliers, and potential applicants. Researchers have suggested that organizations that behave unethically may find themselves headed down a dangerous fiscal path, as damaged reputations are difficult to repair. Successful supply chain performance, for example, is based on trust between supply partners. An organization with a reputation of dealing with its own employees in an unfair or unlawful manner may find it difficult to persuade potential partners to enter into interdependent agreements.
A further casualty of damaged reputation is recruitment. Attracting highly skilled, qualified employees is an important component in an organization’s competitive advantage. Many companies use their reputation for employee treatment and social responsibility to attract quality applicants. Researchers have demonstrated that there is a positive and significant relationship between corporate reputation and job seekers’ intention to apply for positions and accept job offers in an organization. As well, firms with poor reputations for fairness may entice the wrong kind of employees: those who aren’t concerned with organizational trust because they expect to have no allegiance to the organization and consider it simply a short-term source of income and experience.
- Andersson, L. M. 1996. “Employee Cynicism: An Examination Using a Contract Violation Framework.” Human Relations 49:1395-1418.
- Covington, R. N. and Decker, K. H. 1995. Individual Employee Rights in a Nutshell. St. Paul, MN: West.
- Culligan, L. J. and Amodio, A. V., eds. 2004. Corpus Juris Secundum. Vol. 30. St. Paul, MN: West.
- Holloway, W. J. and Leech, M. J. 1986. Employment Termination: Rights and Remedies. Washington, DC: Bureau of National Affairs.
- Lind, E. A., Greenberg, J., Scott, K. S. and Welchans, T. D. 2000. “The Winding Road from Employee to Complainant: Situational and Psychological Determinants of Wrongful Termination Claims.” Administrative Science Quarterly 45:557-590.
- Morrison, E. W. and Robinson, S. L. 1997. “When Employees Feel Betrayed: A Model of How Psychological Contract Violation Develops.” Academy of Management Review 22:226-256.
- Robinson, S. L. 1996. “Trust and Breach of the Psychological Contract.” Administrative Science Quarterly 41:574-599.
- Rothstein, M. A., Craver, C. B., Schroeder, E. P., Shoben, E. W. and VanderVelde, L. S. 1994. Employment Law. St. Paul, MN: West.
- Rousseau, D. M. 1995. Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements. Thousand Oaks, CA: Sage.