Terminating At-Will Employees

Many HR executives believe they can terminate at-will employees for any reason whatsoever. Here's why they're wrong.

Monday, July 14, 2014
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When an employment relationship is at-will, this allows the employer considerable flexibility to terminate an employee. However, there are several important limitations on this flexibility. Human resource executives and corporate decision-makers must understand these limitations in order to make smart decisions and avoid the potentially serious problems which can arise when these limits are overlooked.  

In an at-will employment relationship, employment is generally terminable by either the employer or employee for any reason whatsoever. There are four major exceptions. In legal parlance, these may arise on the basis of public policy, statute, express contract, or implied contract. The first three exceptions are relatively straightforward. The last is not. Unbeknownst to an employer, his conduct may inadvertently create an implied contract, limiting the employer's right to terminate the employee absent good cause. In the event an employer must terminate an employee, this can cause obvious difficulties. The good news is that there are straightforward ways for human resource executives to help their companies avoid this situation.

The Four Major Limitations on an Employer's Right to Terminate an Employee

The mere existence of an employment relationship does not create a legally recognized protection that employment will continue. Without a written or implied agreement, an employment relationship without a fixed term is presumed to be "at will," allowing either party to end the employment without cause, provided termination is not prohibited by a statutory or public policy exception.    

A statutory exception arises where a law or regulation specifically defines circumstances under which an employer may not terminate an employee. For example, the Civil Rights Act of 1964 forbids termination based on protected categories such as race or ethnicity. Along the same lines, the National Labor Relations Act prohibits termination for union organizing activities. An employer may not properly fire an employee in contravention of this statutory authority, even if the employment relationship is at-will. This is fairly straightforward.   

A second exception to the employment-at-will doctrine arises where termination would violate public policy. Typically, a State's public policy is found in those portions of its statutes, regulations, and Constitution that are directed at promoting the public good. For example, an employee may not be fired for disobeying an employer's request to engage in illegal activities, or for filing a workers' compensation claim arising from a workplace injury. The State has a public policy interest in protecting those employees who refuse to break the law, or who seek appropriate relief for a job-related injury. Even if the employment relationship is at-will, an employer may not properly terminate an employee if this runs contrary to the State's public policy. Again, this exception is fairly clear.   

An employer's power to terminate an employee may also be limited by contract. A contract may be written or oral. A contract may contain either express or implied terms. An express contract is created by words that explicitly set forth the terms of the agreement. The terms of the contract may explicitly state the employee will only be terminated "for cause," after a specified duration of time, or upon the occurrence of a specific event or circumstances as defined by the employer and employee. Under these contract terms, employment is not at-will. The employer may not properly terminate the employee in contravention of the express terms of the contract. This exception is relatively straightforward.

An implied-in-fact contract is one where the terms are implied from the parties' conduct. The terms of an implied-in-fact contract have the same legal significance as expressly stated written contract terms. However, due to its nature (which is, by definition, implied), an implied-in-fact contract may form without the employer being aware of it, thus limiting the employer's right to terminate the employee without good cause. This is where things get tricky.

To determine whether an implied-in-fact contract has been formed, courts look to the "totality" of the employment relationship. This typically involves an exhaustive analysis of the parties' relationship and the employer's conduct towards the employee. A court will examine an employer's words or actions to determine whether it was reasonable for the employee to conclude he would only be terminated for good cause.

Factors that will be considered are (a) length of service, (b) any raises, commendations, positive evaluations and promotions, (c) the employer's personnel policies and practices (d) whether the employer said or did anything to assure the employee of continued employment. The first two factors are not enough, by themselves, to imply a promise that termination will only be for-cause. An employee does not have a reasonable expectation of continued employment, absent cause, merely because they have worked for a company for a long period of time, or because they have received positive evaluations. The employer must do something more to create an expectation of continued employment. This typically involves some combination of the latter two factors, where the employer's personnel policies, practices or statements suggest continued employment could be expected. For example, an employee was fired after working for his employer for 32 years, during which time he had risen from dishwasher to vice-president.

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The California Court of Appeal concluded the employer had impliedly agreed it would only terminate the employee for cause. This was because the employer had never previously informed the employee there were problems with his work, and the employer had granted him yearly bonuses and suggested he could expect continued job security.

How Human Resource Executives Can Protect Against the Creation of an At-Will Employment Relationship

There are important and relatively easy steps that human resource professionals and employers can do to protect themselves. The offer-letter, presenting the future employee with proposed terms of employment, should clearly state the relationship will be at-will. Employee handbooks and manuals are also important. The language contained in handbooks  is a central focus in a court's inquiry into the employment relationship and whether the employer has agreed to limit its power to terminate at-will. For example, if the handbook states employees may only be fired for good cause, this may typically become an implied term of the employment contract. Similarly, written personnel policies may create the expectation that seniority and longevity protect an employee against discharge without cause.

Employee handbooks, manuals and policies should therefore clarify that employment is at-will, and make no promises of continued employment. Human resource executives should also note that employers should refrain from oral representations that would allow an employee to assume he would only be terminated for good cause. Employers should avoid referring to the company as a "family," or suggesting an employee will someday retire from the employer's business. Simply put, an employer must avoid any words or conduct that would create a reasonable expectation that employment was anything but at-will. If the employer is able to prevent the creation of an implied-in-fact contract, the employer is better positioned to terminate an employee, provided that action is also not limited by statute, public policy, or an express employment agreement. Human Resource professionals are the employer's first line of defense. With proper vigilance and guidance, they may protect their employer by preventing the transformation of an at-will relationship into one where termination is only available for good cause.

Julian Pardo de Zela is an attorney in the San Jose, Calif. office of Ropers Majeski Kohn & Bentley.

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