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The last two decades have witnessed an unprecedented assault on one of the last frontiers of free contract: the employment relationship. The ability of individuals to choose freely for whom they will work and who will work for them is being undermined by activist jurists and legislators and cheered on by statist academics. Skoppek traces this development in Michigan law, explains the breadth of harm it has caused, and argues strongly for change. 26 pages.
Employment freedom of contract is under attack. The last two decades has witnessed an unprecedented assault on one of the last frontiers of free contract, the employment relationship. The ability of individuals to freely choose whom they will work for and who will work for them is being undermined by activist jurists and legislators, cheered on by liberal academics determined to see public control of most aspects of private life.
Michigan has been in the forefront of this assault. While pretending to preserve "employment-at-will" freedom of contract, the courts of Michigan have made Michigan common taw a national beacon for public control of the employment relationship. Combined with one ofthe nation's most extensive array of state statutes circumscribing the employment relationship, Michigan can truly be said to have virtually eliminated employment freedom of contract.
The consequences of this public takeover of the employment relationship are becoming readily apparent. Michigan's courts are clogged with employment litigation, employers have turned defensive hiring and firing measures into a fine art, and the cost of doing business in Michigan, which was already high, has become prohibitive. Legal confusion reigns, as employers wait for the next edict from Michigan's activist Supreme Court.
The practical result has been the loss of millions of dollars in litigation costs and forfeited managerial opportunities. Michigan is losing business. Employers are leaving for states with more business-friendly legal environments, especially to the South. Out-of-state employers looking to expand their businesses are rejecting Michigan as a possible site. Employers willing to stay in Michigan are finding themselves steadily less competitive as more of their costs are lost in the mire of employment law rules and regulations.
Yet have Michigan's employees really gained anything? This paper will argue that the losses have far outnumbered the gains. The destruction of employment-at-will has not enhanced the employment setting, but instead burdened it with uncertainty, high transaction costs, and reduced opportunities for both employers and employees. The process by which employment-at-will has been eroded has been fueled by numerous myths about the virtues of publicly-controlled employment contracts – myths which upon closer examination have little reality to support them.
Myth: The labor market is a system of supreme employer power in which unfairly terminated employees have their economic lives devastated, with nowhere to turn. Employees are at the whim of all-powerful employers who determine the conditions and existence of employment. In fact, the American labor market is extremely mobile, exhibiting constant, vibrant bargaining between employees and employers. Employees exhibit great bargaining power to establish their pay and conditions of employment.
Myth: Employees need legal assurances of security in the employment setting in order to receive "fair" treatment from employers. Replacing employment-at-will with "good cause" rights ensures such "fair" treatment. In fact, the shift from private determination of the employment relationship to public determination simply shifts the power to decide the employment contract from the parties to judges, juries, administrators and legislators. There is no more assurance of "fairness" from these latter sources than can be achieved one-on-one between the employee and his/her employer.
Myth: Extensive employee access to the judicial system is essential in order for employees to have effective "rights" in the employment setting. Employees need the courts in order to have equal power with employers. In fact, judicial resolution of employment disputes dissipates employee power by imposing high transaction costs, great uncertainty about employment rights, and total dependence an attorneys. The supposed tyranny of the employer is replaced with the certain tyranny of the expensive lawyer. Judicial resolution of disputes also results in formalized, rigidly-adhered-to employment procedures and manuals which eliminate flexibility for either the employee or the employer, to the detriment of both.
Myth: The entire civilized world, with the exception of the United States, has established good cause employment rights. The good cause standard for employment must therefore finally be established in this country just to keep pace with the rest of the world. In fact, comparison to other industrial nations is misplaced. Remedies are extremely limited in most nations, and the context for employment dispute resolution is not oriented toward extensive litigation, but to quick determination of rights. For a comparison to be accurate, a complete change in the American system of dispute resolution would have to be accomplished first.
The recurring image conjured up by advocates for the demise of employment-at-will comes straight out of the fictional world of Sinclair Lewis and John Steinbeck. In this world, the brutal, mischievous boss is a callous monster, mistreating employees out of sheer personal spite. The employee is a virgin-pure hardworking saint, trying his/her best despite the many obstacles of low pay, unsafe work, and constant mistreatment in his/her path. There is no bargaining, no mobility, and no freedom of contract – there is only the master and the servant.
But this image does not comport with the reality of the American marketplace. The American economy is robust and growing. It has made American workers the best paid, most productive, economically well-off citizens in the world. Of course there are abusive employers. Of course there are limits on mobility and the ability to bargain. But these are the fringes of the system, the exceptions to the rule. One does not destroy an entire system of contract, with all of the resulting loss of freedom, just to address these aberrations.
This paper will argue that the abandonment of employment-at-will is a mistake. We will trace the history of employment-at-will law, with particular emphasis on Michigan's departure from the traditional path. We will examine a few of the statutory proposals and models that advocates have forwarded to replace employment-at-will, including the proposal of the National Conference of Commissioners on Uniform State Laws. We will also examine the financial and managerial consequences of departing from employment-at-will and discuss the pros and cons of replacing the traditional doctrine.
It is the ultimate goal of this paper to suggest that Michigan has erred by abandoning employment-at-will. It will propose a return to traditional free contract law, for the sake not just of employers, but also of employees. This paper is designed to join the debate about the future of employment contract law and suggest that the academic and judicial plunge toward publicly-controlled employment contracts is not the inevitable consensus path good public policy demands. This debate is not just a theoretical exercise. At stake are real business opportunities, real jobs, and the very future of Michigan's economy.
The American employment-at-will rule was developed in the 19th Century. It was a departure from the English common law rule that all employment of an indefinite nature was for one year, with each subsequent renewal also considered to be of one year's duration. The American rule instead viewed all employments of no definite period to be terminable at any time by either party. The basic rule was simply stated in the most quoted late-19th century case of Payne v. Western & Atl. R.R.:
(M)en must be left, without Interference to buy and sell where they please, and to discharge or retain employees at will for good cause or for no cause, or even for bad cause without thereby being guilty of an unlawful act per se. It is a right which an employee may exercise in the same way, to the same extent, for the same cause or want of cause as the employer. [1]
The employment-at-will rule became commonly known as "Wood's Rule", based on a 1877 treatise on master-servant relationships by Horace Wood. Wood provided a firm rule for all indefinite hirings which became the fundamental doctrine governing employment duration in the United States:
With us the rule is inflexible that a general or indefinite hiring is prima facie a hiring at will, and if the servant seeks to make it out a yearly hiring, the burden is upon him to establish it by proof. A hiring at so much a day, week, month, or year, no time being specified, is an indefinite hiring, and no presumption attaches that it was for a day even, but only at the rates fixed for whatever time the party may serve. [2]
Many explanations have been given for the adoption of the employment-at-will rule, from its being a reflection of the needs of late 19th century capitalism and laissez fairs economics to being a natural complement to the principle of freedom of contract. [3] Whatever the socio-politics, the consequence was clear. The employment relationship was to be established and governed exclusively by the will of the contracting parties, not by the will of the general public and its judicial and administrative mechanisms.
Employment-at-will struck a perfect balance. The parties could specify employment conditions and duration by explicit contract, which would then be enforceable in court. Without explicit contractual language specifying otherwise, an employer could terminate the employee at any time and an employee could leave the job at any time, without legal encumbrances. Employers had the flexibility to hire whomever they deemed most appropriate, and employees had the flexibility to seek more favorable employment.
Employment-at-will even achieved constitutional weight. In Adair v. United States, the United States Supreme Court in 1908 related liberty of contract and the Fifth Amendment to the employment contract by striking down a federal statute which barred the discharge of a railroad employee for union membership. [4] Seven years later, in Coppage v. Kansas, the Court struck down a Kansas statute which prohibited employers from demanding, as a condition of employment, that employees not become union members. The Court found that the statute was a violation of the 14th Amendment due process clause. The Court related due process to the employer's right to determine whom to hire. [5] With the U.S. Supreme Court thus constitutionally sanctioning the basic underpinnings for employment-at-will, the American rule achieved a common law dominance which it was to maintain deep into this century.
The solid wall of employment-at-will first started to crack in the 1930s, when the U.S. Supreme Court in effect removed the constitutional underpinnings of employment-at-will with the approval of the National Labor Relations Act in NLRB v. Jones & Laughlin Steel Corp. [6] This pathbreaking Act forbade employer discrimination against or coercion of employees because of union activity. Thus began the long and still-ongoing process of statutory exceptions to the employment-at-will rule. The Supreme Court was careful to note that the exception provided by the Act was very limited, permitting employer discharge in all other circumstances. In a related case, Associated Press v. NLRB, the Court went out of its way to emphasize the limited nature of the National Labor Relations Act exception:
The act does not compel the petitioner (employer) to employ anyone; it does not require that the petitioner retain in its employ an incompetent editor or one who fails faithfully to edit the news to reflect the facts without bias or prejudice. The act permits a discharge for any reason other than union activity or agitation for collective bargaining with employees. The restoration of (the terminated employee) to his former position in no sense guarantees his continuance in petitioner's employ. The petitioner is at liberty, whenever occasion may arise, to exercise its undoubted right to sever his relationship for any cause that seems to it proper save only as a punishment for, or discouragement of, such activities as the act declares permissible. [7]
Employment-at-will was thus still very much alive. The common law still recognized as equal the rights to hire/fire and to work/resign. These balanced rights were limited only by specific statutory exceptions. Nevertheless, the previously solid wall had suffered its first substantial crack, creating an opening for the federal Congress and state legislatures to impose their will and sense of proper behavior on the employment relationship.
Today, federal and state statutory law is filled with explicit exceptions to the employment-at-will rule. At the federal level, examples include the Fair Labor Standards Act, which prohibits discharge for exercising rights guaranteed by minimum wage and overtime provisions. [8] The Occupational Safety and Health Act of 1970 prohibits discharge in reprisal for pursuing safety hazards in the workplace. [9] Numerous federal statutes prohibit termination for exercising specific rights granted by those particular statutes. The most significant federal statutes limiting the right to discharge focus on the public policy against discrimination. The Civil Rights Act of 1964 prohibits discharge based on race, color, religion, sex or national origin and reprisal for exercising rights under the Act. [10] Similar provisions prohibit discharge under the Age Discrimination in Employment Act of 1967 [11] and the new Disabled Americans Act of 1990. [12]
Most states have also passed statutory limitations on the employer's right to hire and fire. Michigan has been particularly active in this regard, passing a state version prohibiting discrimination (with the inclusion of additional protected categories such as marital status, weight and height), a very strict affirmative action handicapper discrimination act (which also goes beyond the federal statute), a state payment of wages prescription, an act providing complete employee access to his files, a polygraph protection act, and a whistleblowers' protection act. [13]
Significant about these statutory proscriptions and prescriptions is their limited nature. Even such far reaching statutes as the federal and state civil rights acts still are explicit and focused in their limitations to the employer's right to hire and fire at will. They are the product of extensive public debate and reflect a broad public consensus, as opposed to the opinions of a few individuals sitting as judge or jury. We can look at each statute and know specifically what is permitted or prohibited. In a sense, the passage of statutory limitations on freedom of the employment contract acts as a reaffirmation of the common law employment-at-will rule.
But such is not the case with judicial Intervention. The real damage to employment-at-will has been committed to date through the intervention of liberal activist judges who think they know what is best for the parties In the otherwise private employment setting. Employment-at-will is in decline as the result of an ever-expanding array of theories based on "public policy" and implied contract.
Under the innocent-sounding rubric of "public policy" lurks a judicially-created monster capable of totally destroying freedom of contract in the employment setting. The following proposition sounds innocuous enough: An employer should be free to hire and fire individuals for any reason, but should not be permitted to so act when it violates basic public policy. This proposition seems quite sensible and just. After all, whyshould employers be able to commit anti-public acts at the expense of employees and get away with it? But careful consideration of this simple-looking proposition immediately compels one to ask, what is "public policy"?
The extension or limitation of the definition of what constitutes "public policy" is absolutely critical. A person could be discharged for many things: 1) for failure to violate a criminal statute, 2) for exercising a statutory obligation, 3) for exercising a statutory or constitutional right, or 4) for doing something the general public considers laudatory or not worthy of discharge. As one moves along this progression of potential improper reasons for discharge, the ability to detect the underlying rule beneath the exception becomes increasingly difficult.
The easiest category to accept as a "public policy" exception to employment-at-will involves employer demands that employees violate the law. The leading case denying an employer's right to discharge an employee for refusing to violate a criminal statute is Petermann v. Teamsters Local 396, a 1959 California decision. In that case, the employee, subpoenaed to testify at a legislative hearing, was instructed to commit perjury at the hearing. When the employee testified truthfully, he was discharged. The California court held that a discharge aimed at coercing an act specifically enjoined by statute gave rise to a cause of action, even though the perjury laws themselves provided no remedy to the employee:
It would be obnoxious to the interests of the state and contrary to public policy and sound morality to allow an employer to discharge any employee . . . on the ground that the employee declined to commit perjury, an act specifically enjoined by statute... (I)n order to more fully effectuate the state's declared policy against perjury, the civil law, too, must deny the employer his generally unlimited right to discharge an employee whose employment is for an unspecified duration, when the reason for the dismissal is the employee's refusal to commit perjury. [14]
Petermann, like the statutory prohibitions against discrimination, presents a compelling case for the creation of an exception to the employment-at-will rule. Other illustrative cases supporting the principle that the discharge of an employee for refusing to commit a crime is improper include Trombetta v. Detroit Toledo and Ironton Railroad Co., [15] where an employee alleged discharge for refusing to illegally manipulate pollution sampling results; Tameny v. Atlantic Richfield Co., [16] where the discharge allegedly was for refusing to participate in a price-fixing scheme; Ostrofe v. H.S. Crocker Co., [17] involving a refusal to participate in a conspiracy to violate the Clayton Act; and Sheets v. Teddy's Frosted Foods, Inc., [18] where the employee alleged dismissal for informing his employer that certain packaged goods were mislabeled (silence constituting a violation of Connecticut's Uniform Food, Drug and Cosmetic Act).
This first category of "public policy" is the simplest, most limited, and explicitly recognizable exception. It has clearly defined bounds. Simply put, an employee cannot be compelled, at the cost of his/her job, to violate statutory law. To a great extent, application of this exception is designed not so much to protect the employee, as to protect the public at large. Application of the exception helps to discourage attempts to violate the law.
Much the same can be said for the second category of "public policy" exception, where the discharge is not for refusal to violate a law, but for following a legal obligation. The exception still remains fairly limited, since the reference point remains statutory. The classic example is posed by Nees v. Hocks, an Oregon case where the employee was discharged for indicating her availability for jury duty over her employer's objections. The Oregon Supreme Court reasoned that "(i)f an employer were permitted with impunity to discharge an employee for fulfilling her obligation of jury duty, the jury system would be adversely affected. The will of the community would be thwarted." [19] Here too, the good of the public as a whole is protected as much, if not more, than the employee herself.
The public obligation concept is susceptible to being stretched beyond clearly defined statutory bounds. Palmateer v. International Harvester Co. [20] prohibited a retaliatory discharge for supplying police with information of illegal conduct by a fellow employee. Sherman v. St. Barnabas Hospital [21] prohibited a retaliatory discharge for resisting an illegal preferential hiring scheme under pressure of a strike threat by a participating union. Yet even in these cases, the exception remain fairly narrow. The individual is doing good social deeds closely connected with existing statutes which prohibit wrongful behavior.
However, with the third "public policy" exception – the exercise of a statutory or constitutional right – the narrow confines of proscriptive and/or prescriptive statutory law are abandoned and the exception begins to swallow the rule. Prohibiting discharge for the exercise of a statutory or constitutional right can theoretically encompass the whole universe of social activity. Almost any activity can be linked to the exercise of such a right. It becomes almost impossible to draw a line between what is and is not "public policy".
The most common case example involves the filing of a workers' compensation claim. In Frampton v. Central Indiana Gas Co., the Indiana Supreme Court relied on a general Indiana provision declaring that no agreement or "other device" shall operate to relieve an employer of its obligation under the workers' compensation system. The court referred to the humane purposes of workers' compensation and stated:
The Act creates a duty in the employer to compensate employees for work-related injuries ... and a right in the employee to receive such compensation. But in order for the goals of the Act to be realized and for public policy to be effectuated, the employee must be able to exercise his right in an unfettered fashion without being subject to reprisal. If employers are permitted to penalize employees for filing workmen's compensation claims, a most important public policy will be undermined. The fear of being discharged would have a deleterious effect on the exercise of a statutory right. [22]
Several responses to this court rationale come immediately to mind. First, the employee may have a right to workers' compensation, but is not legally obligated to apply. There is no compelling of a wrongful act. Second, the employee remains fully entitled to recover for workers' compensation. That right is not being interfered with. Third, if the legislature had wanted to prohibit terminations based on the application for workers' compensation, it could have done so within the workers' compensation statute. The legislature chose not to. Is it proper for the court to intervene where the legislature chose not to prohibit an act? All of these questions support the basic concern that prohibiting discharge for exercising a "right" is already too open-ended.
It is important to separate individual facts from the broader legal impact of adopting such an open-ended doctrine. Most of us would agree that a good employer should not firs a worker for seeking workers' compensation, or exercising other basic "rights". But if we are unwilling to ratify our preferences through the democratic process by establishing firm statutory language, why should we grant unfettered discretion to individual judges and jurors?
What activity can a clever lawyer not attach to some statutory or constitutional right? The Constitution provides protection for free speech, so does that mean an employee cannot be discharged for anything he or she says, no matter how derogatory of the employer or destructive of the work environment? Statutes regulating the sale of alcohol give adults the "right" to purchase alcoholic beverages. Does that mean an employee has a right to drink alcohol on the job? Similar examples could go on forever, as we list "right" after "right" after "right". Where does a court draw the line? It is at this point that the exception has become the rule, since the judiciary is free to recognize any exercise ofany "right" as protected. The whim ofa judiciary on a social responsibility mission becomes an intangible threat with every employee termination. The majority of courts have not taken this third step just yet. Many draw the line where administrative remedies are available. Others limit recourse to this type of "public policy" claim to situations where the employee is acting as an employee, as opposed to some other capacity, such as shareholder, environmental activist, or political volunteer. Many have simply rejected any recourse to the exercise-of-a-right exception. But will this current reticence on the part of many of the nation's courts continue?
The danger to individual freedom from an activist judiciary is carried to its extreme with the fourth category, where employees are permitted to challenge their discharge for acts the general public (or more specifically, the courts) find too laudatory or not worthy of discharge. The classic example every contemporary law student is introduced to is Monge v. Beebe Rubber Co., a New Hampshire case where the discharged employee alleged that she had been promoted to a higher paying position after her foreman told her that she could have the job if she was "nice" to him and that she was subsequently fired for refusing to date him. The New Hampshire Supreme Court found a cause of action in her claim, holding that "a termination by the employer of a contract of employment-at-will which is motivated by bad faith or malice or based on retaliation is not in the best interest of the economic system or the public good and constitutes a breach of the employment contract." At no point in its decision did the court articulate any constitutional or legislative basis for its holding or what should be in the public's best interest. [23]
This decision was followed by Fortune v. National Cash Register Co., [24] a Massachusetts case where a salesman with twenty-five years of service was discharged on the day after the employer received a $5 million order which could have resulted in a $92,000 bonus to the salesman. The employer had no legal obligation to pay anything to the salesman, and the court acknowledged that the salesman had received all commissions due under his contract. Nevertheless, the court found that the salesman had been terminated in order to avoid payment of the bonus, something the court just didn't like. So the court decided to forget about contract and just let its feelings govern the day. It deemed it appropriate to find a bad faith breach of the employment-at-will contract.
Both of these cases vividly present one of the toughest dilemmas posed by the common law, since the facts in both are so sympathetic to the plaintiff. Most of us would agree that what the employers did in these two cases was wrong. Most of us instinctively would like to do something to help the wronged individuals. Yet to invent legal theories to help them out, just because the facts in their particular cases are emotionally compelling, can have enormous long-term consequences which go tar beyond the sympathetic immediate facts at hand.
These decision are disturbing, not because of the immediate facts, but because of the uncontrollable theories they establish to cope with the immediate facts. These cases constitute the threshold to a complete judicial takeover of the employment relationship. There is no limitation of any kind on judicial Intervention, no reference to statute, no articulation of boundaries which might guide employer behavior. Instead, the court simply says, if we don't like a reason for termination, we'll hold you as the employer liable. Every employment contract becomes subject to ever-changing judge or jury standards of "fairness" and "good faith". A "covenant of good faith and fair dealing" is imagined in order to justify the desirable result. "Public policy" becomes nothing but a charade to cover up the exercise of unrestrained judicial will. The practical effect is to destroy employment-at-will and replace it with a "just cause" standard, since the absence of "just cause" can in almost every case be interpreted as bad faith.
By the time one has reached the fourth "public policy" exception, one also has to doubt whether the public interest is still the controlling factor. Whereas protection of the public is clearly identifiable in the first exception, where employers are prohibited from discharging employees for refusing to violate a statutory prohibition, it would appear that the primary goal of the fourth exception is merely to protect the economic interest of particular individual employees. Broad public good is replaced with the isolated imposition of fairness in particular cases. It consists of judges and jurors imposing personal morality after the fact, without reliable established legal foundation.
Just as certain courts have resorted to inventing "public policy" exceptions, other courts have invented contracts to circumvent the employment-at-will rule. Courts have turned their attention to verbal promises, policy manuals, personnel guidelines, job evaluations, dispute resolution procedures and other patterns of employer behavior to find the existence of contracts providing employees with "just cause" protection.
Judicial invention of contracts is indeed necessary for this exception to work, since one of the fundamental legal requirements of a true contract – mutuality of obligation (where each party is under a legal duty to the other) – is missing. Mutuality of obligation requires consideration (value) to be given by each party to the other in order to make the contract valid. In an employment setting where there are no explicit contractual provisions concerning conditions and duration of employment, the employee's consideration for the establishment of a mutually binding contract (whether for "just cause" or for employment of a certain duration or for any other specific conditions of employment) is missing. The employee is not obligated to work for the employer, and thus there is no consideration flowing from the employee to the employer to make such a contract binding. In short, there is no real contract.
So a court wishing to impose "just cause" or other contractual requirements upon the employer must engage in an act of fiction. It must invent a contract – imply a contract. The court must find that an employee's mere coming to work constitutes the necessary consideration for the right to such "just cause" or other employment benefit. Even though the employee never verbally or in writing came to an agreement with the employer on the duration of the employment or the non-wage and benefit conditions of employment, the court must find that the employee intended his or her mere daily appearance at work to be the consideration for just cause employment. By inventing this fictional consideration which was never contemplated by the parties, the court destroys the most fundamental and essential cornerstone of the traditional contract: that the contracting parties had a "meeting of the minds". The court must pretend that there was a meeting of the minds, even though in fact there never was.
This invention of contract is now utilized to varying degrees by the courts of many states. Before turning to the most egregious example, practiced by Michigan's activist judiciary, it Is appropriate to look briefly at the less extensive invention of contracts practiced in some of these other states. The favorite judicial source for implied contract promises is the policy manual or personnel guide. Examples of courts giving contractual status to such employer publications have become quite common. In WooIley v. Hoffman-La Roche, lnc., [25] for example, the New Jersey Supreme Court bound the employer to a personnel policy manual provision on termination which promised to discharge employees only for cause. In Duldulao v. St. Mary of Nazareth Hospital Center [26] the Illinois Supreme Court held that "an employee handbook or other policy statement creates enforceable contract rights" when the promise Is clear enough so that the employee would reasonably believe that an offer has been made and the handbook is distributed in such manner that the employee is aware of its contents. The employee must simply commence work after becoming aware of the handbook contents.
Some courts have gone further and found "just cause" protection even where the employer's materials provide no such explicit protection. In Pugh v. See's Candies, Inc. [27] the plaintiff had been employed by the defendant for 32 years, during which time he had worked his way up the corporate ladder from dishwasher to vice president, receiving many commendations. Throughout the period of his employ, the company maintained a practice of not terminating administrative personnel without good cause. On this evidence of a practice, the California Appeals Court concluded that the jury could determine the existence of an implied promise that the employer would not arbitrarily terminate the plaintiff.
Activist courts now look to everything from specific promises in specific situations to general imprecise statements of good intent to find contractually binding commitments on the part of the employer to the employee. The power of enforceability granted upon the recognition of an implied contract is used to bend and shape employer behavior to the will of the jury and the judge. It does not matter to the courts which impose such implied contract law on private parties that the parties never intended to contract – that there never was a true "meeting of the minds". These courts instead act after the fact, contorting common taw principles in order to achieve their idea of good results.
Fortunately, the willingness of courts to impose a contract merely on the basis of general workplace atmosphere and broad patterns of fair dealing is still very much a minority view. Just like most courts have been unwilling to expand tort taw to cover the employment relationship with "covenants" of fair dealing and general niceness, most courts have limited their implied contract holdings to concrete written representations, to the extent that they have been willing to imply a contract at all. It may be that courts have begun to recognize that their intervention into the employment relationship has become too intrusive and that firm new lines need to be drawn. Any such acknowledgment is a step in the right direction. Nevertheless, the state-to-state patchwork of conflicting rules that such line drawing would produce is disturbing, and it certainly does not assist employers in states with liberal activist judges, such as Michigan.
In the state of Michigan, employment-at-will is nearly dead as a legal doctrine. The Michigan judiciary has systematically attacked the foundations of the doctrine, supplanting private contract and freedom of choice with the erratic imposition of judicial will. As a result, Michigan has become a rather dubious leader in the field of employment law. Everyone from liberal academics seeking publicly imposed "justice" in the workplace, to public policy makers searching for ways to give more economic leverage to employees, to plaintiffs attorneys seeking the quick and easy big financial score, Michigan is the legal beacon. The seminal case producing such reactions is Toussaint v. Blue Cross & Blue Shield of Michigan. [28]
Plaintiff Toussaint was a middle management employee with five years service when he was terminated. During the course of his preemployment interviews, Toussaint asked about job security and was told that he would be with the company "as long as I did my job". He was also handed a personnel policy manual which stated in part, "it is the policy of the company to treat employees leaving Blue Cross in a fair and consistent manner and to release employees for just cause only." The policy manual also provided for complaint procedures and disciplinary procedures. In handing Toussaint the manual, an officer at Blue Cross reassured the plaintiff that if he came to Blue Gross, he "wouldn't have to look for another job because he knew of no one ever being discharged".
The Michigan Supreme Court responded to this lawsuit by establishing a new implied contract cause of action. In a 4-3 decision, the Court held that "employers may have an implied contractual obligation not to discharge employees without just cause, based on expressed terms of an employment agreement or an employee's legitimate expectations derived from the employer's policy statement." Going further, the Court found that "oral statements made during a hiring interview to the effect that an employee would remain at work as long as he did his job" was sufficient to create a binding contract. Going still further, the court focused on the "environment" of the workplace:
It is enough that the employer chooses, presumably in his own interest, to create an environment which the employee believes, whatever the personnel policies and practices, they are established and official at any given time, purport to be fair, and are applied consistently and uniformly to each employee. The employer has then created a situation "instinct with obligation." [29]
Traditional contract law was thrown out the window. The Court went so far as to point out that "(n)o pre-employment negotiations need take place and the parties' minds need not meet on the subject". The Court can simply invent the contract from any events, statements, and "environment":
We hold that employer statements of policy ... can give rise to contractual rights in employees without evidence that the parties mutually agreed that the policy statements would create contractual rights in the employee, and, hence, although the statement of policy is signed by neither party, can be unilaterally amended by the employer without notice to the employee, and contains no reference to a specific employee, his job description or compensation, and although no reference was made to the policy statement in preemployment interviews and the employee does not learn of its existence until after his hiring.
It does not take much imagination to grasp what this revolutionary, radical decision unleashed. In a torrent of subsequent cases, the entire employment-at-will foundation upon which Michigan employment law was based was thrown into disarray. Suddenly, every discharged employee could sustain a full trial claiming unjust discharge. Any reference point, whether it was a statement made by someone somewhere at some time, or a slip of paper, or a pattern of behavior, was enough to require a jury trial.
Rather perversely, the Court insisted that Michigan was still an employment-at-will state. Employers would simply have to inform their employees that they were employed at will. Yet Michigan courts have held that whether disclaimers are enforceable can be a question of fact where factors reflecting a contrary intention exist. In Dalton v. Herbruck Egg Sales, Co., [30] plaintiff admitted reading and understanding a disclaimer in his handbook that he could be terminated "at any time ... without specific cause or reason." Yet the handbook also contained a progressive discipline policy. The Court of Appeals found that the tenor of the entire handbook was that all employees would be treated fairly and justly in accordance with the procedures set forth therein, and thus a jurycould decide to disregard the disclaimer. In Schipani v. Ford Motor Co. [31] the Court of Appeals held that an employer's oral representations regarding duration of employment could override an express disclaimer in written materials.
Recent doubt has also been cast on the ability of the employer to change previously established Implied contract rights. In Bankey v. Storer Broadcasting Co., [32] the Michigan Supreme Court reaffirmed that a written "discharge for cause" provision could be revised by a later writing, provided the employee was given "reasonable notice". But in a companion case, Bullock v. Automobile Club Insurance Association of Michigan [33] the Court indicated that implied contracts, once created, may create a legitimate expectation which subsequent employer policy changes cannot simply reverse. In Bullock, the plaintiff claimed an oral promise of discharge for cause only. The defendant subsequently issued a policy manual indicating employment-at-will. The Court indicated that in the right factual circumstances of "reasonable expectation", the subsequent change could be considered only an offer of a contract change, permitting a jury to conclude that the previous implied contract was still enforceable.
Even the Michigan courts have set limits on their new doctrine. In Schwartz v. Michigan Sugar Co., [34] and subsequent cases, the courts have insisted that "a more subjective expectancy on the part of employee" is insufficient to create the "legitimate expectation" necessary to form an enforceable contract. Actual conduct by the parties, oral statements, or written materials are at least necessary to form an implied contract. In addition, the more conservative federal courts (especially the Sixth Circuit) have engaged in guerilla warfare against the Toussaint doctrine, taking every opportunity within the guidelines established by the Michigan Supreme Court to limit the impact of the implied contract approach to the employment relationship. [35]
Yet despite the efforts of the federal courts and certain Michigan judges to establish boundaries within which the implied contract doctrine can operate, the doors to moment-by-moment courtroom invention of contracts have been inalterably opened. The particular facts in a case can always be construed to help the sympathetic plaintiff or punish the less than likeable defendant. An employer can take all the care in the world to issue the correct employment-at-will language, conduct the most precise job evaluations, and adhere to all the proper hiring procedures, and still have an implied contract imposed, merely because a jury somewhere thought that a discharge was not fair under the circumstances.
Needless to say, the Michigan courts have not just limited themselves to the invention of contracts. They have also resorted to the "public policy" theories to enhance their ability to interfere with the employment relationship. When even implied contract law fails to provide relief to a discharged employee, the court can always turn to the new "fairness" world of "public policy" in order to punish and manipulate the employer.
In Renny v. Port Huron Hospital, [36] the employer did everything right from the standpoint of implied contract. The plaintiff had signed an Acknowledgement and Agreement stating that she had received a copy of the hospital handbook, had read and fully understood the contents, and agreed to abide by the rules and regulations contained therein. Employees were expected to read the handbook carefully and become familiar with its contents. The handbook stated explicitly that management had "the sole right to manage and operate the hospital." Among the provisions in the handbook was an optional grievance procedure. Plaintiff Renny, a registered nurse, agreed to use that procedure to appeal her discharge for operating room irregularities. A peer review committee consisting of three supervisory and three non-supervisory employees which she had selected from a group of qualified volunteers ruled against her.
Renny nevertheless challenged her termination in court. In a bizarre twist of logic, the Michigan Supreme Court ruled in her favor, first by finding that the existence of the grievance procedure created a good cause employment contract, and then by holding that the grievance procedure provided by the hospital was simply not fair enough. The Court hold that a good cause employment contract requires certain procedural rights and protections which the hospital had failed to provide. It didn't matter that the hospital was under no obligation to establish a grievance procedure. It didn't matter that Renny voluntarily chose to use the grievance procedure. The Court simply took it upon itself to pass judgment on the procedure on the basis of its own arbitrary sense of fairness.
Not only did this decision severely limit the ability of Michigan employers to resolve workplace disputes outside of the courtroom setting by requiring complex, high cost procedures which make implementation of a grievance procedure prohibitive, but it also imposed a significant limitation on the ability of the employer to set even the most basic conditions of employment. For every rule and procedure established by the employer to run the workplace, the Court simply takes it upon itself to impose its own arbitrary standard of "fairness", accepting or rejecting each rule or procedure regardless of the actual contractual choices of the parties. The will of the parties is dismissed and replaced with the personal will of the judge. At this point one must ask, who is the real employer? Has the Court decided to substitute its standards of management for those of the employer?.
The "public policy" exception also reared its intrusive head in Coins v. Ford Motor Co., [37] where the Michigan Court of Appeals decided that a discharged employee could bring a tort action claiming unjust discharge for exercising "rights" outside of the immediate employment setting. Goins was discharged, according to the employer, for falsifying his medical history form. The plaintiff had failed to state on the form that he had sustained a work-related knee injury while previously employed with another company. In filing a wrongful discharge suit against Ford, Goins argued that the company had in fact not discharged him for filing a false form, but instead for filing the workers' compensation claim with the previous company. The court accepted Goins' argument, arguing that the exercise of a public policy "right" prohibited Goins' discharge, even though the right was exercised in a setting totally unrelated to the employment at hand.
The practical effect of this two-pronged judicial attack on the freedom of the employment contract is that employment-at-will is virtually dead in Michigan. Each judge or juror need only turn to his/her own sense of what is fair, and then manipulate the facts in the case to suit his/her needs. If the facts permit the invention of an implied contract, this technique will be used. If the facts are too flimsy to support a contract, then "public policy" will do. The actual intent of the parties becomes irrelevant.
Judges and juries have become managers in Michigan's workplace, second-guessing the decisions of both employers and employees. No private contract between an employer and his/her employee is ever completely safe from after-the-fact alteration. Every workplace decision is subject to an appeal to the "instincts" of courtroom participants. To liberal academics, public activists, and income-hungry lawyers, such a system of governmental intervention may indeed offer an ideal model for the future of employment law, but it has little to do with the American tradition of contract and freedom of choice.
The judicial attack on employment-at-will has been accompanied by strong academic and political activity designed to replace the traditional doctrine with "just cause" protection. The scholarly chorus in favor of abrogating employment-at-will had its roots in two groundbreaking articles, one by Professor Lawrence Blades, advocating judicial development of the tort of "abusive discharge" as a limitation on employment-at-will, [38] and one by Professor Clyde Summers, calling for legislative action to protect employees against unjust discharge. [39] Many of the "public policy" exceptions crafted by liberal state courts have their seeds in Blades' argument that employer power exercised with ulterior or wrongful motives should give rise to a common law cause of action. Now, many of the legislative initiatives designed to protect individual workers may find similar stimulation from the work of Summers.
Summers argued that legal protection against unjust dismissal should be built upon the standards and procedures established within the existing labor arbitration system. The "just cause" standard developed within the collective bargaining setting could be used, as could the cadre of arbitrators nurtured under that system. The state would pay the costs. All employees, both public and private, would be covered after a uniform six month probationary period (unless an explicit contractual term were agreed to instead). Small employers would be protected by having arbitrators take the "close personal relationship" factor into account. The statute would reach all forms of disciplinary action, including demotion, reduction in pay, reduction in seniority, assignment to undesirable work, and forced resignation. In cases of economic layoffs, objective standards of seniority, age, training, breadth of skill, past productivity, and family responsibilities could be used. Reinstatement, back pay, and damages would all be available as remedies.
Summers concludes his advocacy piece with a classic socialist call for public intervention in the private lives of individuals in the name of "justice". This summation, which bleeds across the page with compassion, is worth noting, since it represents well the social and economic view of the enemies of employment-at-will:
It should need no argument in our time to demonstrate that all employees should be protected from arbitrary and unjust dismissal. Almost every other major industrial country now recognizes that employees are entitled to at least this minimum measure of security in their jobs. In this country we have also recognized that this protection is an essential element of industrial justice: unions and employers have manifested their acceptance of this principle in the most concrete fashion possible, by including just cause clauses in their collective agreements and vesting arbitrators with binding authority to protect employees from unjust discipline. For most employees, their job is the most valuable thing they possess; it is not a figure of speech but a statement of economic and social reality to say that employees have property rights in their jobs. Such valuable interests have a compelling claim to legal protection. Just as unions have provided legal protection by contract for many employees, society should provide legal protection by statute for other employees.
In the last five years, the introduction of legislative proposals limiting "wrongful discharge" have become common. The AFL-CIO Executive Council has formally endorsed the concept of wrongful discharge legislation, and the American Bar Association is now seriously looking at the statutory alternative. So far, only one state has enacted a wrongful discharge statute. In 1987, Montana preempted all prior common law remedies with the Wrongful Discharge From Employment Act. [40]
Montana's act is remarkably brief in structure, prohibiting "wrongful discharges" 1) in retaliation for an employee's refusal to violate public policy or for reporting a violation of public policy, 2) in violation of express provisions of an employer's written personnel policies, and 3) for reasons other than good cause after the employee serves any probationary period. "Good cause" is defined as "reasonable job-related grounds for dismissal based on a failure to satisfactorily perform job duties, disruption of the employer's operation, or other legitimate business reason" – a definition which should keep Montana's lawyers heavily-employed for many years. Plaintiffs are entitled to recover up to four years of lost wages and fringe benefits (with interest) from the date of discharge. Punitive damages are recoverable if the plaintiff can show actual fraud or malice. Arbitration of claims is optional, but attorneys fee awards are provided for against the party declining to arbitrate.
The Montana statute has been upheld against claims that it denies the right to full legal redress and to equal protection. [41] The precedent has thus been set that statutes may be used to altar common law causes of action, remedies, and redress in the employment setting.
Most of the bills which have been introduced in various states follow much the same pattern. Their intent is to publicly interfere with private employment contracts, forcing notions of fairness and justice upon the rights of the employer. All exhibit a distrust of the free market, the ability of the employee to function freely and with mobility in that market, and the propensity of employers to make rational and reasonable employment decisions on their own without the "help" of legal guidelines. All insist on using sweeping approaches to deal with perceived problems on the fringes.
For example, Senate Bill 72, introduced in Massachusetts by Senator Costello in 1989, states in its purpose section that "it is in the interest of the commonwealth to protect employees against arbitrary dismissals and to encourage fairness and equitable treatment in the workplace". It would prohibit the constructive or actual termination of any non-managerial /supervisory employee employed more than six months and not covered by a collective bargaining agreement "without just cause", sending all disputes not resolved in mediation to arbitration.
Senate Bill 282, introduced in California by Senator Bill Greene, would establish a Justice and Dignity in Employment Act. The act would prohibit the discharge of a 6-month employee except for just cause, very narrowly defined as including but not limited to excessive absenteeism or tardiness, loafing or sleeping on the job, leaving work without permission, fighting, insubordination, using profanity, or abusive language to supervisors or to other employees, falsifying records, theft or dishonesty, incompetence, gross negligence, or carelessness, gambling, possessing or using drugs or alcohol at work, or reporting to work under the influence of drugs or alcohol. The bill would require detailed notice to the employee of the reason for discharge, as well as mediation and arbitration of any dispute.
In an interesting twist, Senate Bill 115, introduced in California by Senator Rosenthal in 1988, would simply prohibit any employer from asking any employee or applicant for employment to sign any agreement which would specifically permit the employer to dismiss the employee "at will", for any reason or no reason at all, thereby statutorily destroying the employer disclaimer defense.
A somewhat less intrusive Senate Bill 222, introduced in California by Senator Beverly in 1989, would prohibit 5-year employees making less than $100,000 per year from being terminated without good cause (defined as "a legitimate business reason ... (i)ntended to be less restrictive on management than just cause"). It would prohibit 3-year hourly or nonsupervisory employees making less than $15,000 per year from being discharged without just cause (defined as "a reason or reasons which a reasonable employer, in the factual context in question, would find sufficient to justify discharge"). It would require use of California's State Mediation Service, followed by optional arbitration.
Michigan too has seen proposals for the imposition of "just cause" termination requirements on private employment relationships. House Bill 5155, introduced by Representative Perry Bullard in 1983, would have given all non-union employees good cause employment protection, utilizing a new state arbitration system to resolve disputes.
All of these legislative proposals would affirm in statutory law what activist courts in many states have to a large extent already imposed through common law. They would make concrete and universal the shift from private determinations of the employment relationship to public determinations, where each jury or judge has the power to decide, based on shifting notions of fairness and justice, who will work for whom, and under what conditions.
Given the numerous and varying exceptions to the employment-at-will doctrine already crafted by many of the nations' courts, it may be fair to ask whether a statute prohibiting unjust discharges might not be a better solution for both the employee and the employer. If there is a confusing quilt of state laws, uncertain standards, expensive litigation and enormous damage awards, isn't a stable, uniform statutory scheme preferable?
It is in the context of this question, where a statutory abrogation of the employment-at-will doctrine is seen as a way to balance the interests of employers and employees, that the National Conference of Commissioners on Uniform State Laws (NCC) has explored the feasibility of recommending a uniform act to the states. The road taken by the drafting committee has been a rocky one. Interest groups having a financial stake in the issue (especially lawyers) have consistently expressed strong objections to any proposal daring to strike a balance between employer needs and employee desires.
The essence of the proposal has been to provide "good cause" protection against discharge for employees, while sharply limiting the range of available remedies to reinstatement, with or without backpay, and severance pay when reinstatement is unfeasible. Compensatory and punitive damages are eliminated. Attorneys' fees are permitted prevailing plaintiffs. "Good cause" is defined to emphasize management's right to make legitimate good faith business decisions and react to changing economic conditions. Employers are permitted to contract with individual employees for a continuing "at-will" status, as long as the employee is guaranteed a fixed minimum amount of severance pay, graduated according to length of service. Subsidiary tort claims arising out of a termination are extinguished. Arbitration is preferred.
The NCC draft committee proposal discussed in 1990 would cover all workers who work at least 20 hours per week (approximately 90% of the workforce) and who work for employers with 5 or more employees. Draft committee staff informed the committee that the 5-or-more-employee standard would eliminate 62.1 % of the nation's companies, but would only disqualify 8% of the nation's workforce. Small employers would retain greater discretion, while the overwhelming majority of workers would be protected.
The logic behind this balancing scheme is simple. On the one hand, employees should be given job security and protection from employer arbitrariness. On the other hand, employers cannot be subjected to substantial liability once all employees are given protection. Employers must retain enough discretion to be able to run their businesses effectively. Litigation must be avoided as much as possible, with disputes resolved as quickly and inexpensively as possible, for the benefit of both sides.
If one assumes that employment-at-will has been defeated, this scheme of uniform full "good cause" protection, with strictly limited remedies, offers a better balance than the common law, providing substantially more certainty than a system of hit-and-run judicial intervention. It still permits constant public intervention into the employment relationship, with shifting interpretations of what is "reasonable" and/or a "legitimate good faith business decision". But at least there is a uniform definitional standard, with the focus of employers and employees concentrated on one clearly identifiable law.
However, the assumption of employment-at-will's defeat may be premature. The doctrine may in fact not be quite dead yet. Freedom of contract and free market economics may still have some life left when it comes to the employment relationship. If employment-at-will has a chance to survive, the NCC approach is not yet appropriate.
The replacement of employment-at-will with "just cause" and ephemeral "public policy" standards has both financial and managerial consequences. These consequences impact not just the employer, but also the entire employment market, affecting the income and opportunities of employees as well. Although the most obvious costs involve litigation and avoidance, there are also significant intangible costs to employers and employees caused by the change in managerial behavior that results when a "just cause" system is in place.
What are the dimensions of a "just cause" system? In an early analysis of the data involved in granting "just cause" protection to employees, Professor Jack Stieber of Michigan State University estimated that approximately 2.3 million private-sector employees not covered by collective bargaining agreements were discharged In 1977, of which about 1 million were not probationary employees. [42] Using these figures, Nathan Lipson and J. Douglas Korney made some estimates of the potential cost of granting "just cause" arbitration rights to the nation's non-union employees. [43] If only half of the discharged employees utilized a state-financed arbitration system, the cost of such arbitration (using average 1981 costs) would have amounted to $566 million in 1982.
Given the decrease in union membership and the increase in jobs stimulated by the Reagan economy, as well as the increase in arbitration costs, these figures would be substantially higher today. And these would only be the costs to government. Even greater costs would be associated with attorneys for the parties, preparation time, lost work time, and similar transaction costs, as well as (most significantly) the payout of awards, much of it for periods of time when the parties were waiting to arbitrate their disputes. Given the many billions of dollars such a system would remove from the productive economy, one needs to ask whether society would benefit from the imposition of universal "just cause" arbitration. Of course, these costs need to be compared to current litigation costs – costs which threaten to increase rapidly as additional jurisdictions succumb to the temptation to craft exceptions to or eliminate employment-at-will.
The litigation costs associated with wrongful discharge are already staggering. According to a 1987 Newsweek article, 72% of the employees who brought wrongful discharge actions between 1980 and the time of the article recovered damages, with an average award of $582,000. [44] Juries simply favor discharged employees. Reviewing various surveys in 1988, David J. Jung and Richard Harkness [45] found estimates of how often plaintiffs win ranging from 60% to nearly 80%, with average awards ranging from $425,500 to $582,000. Their own study revealed a 70% plaintiff success rate, with an average award of $486,812. The median award was $124,150. In an interesting cost calculation, the authors took into account the 30% of cases employers win, to arrive at an average "expected award" of $342,377.
A Rand Institute for Civil Justice study [46] released the same year analyzed 120 California wrongful termination jury trials between 1980 and 1986 and found plaintiffs victorious in 68% of the cases, with the average jury award over $650,000. Of that average amount, 40% was for punitive damages. Half of the plaintiffs were awarded more than $177,000. The study also found that only about 59'0 of all cases go to trial, suggesting staggering sums paid out by employers in settlements.
Such figures indicate that wrongful discharge cases are very much in the mainstream of the contemporary litigation mania. Based on the famous 1987 Rand study of trends in jury trials and verdicts, [47] which revealed that the average award in San Francisco and Chicago was $302,000, it would appear that wrongful discharge litigation does not offer a category which is somehow less costly or market-threatening. In fact, the average figures ranging from $425,000-5650,000 indicate that wrongful discharge litigation is one of the more expensive areas of courtroom combat.
Wrongful discharge litigation may be less risk-intensive than some other flashy areas of tort litigation. In comparing the Rand figures with their own research, Jung and Harkness [48] revealed a "curious amalgam". Although the median award in wrongful discharge cases is similar to medical malpractice cases, for example, the average is less than half as large. Product liability cases also average more than twice as high as wrongful discharge cases. But the median wrongful discharge figure of $124,150 is twice as high as the median for all cases, at $62,000. In short, wrongful discharge litigation is a dangerously expensive threat to the nation's businesses.
Furthermore, the danger of the extremely large wrongful discharge award should not be minimized. One of the most significant factors affecting the settlement value of cases is the risk of an extremely high award. The wrongful discharge field of law has seen many staggeringly high awards. Single individuals have received jury awards covering actual and punitive damages as high as $20 million, $4.7 million, $3.25 million, and $2.57 million. [49] In fact, according to the 1990 NCC Draft Report, "jury awards exceeding $1 million have been common." [50] With the threat of such massive awards hanging over the heads of employers, the settlement values of cases can be quite substantial.
The NCC Draft Report cites the estimate that 150,000 to 200,000 American workers would have a legitimate claim under a "good cause" standard each year. The value of these claims in total employer payouts would be too speculative, but reference to the studies on average awards indicates a multi-billion potential loss to employers in payouts alone. If each payout cost $100,000 (a not unreasonable figure), the payout would total $20 billion annually. Of course, one would assume that the existence of universal "good cause" protection would substantially reduce the number of employees terminated each year. In fact, in a theoretical world, none of the 200,000 workers who would have a legitimate claim would be fired, since employers would simply not act wrongfully in the face of such severe legal sanction. However, since we live in both a real world and a litigious one, it can safely be assumed that the majority of so-called legitimate cases would still be around, imposing their substantial costs on American employers.
In addition to the high cost of awards, there are of course the equally substantial transaction costs, especially for attorneys. According to the Rand wrongful discharge study, [51] defense billings for discharge cases add up to over $80,000 for an average case. A typical 1987 case involving a potential award of $1.5 million would cost almost $250,000 to defend. These fees are rising between 15 and 24 percent annually. With costs running this high, the settlement value for discharge cases naturally goes up as well. After all, if a case will cost $80,000 to defend, it will take a great deal of dedication to principle (or a legitimate fear of encouraging additional suits) to avoid settling for an amount less than that.
The employee also pays. The Rand study reveals substantial loss to suing employees. With an average final payout of $208,000 per case (after appeals have reduced the average jury award), plaintiff attorneys are taking home about $83,000 per case (using the standard 40% contingency fee figure). The average plaintiff employee only receives about $125,000 when all is said and done, even though total costs have exceeded $289,000. Amazingly, the $164,000 in transaction costs are 319'o higher than the payout to the plaintiff employee who initiated the suit. The cost of the suit makes up 609'a of the total financial payout. This certainly explains why both defense and plaintiff attorneys vigorously fight all efforts to limit access to litigation for wrongful discharge claims. It also shows quite convincingly that the current system of courtroom litigation does not serve the interests of employees very well.
From the standpoint of transaction costs alone, the current system of piecemeal recourse to courtroom litigation makes little economic sense, ft keeps the world's largest per capita force of lawyers employed, but does little to enhance the economy or make American business competitive with other nations. Any shift to full "Just cause" arbitration rights appears to be equally costly. The transaction costs may be reduced, but the overall costs of discharge may increase substantially. Employment-at-will avoids almost all of these costs. From the standpoint of litigation costs alone, and in the context of the great risk and loss of time that discharged employees must incur, the current system offers insufficient reward to employees.
The oft-cited truism that the United States is the only industrialized nation in the world which fails to provide some form of uniform "good cause" protection fails to offer any useful guidance or support. It is in fact a quite deceptive truism. In the first place, it must be noted that a comparison between the highly litigious environment of the United States and other industrialized nations, which all make very spars use of the courtroom, is a case of comparing apples and oranges. The American penchant for filing a lawsuit at the slightest provocation, which according to the American Bar Association enables 713,456 attorneys to practice law in the U.S., filing one private lawsuit for every 15 Americans (16.6 million private civil suits filed in state court every year), [52] cannot be compared with the stable environments of the other industrialized nations, especially since in these nations the courtroom loser must pay the costs of the winning party.
For example, it would be most inappropriate to compare the combative American labor environment with that of Japan. The Japanese system relies heavily on the notion of "life-time employment", but this comes in the context of weak loosely-federated unions, a strong identity of each enterprise-specific union with the corporation, and complete employee loyalty to his/her employer, with an extremely dominant preference for cooperative negotiations to solve all employee/management problems. [53]
Furthermore, "(w)hile statutes in several European countries boldly declare an employee's right not to be unfairly dismissed, labor courts applying the statutes have given very modest awards that serve principally as a balm to the employee's wounded pride." [54] The author of this quote, Professor Richard Power, points out that European courts seldom order reinstatement even in unionized employments. Another study notes that back pay is usually limited to a brief period and that short notice (of as little as 30 days) will often suffice. [55]
More ambitious employee protection laws have proven quite problematic. Great Britain, for example, established an industrial tribunal system for all claims of unjust dismissal. In 1982 alone, more than 40,000 applications were made for tribunal hearings, mostly for unjust dismissals, causing employers to complain that the system deters them from dismissing inefficient workers and from working for productivity gains. Meanwhile, labor unions are distressed by the severe inefficiency of the system. A successful claimant may be awarded up to $32,000, requiring employers to procure expensive insurance costing an average $20 per employee annually. Experts estimate that the cost to a company for defending itself at a one-day hearing, in time and legal fees, can reach $2000. [56]
In 1975, Portugal adopted a system under which nearly all dismissals must be reviewed by labor courts. The Wall Street Journal reported:
(E)mployers have found dismissals for cause difficult to prove in the courts. Workers who prevail may be reinstated with full back pay – often several years' worth – and often become sources of agitation after returning to work. Employers say that they would rather put up with absenteeism and low productivity than undergo the time and expense of the labor courts. [57]
One of the few systems of law that seems to be working without high cost and systematic damage to the economy can be found in Canada. The Province of Ontario, for example, uses the euphemism of a "reasonable notification period" to resolve discharge disputes. Using a fairly loose definition of what constitutes good cause for dismissal (focusing on legitimate business reasons), the common law of Ontario will provide for at most two years of severance pay, based on such factors as the reason for dismissal, length of service, age, market conditions for the job in question, and inducements at time of hiring. The system carefully balances limited job security protection for the employee with a strict limitation on damages. [58] Note how very similar this system is to the Draft NCC Uniform Wrongful Termination Act.
The lesson which can be derived from reference to the "rest of the Industrialized world" is thus quite contrary to what the advocates of "just cause" employment rights desire. Foreign systems work to the extent that they limit remedies and litigation opportunity. To the extent that they invite formal dispute, they create significant cost and managerial problems. Europe may in fact pull back from some of the more extreme grants of unjust discharge protection, especially with the advent of a more economically-unified European Common Market beginning in 1992. A successful system, as experienced in Ontario, requires a scrupulous balance between the interests of employees and employers. Is such a balance achievable in the litigious United States? If the answer is no, the abandonment of employment-at-will can only spell significant economic/market loss.
Litigation costs are only the most obvious costs. The consequences of abandoning employment-at-will also have significant impact upon the management of a business and the opportunities of employees. Everything from the employer's ability to manage the workplace, to the quality of the workforce, to the establishment of work incentives and rewards, to employee market mobility are affected by the straightjacket imposed by "just cause" protection. It is at the level of management and opportunity that some of the most significant and substantial costs are incurred.
To begin with, an unavoidable fact constraining all employment decisions when "good cause" or "public policy" protections exist is that employers and employees cannot at any one time know exactly which termination decisions are "legal" and which are not, since such determinations are always reached after the fact. Thus, employers desiring to avoid litigation inevitably exhibit more caution than the law in theory really requires. If there is uncertainty about the propriety of a termination, the risk-averse employer is likely to not terminate. With this comes loss to the operations of the employer, and loss to other employees. Managerial discretion, business efficiency, and employee opportunity are all negatively affected.
A significant microeconomic analysis of the impact of shifting away from employment-at-will was made by Professor Jeffrey Harrison. [59] Harrison found that the derogation of employment-at-will has effects on both the supply and demand sides of the labor market. As the old doctrine recedes, the cost of labor to the employer rises, causing the demand for labor to contract. In addition to an overall loss in jobs, the result is lower wages and less labor quality.
This becomes particularly problematic for the very workers whom the advocates of "just cause" employment are most interested in helping, namely workers caught in a labor market with inelastic supply and elastic demand. According to Professor Narrison, the increase in job security brought about by "just cause" protection "is likely to be paid for disproportionately by workers with low skills and few alternative employment opportunities. . . (T)he less affluent may pay what amounts to a regressive tax in order to finance the promotion of the public interest." [50]
Professor Narrison's analysis partially rebuts one of the myths surrounding the adoption of "just cause" protection. Many "just cause" advocateswill advance the argument that the costs of being forced to employ certain employees who don't work at maximum effectiveness is offset by the superior performance given by all of the remaining employees who bask in the knowledge of job security. Yet the experience of unions and civil service employees indicates quite the contrary. With job security comes the knowledge that maximum output on the job isn't necessary – that the job is guaranteed except in cases of complete ineptitude or wrongful behavior. Instead of an incentive to work with more dedication, job security works as a disincentive. Even those employees who might have pursued opportunity in an employment-at-will setting will experience disincentive, since the laggards will tend to receive the same rewards as the more energetic. Thus, there are no profit benefits from granting job security, but instead still more economic loss to the employer.
From the standpoint of the employee, basic mobility and opportunity are lost with the adoption of "just cause" protection. Going beyond the obvious fact that a position retained by an otherwise terminated employee is not available to a new employee, it should be clear that the overall mobility of the employee both with his/her immediate employer and with others is broadly constrained. This occurs because, as Professor Richard Epstein of the University of Chicago points out, "a rule that starts with modest ambitions will in the end regulate each and every aspect of the employment relationship." [61] Good performance can no longer be as readily rewarded, since "just cause" has made the entire work environment more static, with emphasis on equal treatment of employees, regardless of merit. Employees must be treated bureaucratically, without unique rewards or detriments to particular employees, in order to avoid the possibility of a lawsuit. Consequently, the pursuit of better and high paying jobs becomes more difficult, since the freedom of the employer to establish such positions has been hampered. Employees have less opportunity to excel, to the detriment of their occupational ambition and their income.
The static risk-averse employment atmosphere created by greater job security also harms the less ambitious or less attractive employee. As Professor Epstein points out:
Where an employer might have been more willing to take risky employees under an at-will rule, he will now be less willing to do so under the for-cause rule because any subsequent demotion or dismissal will be an open invitation to a lawsuit by an aggrieved employee... (I)t is hard to see how employees as a class benefit from a rule that can only hamper general mobility in labor markets.
As for the ability of the employer to run his/her business, the demise of employment-at-will is potentially devastating, depending on how far courts are willing to go toward making all employment decisions themselves. No business can operate efficiently and effectively without good management. One of the most important aspects of good management is the selection, administration, and replacement of personnel. If this fundamental right of employers is severely constrained, effective and efficient management is simply not possible. Not only will the employer be forced to live with less effective employees than the free market could provide, but the employer will even be "inhibited from critically evaluating (his/her) employees because of the constant threat of litigation." [62]
Constraints on the employer's ability to chose with whom to work becomes particularly troublesome at the managerial level. Not only is the responsibility of managerial employees for the welfare of the organization extremely high, but this level of employment is characterized by the need for very close interpersonal interaction, with an emphasis on trust and good communication. Inability to actively choose who will be a manager can be more than just disruptive – it can destroy the functional effectiveness of the employer. Even that ardent advocate of a judicial tort remedy for "abusive discharges", Professor Blades, warned:
The employer's evaluation of the higher ranking employee is usually a highly personalized, intuitive judgment, and, as such, is more difficult to translate into concrete reasons which someone else – a juryman – can readily understand and appreciate... Compromise of the employer's power to make such judgments about professional, managerial or other high-ranking employee ... Is especially undesirable. [63]
The impact of eliminating employment-at-will is thus not just a question of up-front litigation cost. The intangible costs of managerial timidity, employee immobility, lost employee incentive and opportunity, lower quality labor, and lower workplace morale are equally great. Freedom is replaced with uncertainty and the tyranny of the courtroom. Everything becomes risk, with the intervening hand of the law hovering over every decision. Employment relationships become imposed, instead of freely chosen. This is not good for the market, and it is not good for either employers or employees.
The abandonment of employment-at-will does not provide the natural path to greater workplace justice that many academics and liberal jurists have presumed. It in fact presents many dangers to employers, employees and the economy. The added job security which "just cause" protection provides may permit its advocates to sleep better at night, but it is doing its supposed beneficiaries, the workers of America, no service. The losses incurred by the great majority of employees far exceed the gains made by the few fringe employees benefiting from the right to sue. Lawyers benefit from the abandonment of employment-at-will, but employees do not. In short, the abandonment of the traditional American doctrine is a mistake.
Employment-at-will has survived for more than a century for good reasons: It is inherently fair and functional. It serves the needs of employers and employees equally, and does so at minimal transaction cost. It does not avoid incidents of unfair treatment, but neither does a good cause employment system. Employment-at-will most perfectly reflects a free and open market system, freedom of contract, and respect for individual choice. The doctrine should be preserved.
Employment-at-will is built on the foundation of a competitive, mobile labor market. The United States has such a market. The academic complaint about oppressed workers thrown on the scrap heap for the sake of profit is Marxist rhetoric based on a perception of capitalism that has long since been refuted both in theory and in practice. The American economy today, more than ever, offers widespread opportunity and vibrancy. In any one year, ten percent of all workers change occupations. That's 10 million workers, more than half of whom switched occupations because of better pay, better working conditions, or advancement opportunities. Only 1 in 8 workers changed occupations because they lost their previous jobs. A more one-fourth of all American workers have been with the same employer for 10 years or more. Those who lost their jobs did so primarily because of economic factors, not wrongful termination. [64] In short, mobility is a hallmark of the American labor market.
In this context, employment-at-will offers the perfect balance. An employer may work with whomever he/she chooses for as long as he/she chooses. An employee may work for whomever he/she chooses for as long as he/she chooses. The parties can explicitly contract for a specific duration of employment, or decide to work from moment to moment. The choice is up to them. The conditions of employment are also up to them. Each side is free to terminate the relationship at will.
Whether the choices are wise or "fair" should not be the business of anyone but the parties themselves. The notion that legislators, judges and jurors should impose their own arbitrary sense of what is fair after the fact over the wishes of the contracting parties at the time of contracting is antithetical to freedom of choice and freedom of contract. It has been a fundamental principle of our society that freedom of choice, not government intervention by master planners, will produce the best economic, social and political results. The ability to freely craft an employment relationship is fundamental to such freedom of choice.
The demise of central economic planning in nations such as the Soviet Union and East Germany also shows quite clearly that government cannot impose its will when the parties are unwilling to accept the conditions. The consequence of imposed notions of "fairness" and economic justice is simply stagnation and decline. This principle holds just as true on the level of one-to-one relationships, as it does for entire economies. No one should be forced to contract with someone else against their will. The remarks of Professor Power are apt:
Whatever its setting, consensus is the core of the (employment) relationship, its energizing ingredient which secures the fruits of the agent's skills for the principal and appropriate rewards for the agent's services. At the risk of romanticizing, one can say that consensus is the flower of voluntariness while labor under compulsion comports a withering sterility. Consensus is the source from which flows fidelity, perseverance, and the exercise of ingenuity – a maximum use of skills. When one or both of the parties no longer wish to continue the relationship, consensus has disappeared and the agency relationship can no longer function effectively. [65]
Many factors stop both employers and employees from making irrational choices about departure and termination. Employees cannot simply switch jobs with impunity, out of fear that they will become undesirable on the market. Employers who practice repeated unjust dismissals will suffer decreased morale, loyalty, and productivity, and will find it harder to attract talent. The free market system is designed to make the necessary adjustments which will limit the willingness of employees and employers to act irrationally.
If society decides that it should interfere with the freedom of contract and prohibit terminations or departures for various reasons, it should do so with great care and precision. If it wishes to protect union activity, or freedom from racial, religious, sexual or other specified discrimination, it can do so, as long as it is an informed decision resulting from the traditional processes of legislative and executive activity. Statutory exceptions to free contract are not bad, as long as they are narrow and precise, and democratically created.
It is worth noting that the advocates of "just cause" employment taw never suggest interfering with the freedom of the employee to depart. These advocates see nothing wrong with employees leaving their employers in economic difficulty by taking a job elsewhere anytime they wish. But we must ask whether any system that burdens one side with restraint while leaving the other free to choose is fair and just. Employee departures can be just as unfair, as violative of "public policy" considerations, and as disruptive of implied contracts as employer terminations. Employers can be just as harmed by the unexpected sudden departure of an important employee, or of many employees, as employees are harmed by terminations. Yet this side of the equation is usually forgotten.
The historical truth is that "a balancing of the interests of employees with the rights of employers has been a cornerstone of our free economy for two centuries. The termination at-will rule is the foundation supporting that cornerstone." [66] It conforms to the traditional, pre-litigation era expectations of workers and employers in the workplace – expectations which are perfectly compatible with notions of justice, since employees and employers are free to establish any terms and conditions of employment by contract that they wish.
Employment-at-will works so well because it allows some temporary setbacks for both employees and employers for the sake of maximized freedom of choice and mobility. So what if a particular employer or employee was not nice in ending an employment relationship? Is it the job of society to legislate good behavior at the expense of free choice? No. So what if an employer or employee suffers economic loss due to sudden termination or departure? Employment-at-will permitted the parties to contract with each other to protect both sides from such economic loss. The collective bargaining agreement is a perfect embodiment of such a contract. If the parties chose not to so contract, why should the arm of government authority intervene and invent such a contract? It shouldn't.
This is especially true given the many insurance protections society has provided both employers and employees. The employer, for example, is protected by bankruptcy law, which permits continued operation or salvaging of assets In case of insolvency. The employee is protected by the unemployment compensation system, as well as workers' compensation and payment of wages guarantees.
Given the many benefits bestowed by freedom of contract, and the many risks and burdens imposed by "just cause", it simply does not make economic or public policy sense to abandon employment-at-will. It is easy to succumb to the seduction of the public imposition of "fairness", without fully understanding the heavy costs to all of the supposed beneficiaries. It is a truism of the law that "good facts make bad law", but this is precisely what lures the sentimental to abandon freedom of contract. They see the singular outrageous case and cry, "what an outrage, this cannot be tolerated". But to correct the singular case, they will unthinkingly burden everyone. To the address the 1 in 100, they will crush the freedom of the remaining 99.
This paper proposes that a society of free choice and freedom of contract is much more capable of providing "fairness" to the many than is any intrusive collection of politicians, judges, and academics. Employment-at-will is based upon such free choice and freedom of contract. It still offers the American economy and labor market the best hope for productivity, efficiency, and reward.
81 Tenn. 507 (1884)
H. G. Wood, Master and Servant (2nd edition), section 134 (1886)
Feinman, The Development of the Employment-at-Will Rule, 20 Am. J. Legal History 118 (1976); Hill, "Wrongful Discharge" and the Derogation of the At-Will Employment Doctrine, University of Pennsylvania Labor Relations and Public Policy Series, No. 31 (1987)
200 U.S. 161 (1908)
236 U.S. 1 (1915)
301 U.S. 1 (1937)
301 U.S. 103 (1937)
29 U.S.C. sections 215(a)(3), 216(b)
29 U.S.C. section 660(c)
Title Vii, 42 U.S.C. sections 2000e, et. seq.
29 U.S.C. sections 621-634
P.L. 101-336
Michigan Eiliott-Larsen Civil Rights Act of 1977, MCL 37.2101 et seq. Michigan Handicappers' Civil Rights Act, MCL 37.1101 et seq. Payment of Wages and Fringe Benefits, MCL 408.472 et seq. Bullard-Plawecki Employee Right to Know Act, MCL 423.501 et seq. Polygraph Protection Act of 1981, MCL 37.202 et seq. The Whistleblowers' Protection Act, MCL 15.361 et seq.
174 Cal.App. 2d 184, 344 P.2d 25 (1959)
81 Mich.App. 489,265 N.W.2d 385 (1978)
27 Cal.3d 167, 610 P.2d 1330, 164 Cal.Rptr. 839 (1980)
740 F.2d 739 (1982)
179 Conn. 471, 427 A.2d 385 (1980)
272 Or. 210, 536 P.2d 512 (1975)
85 111.2d 124, 421 N.E.2d 876 (1981)
535 F.Supp. 564 (E.D.N.Y. 1982)
260 Ind. 249, 297 N.E.2d 425 (1973)
114 N.H. 130, 316 A.2d 549 (1974)
373 Mass. 96, 364 N.E.2d 1251 (1977)
99 N.J. 284, 491 A.2d 1257 (1985)
115 111.2d 482, 505 N.E.2d 314 (1987)
116 Cal.App.3d 311, 171 Cal.Rptr. 917 (1981)
408 Mich. 579, 292 N.W.2d 880 (1980)
The Michigan Supreme Court quoting Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917)
164 Mich.App. 543, 417 N.W.2d 496 (1987)
102 Mich.App. 606, 302 N.W.2d 307 (1981)
432 Mich. 438, 443 N.W.2d 112 (1989)
432 Mich. 472, 444 N.W.2d 114 (1989)
106 Mich.App. 471, 308 N.W.2d 459 (1981)
See, for example, Reid v. Sears. Roebuck & Co., 790 F.2d 453 (6th. Cir. 1986); Pratt v. Brown Machine Co., 855 F.2d 1225 (6th Cir. 1988); Dell v. Montgomery Ward & Co., 811 F.2d 970 (6th Cir. 1987); Novosel v. Sears, Roebuck & Co., 495 F.Supp. 344 (E.D.Mich. 1980)
427 Mich. 415, 398 N.W.2d 327 (1986)
131 Mich.App. 185. 347 N.W.2d 184 (1983)
Blades, Employment at Will vs. Individual Freedom: On Limiting the Abusive Exercise of Employer Power, 67 Columbia L. R. 1404 (1967)
Summers, Individual Protection Against Unjust Dismissal: Time for a Statute, 62 Virginia L. R. 481 (1976)
Montana Code Ann. Sections 39-2-901 et seq. (1987)
Meech v. Hillhaven West, Inc., 776 P.2d 488 (1989); Johnson v. Montana, 776 P.2d 1221 (1989)
Stieber, The Case for Protection of Unorganized Employees Against Unjust Discharge, proceedings of the 32nd Annual Meeting of the Industrial Research Association (1980)
Lipson and Korney, A Case Against Statutory Review of Private Sector Discharge Cases, 1983 Michigan Bar Journal 764
Newsweek, "The Revenge of the Fired", Feb. 16, 1987
Jung and Harkness, The Facts of Wrongful Discharge, 4 The Labor Lawyer 257 (1988) 46.
Dertouzos, Holland and Ebener, The Legal and Economic Consequences of Wrongful Termination, Rand, The Institute for Civil Justice (1988)
Peterson, Civil Juries in the 1980s: Trends in Jury Trials and Verdicts in California and Cook Country, Illinois, Rand, The Institute for Civil Justice (1987)
Jung and Harkness, supra, footnote 45
Lopatka and Martin, Developments in the Law of Wrongful Discharge, ABA National Institute on Litigating Wrongful Discharge and Invasion of Privacy Claims (1986)
Draft Report of the Drafting Committee on Uniform Employment Termination Act, National Conference of Commissioners on Uniform State Laws (1990)
Dertouzos, Holland and Eberner, supra, footnote 46
Issue Alert, "Small Business and the Liability Insurance Crisis", United States Small Business Administration, March, 1986
Shapiro, Legal Aspects of Doing Business with Japan, Practicing Law Institute (1985)
Power, A Defense of the Employment At Will Rule, 27 St. Louis University L. J. 881 (1983)
Estreicher, Unjust Dismissal Laws: Some Cautionary Notes, 33 Am. J. Comp. L. 310 (1985)
Hill, supra, footnote 3
Wall Street Journal, April 20, 1983
For a complete discussion of employment law in Ontario, see A Guide to Employment Law by John Sproat (published by Carswell, 1990)
Harrison, The "New" Terminable-at-Will Employment Contract: An Interest and Cost Incidence Analysis, 69 Iowa L. R. 327 (1984)
Id.
Epstein, In Defense of the Contract at Will, 51 University of Chicago L. R. 327 (1984) 62.
Brake, Limiting the Right to Terminate at Will — Have the Courts Forgotten the Employer?, 35 Vanderbilt L. R. 201 (1982)
Blades, supra, footnote 38
News, "Most Occupational Changes are Voluntary", United States Department of Labor Bureau of Labor Statistics (1987); Markey and Parks 11, Occupational Change: Pursuing a Different Kind of Work, Monthly Labor Review, Vol. 112, No. 9 (1989)
Power, supra, footnote 54
Larson, Why We Should Not Abandon the Presumption that Employment is Terminable At-Will, 23 Idaho L. R. 219 (1986-87)
Jürgen Skoppek is an attorney and Senior Policy Analyst with The Mackinac Center for Public Policy. He has practiced law in the labor, employment, insurance and liability fields and advises the Michigan Legislature on these matters.
The author would like to thank attorneys Gary Gulliver and John Sproat; research assistants James Carey, Charles Cavell, and Mark Dillman; and editors Joe Olson, Lawrence Reed and Jill Murphy.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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