Human Capital & Careers

Benefits: Be Careful Whom You Fire

A California Supreme Court case sends up warning lights on "implied contracts" in personnel policies.
David KatzOctober 24, 2000

Alert to senior executives: Don’t fire employees just before their stock options vest. And be careful about the promises you make in your personnel policies, even if they’re the most humane ones in the world.

Those are the cautionary notes employers can glean from the Oct. 5 California Supreme Court ruling in Guz v. Bechtel National, one of the year’s most closely watched employment-law cases and a decision they can otherwise claim as a clear victory, lawyers say.

About those stock options. If your motive for firing someone looks suspiciously like not wanting to pay up, and you operate in California, William Quackenbush, a San Mateo plaintiffs’ lawyer, could come gunning for your company, his aim squarely on your right to fire workers at will.

Quackenbush finds fodder for such suits in an obscure footnote to the Guz case—a case his client actually lost.

“The employer who says, `I can fire you for whatever reason I want may be in trouble,’” he asserts.

The footnote–number 18, to be precise–says the hallowed legal covenant of good faith and fair dealing might be shattered if a firing was “a mere pretext to cheat the worker out of another contract benefit to which the employee was clearly entitled, such as compensation already earned.”

Declaring himself now “armed and ready” to do battle with cheating employers, Quackenbush says the ruling is the farthest the court has gone with the theory that employers may be acting so unfairly that they can violate a contract that has been implied, rather than written down.

Quackenbush acknowledges, however, that the footnote is his solace for a decision that otherwise went against his client.

Firing As You See Fit

Reversing a California appeals court decision, the high court ruled that even if an employer’s personnel policies amount to an implied contract with a worker, the employer can “eliminate a work unit as it [sees] fit, even where dissatisfaction with unit performance was a factor in the decision.”

In other words, even an employer whose personnel policies amount to an implied contract with an employee can fire the employee’s work unit at will for reasons other than the need for labor cutbacks.

But even though employers held sway in the case, they barely dodged a bullet and need to be extremely cautious about implying they have agreements with employees on job security, thinks Peter J. Petesch, a partner in the Washington law firm of Ford & Harrison.

This was a case with “a real potential to have run amuck” against employers in terms of the doctrine of finding implied contracts in their personnel policies, he says.

Human resources professionals and employers should take a hard look at the decisions “and see how far this case went before the employer prevailed,” warns Petesch.

In fact, Bechtel National, the defendant, came close to being punished for being a good corporate citizen, he thinks. Had the ruling gone the other way, the decision “might have actually been a deterrent to employers who put together compassionate and wise personnel policies,” he thinks.

In the case, the plaintiff, John Guz, argued that Bechtel’s “progressive discipline” policy amounted to an implied contract between the employee and employer. The personnel policy included providing employees with a chance to improve unsatisfactory performance; objective rankings of workers to be used in layoffs; and giving laid-off workers consideration for other positions within the company.

While the high court agreed with Guz’s argument that he had “implied contractual rights” under Bechtel’s personnel policies, it said that still didn’t mean he could only be fired for good cause.

Guz, who was 49, was terminated in 1993 when his work unit was eliminated and its tasks transferred to another office of Bechtel National, a division of Bechtel Corp., an engineering, construction and environmental remediation company.

In October 1994, Guz, a 22-year employee of the company who worked in the management information area and received generally favorable performance reviews, sued Bechtel, charging breach of an implied employment contract, breach of good faith and fair dealing and age discrimination. Lawyers agree that the implied contract element was the crux of the case.

An Aid to Risk Managers

Despite the finding of implied contracts in progressive discipline policies, risk managers aren’t likely to advise their organizations to shed them, because the existence of such policies could prove helpful in court. Lance J. Ewing, director of insurance and loss prevention for GES Exposition Services in Las Vegas, Nev., says that “any company that has a progressive discipline program…certainly stands a better chance of indicating that they are trying to follow established protocols.”

Employers can thus show they’ve made an attempt to bring flagging employees “back to where they need to be” in terms of the employer’s culture and its job expectations, added Ewing, who’s also vice president for external affairs for the Risk and Insurance Management Society in New York.

But employers still need to be “very, very careful about promises made to people in word and in writing,” Petesch advises, suggesting that employers should not only closely review their employee-termination policies but also “train managers not to make statements… about when a person’s employment might end.”

He adds: “You need to be honest with people in evaluations [and] in recruiting and not make promises of long-term job security.”