Employment-at-will: Has the death knell officially sounded?

Employers in the U.S. have traditionally been able to terminate employees without notice or cause, but this established doctrine appears to be waning

A change in termination doctrine

The notion that an employee without an employment contract was an “at-will employee” who could quit or be legally terminated for any reason became a popular one across the United States in the late 19th century. By 1908, the United States Supreme Court recognized the doctrine and it became a fixture of employment-related common law.

Over time legislators recognized employers and employees were clearly not on equal footing. Eventually, the Fair Labour Standards Act and the Civil Rights Act provided the groundwork for protecting employees from discriminatory work practices.

Courts also became more active in protecting employees. One approach entailed carving exceptions into common law at-will employment. The three most prevalent themes to emerge focused on “public policy,” implied contracts” and “good faith covenants.” These exceptions have taken root, to varying degrees, in U.S. case law and legislation. Many legal analysts now conclude the at-will employment doctrine has suffered significant erosion. Given the prominence of employee termination rights in Canadian employment law, it will be interesting to see the fate of this different perspective on termination in the United States.

Many states in the U.S. have seized on the public policy principle, which is the principle of the law that no subject can lawfully do anything harmful to the public or against “the public good,” to craft exceptions to the at-will doctrine, particularly with respect to employment termination. But, in this context, what exactly is “public policy?” The majority of states have based their definition of public policy on state constitutions, statutes and administrative rules. Some state courts have recognized exceptions not explicitly anchored to those sources, while others have applied narrow exceptions limited to statutes expressly declaring they are exeptions to the state’s employment-at-will doctrine.

California was the first state to recognize a public policy exception to at-will employment. In 1959, the California appellate court held an employer could not discharge an employee-at-will for refusing the employer’s direction to commit perjury. This judicially crafted public policy exception, however, failed to ignite any immediate sparks in other jurisdictions. Recognition of the exception elsewhere came slowly. By the early 1980s, only 22 states had addressed the issue. During that decade, public policy exceptions gained momentum. State courts in Illinois and Wisconsin, for example, relied on public policy created by the courts themselves, as well as legislative provisions and administrative rules. Today, nearly every state has adopted a statutory or common law public policy exception to the employment-at-will doctrine.

The implied contract exception

This exception derives primarily from employer representations to employees. Courts scrutinize those representations to determine whether they create an implied contract for employment, regardless of whether a written employment contract already exists. For example, statements contained in an employee handbook may give rise to judicially enforceable implied contractual obligations.

One of the leading implied contract cases is Toussaint v. Blue Cross & Blue Shield of Michigan, decided by the Michigan Supreme Court in 1980. The employee was terminated after working for five years as a manager for Blue Cross and he sued for wrongful discharge. Though he did not have an employment contract for a definite term, he argued certain representations made by Blue Cross in its employment manual created an implied employment contract. The court agreed, finding the just cause provision gave rise to an enforceable implied contract if it created legitimate expectations of job security in an employee.

In many jurisdictions that recognize the implied contract exception, employers can preserve the at-will nature of employment relationships by specifically disclaiming the existence of any implied contract, expressly providing that the content of their employee handbooks does not alter the at-will relationship and unequivocally declaring the handbook’s content may be changed unilaterally by the employer at any time.

The covenant of good faith exception

The covenant of good faith exception implies a promise of good faith and fair dealing into every employment relationship. The California appellate court was the first to recognize this exception in Cleary v. American Airlines Inc. The court held that “the longevity of service by the (employee) — 18 years of apparently satisfactory performance” and “the expressed policy of the employer regardless of specific procedures for adjudicating employee disputes” gave rise to a duty on the part of the employer “to do nothing which would deprive the employee of the benefits of the employment bargain, precluding any discharge of such an employee by the employer without good cause.”

This sweeping proposition posed a threat to the continued existence of any employment-at-will because it would engraft a “just cause” or “good faith” requirement for all terminations. Perhaps for this reason, very few other states have followed California’s lead. Even California itself has retreated somewhat. Its supreme court has, on at least two occasions, curtailed the appellate court’s Cleary rule. In Foley v. Interactive Data Corp., the court subsequently disapproved of Cleary’s holding to the extent it permitted tort remedies in contract-based wrongful termination actions. Later, in Guz v. Bechtel National Inc., the court held that while good faith and fair dealing is implied by law in every contract, it exists merely to prevent one contracting party from unfairly frustrating the other’s right to receive the benefits of the agreement. Given the less-than-resounding support it has received, the covenant of good faith exception is the weakest of the “three major exceptions.” However, it remains the law in several states.

Despite predictions to the contrary, it appears “funeral arrangements” for employment-at-will may be premature. Without question, the doctrine has undergone considerable modification since the 19th century. It no longer affords employers the absolute power they once held over the conduct of their business enterprises and their employees and recent trends suggest erosion of the doctrine.

Employees continue to chip away at what remains. Deborah Ballum, in her 2000 article “Employment-at-will: The impending death of a doctrine,” said the increasing concern with privacy rights as “perhaps the most significant development with the potential to destroy the employment-at-will doctrine” and predicted the trend towards privacy protections would not be reversed by courts and lawmakers.

For now, there remains a strong undercurrent in some states, to hold fast to the notion “at-will” still means something. Consequently, it is still too soon to sound the death knell.

For more information see:

Toussaint v. Blue Cross & Blue Shield of Michigan (1980), 292 N.W. 2d 880 (Mich. Sup. Ct.).
Cleary v. American Airlines Inc. (1980), 111 Cal. App. 3d 443 (Cal. 2nd Dist.).
Foley v. Interactive Data Corp. (1988), 47 Cal. 3d 654 (Cal. Sup. Ct.).
Guz v. Bechtel National Inc. (2000), 24 Cal. 4th 217 (Cal. Sup. Ct.).

Peter J. Strelitz is a partner in Segal McCambridge Singer & Mahoney’s Austin, Texas, office. Arturo M. Aviles is a senior associate in Segal McCambridge Singer & Mahoney’s Austin office. David M. Walter of David Walter Law Firm PLLC is a solo practioner in Austin.

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