I. Implied Contract Exceptions

In addition to federal and state statutory restrictions on an employer's freedom to discharge employees and various public policy exceptions, other protections may restrict the at-will authority of companies to terminate employment without having to state a reason. This protection is in the form of "implied contract" terms created by representations and promises published by employers in their employee handbooks.

A number of state courts began this legal trend by ruling that company retirement, sick leave, and fringe-benefit plans described in employee manuals were enforceable promises of compensation. Later, such rights were incorporated into federal ERISA law, but ERISA did not affect an employer's right to terminate a person's job "at will." As previously stated, many states have now ruled that promises in employee handbooks may be legally enforceable as implied contracts.

The first step in determining a company's liability in such cases is to determine if the words relied upon were sufficiently definite to constitute a promise. Courts often rule that statements in employee handbooks are not legal promises but merely puffery aimed at enhancing morale, and the existence of disclaimers may be legally sufficient to void the enforceability of such promises. The company may also protect itself by reserving the right to print revisions to the manual which eliminate promises contained in earlier editions that were previously given to the worker.

The implied contract exception to the employment-at-will doctrine may extend to oral promises made at the hiring interview. For example, if a company president tells an employee at the hiring interview, "Don't worry, we never fire anyone around here except for a good reason," a legitimate case might be made to fight the firing, provided the employee could prove that the words were spoken and that it was reasonable to rely upon them (i.e., that they were spoken seriously and not in jest).

This occurred in a case decided in Alaska. At the hiring, an employer stated that an applicant could have the job until reaching retirement age so long as he performed his duties properly. When the employee was fired suddenly, he argued that his job performance was excellent and that he had relied upon the promise of job security in deciding to accept the job. He won the case after proving the words were spoken. Several witnesses had overheard the promise at the job interview and testified to this fact at the trial.

A New Jersey employee complained that, relying on an em- ployer's oral promise that he could be fired only for cause, he turned down a position offered by a competitor. Several months later he was summarily fired. The court, noting that promises were made inducing him to remain in the company's employ, ruled that the employer had made representations which transformed the employ- ment-at-will relationship into employment with termination for cause only. After finding that the employee's decision not to accept the competitor's offer was significant, binding the employer, the court ruled in the employee's favor.

TIP: Note all oral promises are enforceable against a company, particularly when an employee is promised "a job for life." Promises of lifetime employment are rarely upheld due to a legal principle referred to as the Statute of Frauds. Under this law, recognized in most states, all contracts with a job term exceeding one year must be in writing to be enforceable. As a result, courts are generally reluctant to view oral contracts as creating permanent or life-time employment. Usually, such contracts are viewed as being terminable at will by either party. Thus, a "life-time contract" may theoretically be terminated after one day!

Counsel Comment #132: Some states have laws that limit the duration of an employment contract to a specified number of years (e.g., seven). Nevertheless, avoid extending such offers, even in jest, to avoid potential problems unless following through on the offer is your company's intent.