WRONGFUL TERMINATION OF EMPLOYMENT

2006 DLA Piper Rudnick Gray Cary US, LLP

TABLE OF CONTENTS
Page

I II

INTRODUCTION .................................................................................. 1 CLAIMS FOR BREACH OF CONTRACT ............................................... 1 A. Creating the At-Will Employment Relationship..................... 1 1. The Presumption of At-Will Employment .................... 1 2. The Express, Written Agreement for At-Will Employment.................................................................... 2 3. Integrating the Written At-Will Agreement .................. 3 4. Establishing At-Will Status for Existing Employees .... 5 5. Where At-Will Language Should Be Included.............. 7 B. Employment Contracts Requiring Good Cause for Termination.............................................................................. 8 1. Express Contracts to Terminate for Good Cause .......... 8 2. Implied Contracts to Terminate for Good Cause........... 9 C. Consequences of Finding an Implied Contract Good Cause. ................................................................................... 11 1. The Shifting Definition of Good Cause. .................. 11 2. Reductions-In-Force..................................................... 12 3. Termination for Misconduct ........................................ 12 D. The Wrongful Demotion Claim ............................................ 15 E. The Implied Covenant of Good Faith and Fair Dealing ....... 16 WRONGFUL TERMINATION IN VIOLATION OF PUBLIC POLICY ..... 17 A. General Requirements for Public Policy Claims .................. 17 1. The Public Policy Must Be Tethered to a Constitutional or Statutory Provision........................... 18 2. The Public Policy Must Benefit the Public at Large ... 18 3. The Public Policy Must Be Well-Established, Substantial and Fundamental ....................................... 19

III

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TABLE OF CONTENTS
(continued) Page

B.

C. D. IV

Whistleblower Claims ........................................................... 20 1. Claims Based on Complaints of Illegal Activity ......... 20 2. Claims Based on Refusals to Perform Illegal Acts...... 21 3. California Whistleblower Statute................................. 21 4. Post-Enron Federal Whistleblower Protections........... 22 5. Avoiding Whistleblower Claims.................................. 22 Public Policy Claims That Duplicate Statutory Claims........ 23 Liability for Punitive Damages on Public Policy Claims..... 24

CLAIMS BASED ON PREEMPLOYMENT AND POSTEMPLOYMENT CONDUCT ................................................................ 26 A. Fraud in Inducing Employment............................................. 26 B. Withdrawal of Job Offer: Promissory Estoppel................... 26 C. The Letter of Recommendation............................................. 27 TERMINATION GUIDELINES ............................................................. 28 CONCLUSION ................................................................................... 30

V VI

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I INTRODUCTION
When bringing wrongful termination lawsuits, terminated employees have a variety of weapons in their arsenal. Breach of contract claims are limited to economic damages (e.g., lost wages and benefits) so employees often add tort claims to their lawsuits, which allow for the recovery of emotional distress and punitive damages. Thus, a terminated employee may (and probably will) bring several claims, alleging that the termination was in breach of an express or implied contract, in violation of public policy, discriminatory on the basis of race, sex, religion, disability or some other protected status, or in retaliation for opposing unlawful activity. The employee may add other claims as well, such as for wrongful demotion, harassment, infliction of emotional distress, defamation or fraud. This article will discuss breach of contract claims that can arise out of terminations and demotions, as well as tort claims for wrongful termination in breach of public policy, and tort claims based on preemployment and postemployment conduct.1 This article will also suggest management practices for structuring the employment relationship to promote fairness and to avoid potential legal pitfalls when demoting or terminating employees.

II CLAIMS FOR BREACH OF CONTRACT

A. Creating the At-Will Employment Relationship. 1. The Presumption of At-Will Employment.

California law provides a general rule that every California employee is presumed to be employed at the will of either party: An employment, having no specified term, may be terminated at the will of either

As other DLA Piper Rudnick Gray Cary US LLP Employment Law Briefing articles address statutory claims, such as discrimination, retaliation and harassment, these types of claims will not be addressed in this article.

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party on notice to the other.2 In other words, absent an agreement to the contrary, employers may terminate employees for any reason or no reason so long as the reason does not violate the law or a fundamental public policy. Likewise, the employee has the option to quit for any reason or no reason. However, it is relatively simple to rebut the at-will presumption and claim that an employer must have good cause to terminate the employment relationship. Thus, a terminated employee will often include a claim for breach of contract in a wrongful discharge lawsuit, alleging that there was an employment contract (either express or implied) requiring good cause for termination and that the employee was fired for something less than good cause. In the absence of an express, written agreement for at-will employment, a breach of contract claim is more difficult to defend. Thus, employers can and should consider entering into express, written contracts with their employees that spell out the at-will relationship. As a general business practice, it is not advisable to terminate employees for no reason. Instead, as discussed in further detail infra in Part V, entitled Termination Guidelines, termination decisions should be fair, objective and consistent with company policies. However, where an enforceable express at-will agreement is in place, a jury should not be allowed to second-guess whether a termination was for good cause. In other words, although an express at-will agreement will not prevent the filing of a breach of contract claim, it will offer a powerful weapon to defeat such a claim. 2. The Express, Written Agreement for At-Will Employment.

A written agreement for at-will employment can be as simple as a one-page at-will employment agreement. Alternatively, a term for at-will employment can be incorporated into a more extensive written agreement, such as a job offer letter or an employment contract. There are many variances in the written terms for at-will employment that California courts have recognized as enforceable. The following language is typical:

Cal. Lab. Code 2922.

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I understand and agree that my employment with the Company is at-will and therefore is for an unspecified period of time and may be terminated at any time, with or without good cause, and with or without advance notice, by the Company or by me. Specific examples of at-will agreements that have been enforced by the courts are as follows: (1) Employee acknowledges that there is no agreement, express or implied, between employee and the Company for any specific period of employment, nor for continuing or long-term employment. Employee and the Company have a right to terminate employment, with or without cause.3 My employment and compensation can be terminated, with or without cause, and with or without notice, at any time, at the option of either the Company or myself.4

(2)

The courts are continually determining the enforceability of new variations of language used in at-will employment agreements. Accordingly, any use of the above sample clauses by employers should be reviewed by legal counsel before distribution to employees. 3. Integrating the Written At-Will Agreement.

It is important to integrate the at-will employment agreement. A written agreement is integrated where the parties adopt the writing as the final and complete expression of their agreement. Where an employer wants to integrate a written at-will agreement, the integration clause should follow the clause providing for at-will employment. A sample integration clause is as follows:

Slivinsky v. Watkins-Johnson Co., 221 Cal. App. 3d 799 (1990). Hoy v. Sears Roebuck & Co., 861 F. Supp. 881 (N.D. Cal. 1994).

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I understand and agree that no person other than the [Chief Executive Officer] of the Company has the authority to enter into an agreement contrary to my at-will employment relationship with the Company. To be valid, any such agreement to the contrary must be specific, in writing, and signed by the [Chief Executive Officer] and me. I further understand and agree that all prior agreements with the Company on this subject, whether written or oral, are superseded by this agreement. I understand and agree that this is the entire agreement between the Company and me on this subject. (To ensure its enforceability, use of this sample integration clause by employers should be reviewed by legal counsel prior to distribution to employees.) A number of courts have examined integrated at-will employment contracts. In Slivinsky,5 the court held that an employment application and employment agreement, read together, were sufficient to establish an integrated agreement for at-will employment. Consequently, the court rejected the plaintiffs claim for breach of an implied contract requiring good cause for termination. The court reasoned: There cannot be a valid express contract and an implied contract, each embracing the same subject, but requiring different results. The integrated at-will agreement was enough to bar the implied contract claim, resulting in dismissal of the lawsuit prior to trial. The integrated employment agreement in Anderson v. Savin6 further illustrates the proper steps an employer should take to retain the at-will status of employees. In Anderson, the written contract signed by the employee provided that it constituted the entire arrangement between the parties and could not be modified except by written approval. The contract also stated that nothing could interfere in any way with the right of [the employer] to terminate the [employees] employment at any time, with or without cause, without liability. Based on that agreement, the court held that the employment relationship was at-will.

221 Cal. App. 3d 799. 206 Cal. App. 3d 356 (1988).

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In contrast with the integrated at-will agreements in Slivinsky and Anderson, the case of McLain v. Great American Insurance Companies7 illustrates at-will language, without an integration clause, that was insufficient to establish that employment was at-will. In McLain, the court held that an employment application form containing an at-will clause did not create an at-will relationship, because other language in the application stated that the terms and conditions of employment could be changed at any time, with or without notice. The court reasoned that if the terms of employment could be changed at any time, an implied contract to terminate for good cause could be created after the employment application was signed. Although employers can and should incorporate at-will language into various employment documents, only one document need be integrated. In fact, including integration clauses in several documents may be confusing. An employment contract or job offer letter is the most appropriate document for an integration clause. 4. Establishing At-Will Status for Existing Employees.

It is uncertain whether the status of a current employee can be changed to at-will by a written agreement without offering some consideration in exchange for the employees agreement i.e., something that justifies the employees forfeiture of the protections of the good cause standard. It is also unclear whether the consideration offered must be more than mere continued employment. Thus, simply implementing a new at-will policy with current employees as a condition of continued employment may not be enough to create an enforceable at-will employment agreement. Modification of a long-term employees status to at-will employment has been upheld where valuable consideration, in addition to continued employment, was offered in return for the employees agreement. In Cruey v. Gannett Co.,8 an employee signed a written agreement with his employer, nine years after he was hired, in which the employer agreed to subsidize the employees purchase of a new home following his relocation to a more expensive

208 Cal. App. 3d 1476 (1989). 64 Cal. App. 4th 356 (1998).

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housing market. The written agreement also stated that the employee was employed at-will. The court enforced this at-will agreement, dismissing the employees breach of contract claim. The court reasoned that the housing subsidy was sufficient consideration for the at-will agreement. In Asmus v. Pacific Bell,9 the California Supreme Court shed light on how courts may address the fairness concerns posed by requiring current employees to agree to at-will employment. Although Asmus did not involve an at-will policy, the case addressed a related issue whether an employer who has a written employment security policy can unilaterally modify that policy. In Asmus, Pacific Bell had a written policy that promised its managers continued employment absent a specified change in business conditions. After five years, Pacific Bell notified its managers that the policy might not be continued. Two years later, the company terminated the policy, replacing its promise of guaranteed employment with a generous severance program. In response to a lawsuit filed by sixty managers, Pacific Bell argued that the policy could be unilaterally modified by the company. The California Supreme Court assumed that the written policy was a contract but concluded that Pacific Bell could unilaterally terminate it. In reaching this conclusion, the court reasoned that an employer can eliminate or modify a security policy of indefinite duration so long as certain conditions are met. These conditions include terminating the policy (1) after a reasonable time, (2) on reasonable notice and (3) in a manner that does not interfere with employees vested benefits. The court concluded that because the managers had received the benefits of the policy for more than five years, the policy had remained in effect for a reasonable time and there was no denial of vested benefits. In addition, the court found that the two-year notice of the change given by Pacific Bell was reasonable. The court also concluded that the managers continued employment following Pacific Bells modification of the policy was sufficient consideration to constitute their acceptance of the modified policy. However, the significance of this final ruling is uncertain because Pacific Bell actually offered the managers enhanced severance benefits, in addition to continued employment, in consideration of the modified policy.

23 Cal. 4th 1 (2000).

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All told, it is probably safest to offer something to current employees when changing their status to at-will employment. A promotion, a housing subsidy, stock options, an increase in wages, a bonus or new benefits (such as enhanced severance benefits) should be sufficient. In addition, pursuant to Asmus, employees should be given adequate notice of the new at-will policy (although a two-year notice is most certainly unnecessary). Finally, given the uncertain state of the law, an employer who wants to implement a new at-will employment policy should seek advice from legal counsel. 5. Where At-Will Language Should Be Included.

At-will language should be included in various employment documents, such as job applications, offer letters, employment contracts, employee handbooks, acknowledgment forms for handbooks and personnel policy manuals. Depending on the type of document, the language used may need to be modified, and an integration clause may be appropriate. The following guidelines should help employers incorporate at-will language into various employment documents: a. Job Application. A statement of the employers at-will policy can be placed above the signature line of the job application. Applicants can be asked to acknowledge by their signatures that they agree that any employment offered will be at-will. b. Job Offer Letter. If a job offer letter is used, the at-will employment policy can and should be clearly stated in the letter, and an integration clause also should be included. The new employee should be asked to signify his or her agreement to the terms of the offer letter, including the at-will terms, by signing and returning the letter. c. Employment Contract. If a formal written employment contract is used, it should include an at-will employment clause and an integration clause. As written contracts are formal legal documents, they should advise employees of their right to seek independent legal counsel before signing. d. Employee Handbook. The employee handbook can and should set forth the at-will policy and reserve the employers right not only to terminate the employment relationship at-will, but also to modify or alter an employees position through actions other than termination, such as demotion, promotion, transfer, reclassification or reassignment, at the employers sole discretion. Any discipline policy in the handbook should remind employees that employment with the company is at-will and that the employer reserves the right to -7 2006 DLA Piper Rudnick Gray Cary US, LLP

exercise its discretion in the imposition of discipline, including determining when termination, with or without notice, should occur as a disciplinary measure. It is especially important to expressly reserve this management discretion where there is a progressive discipline policy. e. Employee Handbook Acknowledgment Form. A signed employee handbook acknowledgment form that includes at-will language can establish at-will employment. The form should also state that the employee handbook is not intended to conflict, in any way, with the companys at-will policy nor to create any contractual obligations. In addition, the form should state that, except for the at-will policy, the employer reserves the right to make changes to other policies in the employee handbook, with or without notice. If a job offer letter or employment contract is not used, an integration clause can be included in the acknowledgment form. f. Personnel Policy and/or Operation Manuals. If the employer maintains a separate personnel policy manual and/or operations manual in addition to an employee handbook, these manuals can also state the at-will policy. The employer should make sure that all other policies in the manuals are consistent with the at-will policy, including, for example, any discipline policies and reduction-in-force policies. B. Employment Contracts Requiring Good Cause for Termination.

Both express and implied contracts can rebut the presumption of at-will employment under California law. A written employment contract can expressly agree to require good cause for termination. For example, labor organizations have traditionally demanded that that a similar just cause standard be included in collective bargaining agreements. In contrast to an express writing, an implied contract that rebuts the at-will presumption arises out of the employers practices and conduct. 1. Express Contracts to Terminate for Good Cause.

Express agreements, which are usually written, often explicitly require that the employer have good cause to terminate an employee or that the employer terminate only after a particular notice period. An employer using such an agreement is strongly encouraged to expressly define in the agreement the grounds that constitute good cause for termination. Examples of conduct warranting termination for good cause can also be included. An express definition

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will help the employer and employee avoid the misunderstandings that often arise when the employment relationships is terminated. 2. Implied Contracts to Terminate for Good Cause.

Terminated employees often argue that they formed implied agreements with their employers that could be terminated only for good cause. In the absence of an express at-will agreement, it is left to a jury to determine whether an implied contract to the contrary exists. As one might imagine, employeefriendly juries are generally inclined to find an implied agreement requiring the employer to have good cause to terminate the employee. Juries are instructed to consider certain factors in determining the existence of an implied contract. In the case of Foley v. Interactive Data Corp.,10 the California Supreme Court listed several factors that should be considered (in the absence of an express agreement) in determining the existence of an implied contract: a. b. The personnel policies or practices of the employer; The employees length of service;

c. Oral or written assurances by the employer of continued or long-term employment; and d. working. In the case of Guz v. Bechtel National, Inc.,11 the California Supreme Court reaffirmed the Foley factors but instructed that every vague combination of these factors shaken together in a bag will not establish a right to be discharged only for good cause. In other words, the mere existence of one or more of these factors is not determinative. Instead, the totality of the facts must show a mutual understanding between the employer and employee that their relationship will continue absent good cause for termination. The practices of the industry in which the employee is

10

47 Cal. 3d 654 (1988). 24 Cal. 4th 317 (2000).

11

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In Guz, Bechtel did not have an integrated, written at-will agreement with the plaintiff. However, Bechtel did have an at-will policy stating that employees have no . . . agreements guaranteeing continuous service and may be terminated at [the employers] option. The plaintiff was an employee with twenty-two years of service who was laid off in a company reorganization that eliminated his work unit. In his lawsuit, the plaintiff claimed that his layoff violated an implied contract requiring good cause for termination. He argued that there was no good cause to eliminate his work unit, because Bechtels stated reason for the reorganization a downturn in workload was not supported by the facts. He also argued that even if there was good cause for the reorganization, his termination lacked good cause because Bechtel had violated written personnel rules governing rankings of employees for layoff and fair consideration of laid off employees for other available jobs. The court found Bechtels personnel policies to be the determinative Foley factor. The court reasoned that where an employer distributes written personnel policies, those policies are highly relevant because they evidence an intent that employees should rely on them. However, the court found that none of Bechtels written policies limited the companys right to eliminate jobs or work units, for any or no reason, even if a reorganization would result in the termination of existing employees. To the contrary, the court concluded that Bechtels at-will policy was evidence that the company had reserved the right to conduct a reduction-in-force at its discretion. Thus, the court concluded that Bechtel need not show good cause for its decision to eliminate the employees work unit. However, the court found that Bechtel might have violated an implied contract arising out of its written Reduction-In-Force Guidelines, which set forth detailed procedures for selecting candidates for layoff and for helping laid off employees obtain jobs elsewhere in the company. The court instructed the lower court to reevaluate this secondary claim to determine whether the plaintiff could establish a breach of an implied contract based on the companys alleged violation of these detailed guidelines. Guz makes clear the importance of making sure that written policies do not conflict with at-will employment. In addition, employers must ensure that their managers conduct does not conflict with at-will employment. The following guidelines can help establish and maintain at-will employment relationships:

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 Employers should use written, integrated at-will employment agreements when hiring employees, to avoid confusion about the terms of employment. Personnel policies, operations manuals, employee handbooks and job applications should all state that employment is at-will. Employee handbooks and personnel manuals should also state that they are not intended to create any contractual obligations that conflict with company policies of at-will employment. In addition, reduction-in-force policies should state that they are guidelines that are not intended to create any contractual obligations that conflict with at-will employment. Managers and supervisors should be trained to not make statements to employees that conflict with the companys at-will employment policy by promising continued employment absent good cause for discharge, such as Youll be employed so long as you do a good job, or Continue to do a good job and your future with the company will be secure. C. Consequences of Finding an Implied Contract Good Cause. 1. The Shifting Definition of Good Cause.

If a court finds that an implied agreement exists and the employer could terminate the employee only for good cause, the employer is then saddled with the heavy burden of proving that it had good cause to terminate the employee. This is an uphill battle, made even more difficult because the good cause standard for implied contract claims varies from case to case. In Binder v. Aetna Life Insurance Co.,12 the court opined that what constitutes good cause in a particular setting can be a function of the parties mutual agreement. In other words, the good cause standard is relative and must be implied from the parties conduct and the surrounding circumstances. In Binder, the court concluded that Aetna could not hold the plaintiff to a high moral standard, because the company had previously rehired Zoe Baird soon after her nomination for Attorney General failed amid allegations of tax irregularities.

12

75 Cal. App. 4th 832 (1999).

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As suggested by Binder, when an employee can establish the existence of an implied contract, it becomes very difficult for the employer to have the claim dismissed by the court prior to trial. Not only will the good cause threshold used by the employer be second-guessed, so will the articulated reason for termination. Generally, courts have found, prior to trial, that good cause for termination exists in only two situations: (1) layoffs resulting from reductions-inforce and (2) misconduct that clearly violates an express employer policy. 2. Reductions-In-Force.

Courts have found good cause to exist where a termination is part of a legitimate reduction in an employers work force. For example, in Clutterham v. Coachman Industries,13 an employee who was laid off sued his former employer for breach of contract. The court affirmed dismissal of the case prior to trial, holding that the employers decision to conduct a layoff was good cause. Similarly, in Malmstrom v. Kaiser Aluminum & Chemical Corp.,14 an employers business decision to reduce its staff was held to be good cause for termination. However, Guz v. Bechtel National, Inc.15 suggests that an employer may be liable for breach of an implied contract if it does not adhere to its written reduction-in-force guidelines and procedures. Thus, it is important for employers not only to have formal reduction-in-force guidelines and procedures, but to carefully adhere to them as well. 3. Termination for Misconduct.

a. Admitted Misconduct. Courts have found good cause when the employee admits to misconduct that violates an employers express rule. For example, in Knights v. Hewlett Packard,16 a custodian was discharged after he was injured at work, failed to return to work as scheduled and thereafter repeatedly

13

169 Cal. App. 3d 1223 (1985). 187 Cal. App. 3d 299 (1986). 24 Cal. 4th 317 (2000). 230 Cal. App. 3d 775 (1991).

14

15

16

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failed to satisfy deadlines imposed by his employer to return to work or request extensions. The court dismissed the case prior to trial, holding that the custodians conduct fell into the category of unacceptable performance by any standard. Similarly, in Gosvener v. Coastal Corp.,17 a refinery supervisor, who held a safety sensitive position, was repeatedly warned that his drug and alcohol use was interfering with his job performance and attendance record. After repeated warnings, the employer finally terminated the supervisor. The court upheld the termination in a ruling made prior to trial, finding that the repeated violations constituted good cause. b. Investigations of Alleged Misconduct. In Cotran v. Rollins Hudig Hall International, Inc.,18 the California Supreme Court gave employers who properly investigate allegations of misconduct broader latitude to terminate employees for good cause. The court held that a decision to terminate employees for misconduct need only be based on a good faith belief and reasonable grounds that misconduct has occurred. Cotran involved a breach of contract claim by an executive who was terminated due to complaints of sexual harassment. The employer conducted an investigation of the complaints that was thorough and included an opportunity for the executive to provide his side of the story. Based on the investigation, the company concluded that the harassment had most likely occurred and, therefore, the company terminated the executives employment. In determining whether good cause for the termination existed, the California Supreme Court held that the employer need not prove that sexual harassment had actually occurred. Instead, the court ruled that the proper inquiry is whether the factual basis on which the employer concluded a dischargeable act had been committed was reached honestly, after an appropriate investigation and for reasons that are not arbitrary or pretextual. Under Cotran, three factual determinations are relevant to the question of employer liability: (1) whether the employer acted in good faith in making the decision to terminate the employee; (2) whether the decision to terminate followed an investigation that was appropriate under the

17

51 Cal. App. 4th 805 (1996). 17 Cal. 4th 93 (1998).

18

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circumstances; and (3) whether the employer had reasonable grounds for believing that the employee had engaged in the misconduct. Silva v. Lucky Stores, Inc.19 applied the Cotran standard to a sexual harassment investigation, thus giving employers guidance on procedures for investigations of misconduct. Although all investigations will be different, Silva provides several general suggestions for conducting adequate investigations: (1) An employer should implement a written policy specifying how allegations of misconduct will be investigated. The policy can provide for the following: that complaints will be treated seriously, investigated immediately and treated with confidentiality; that an attempt to identify all potential witnesses will be made; and that the accused employee will be allowed to respond to the charges. (2) A neutral person should be designated to conduct investigations. In many cases, either a Human Resources representative or an outside investigator may be an appropriate investigator. The person selected should be trained in investigations, which may include training by legal counsel. (3) Complaints should be investigated promptly.

(4) The employee making the complaint should be interviewed first, and then the accused employee should be allowed to respond. Other persons who may have witnessed the alleged conduct should also be interviewed. (5) Information obtained from each witness should be recorded by the investigator on a witness interview form. In addition, witness statements should be provided by important witnesses. (6) Typically, the investigator should use relevant, open-ended, nonleading questions in the interview, and he or she should attempt to elicit facts as opposed to opinions or supposition. Confidentiality should not be promised but should be maintained in each interview. Interviewees should be

19

65 Cal. App. 4th 256 (1998).

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encouraged to contact the investigator after the interview if they want to further discuss the matter. (7) The accused employee should be afforded ample opportunity to present his or her side of the story. This may require having more than one interview with the accused employee, not only at the beginning of the investigation but also at the end, giving the employee a final opportunity to comment on information gathered during the investigation before a conclusion is reached. (8) Witnesses can be allowed an opportunity to clarify, correct or challenge information provided by other witnesses which may contradict their statements or cast doubt on their credibility. (9) The investigators conclusions should be memorialized in a written document that focuses on factual conclusions rather than legal conclusions. D. The Wrongful Demotion Claim.

Breach of contract claims can also be based on personnel decisions that are less severe than termination. In Scott v. Pacific Gas & Electric Co.,20 the California Supreme Court concluded that an employee may bring a cause of action for breach of an implied contract not to demote without good cause. In Scott, the plaintiffs were long-term employees who alleged that they were wrongfully demoted. The plaintiffs claimed that the employer had failed to follow its written procedures, which provided for various progressive disciplinary steps to be taken before demotion was appropriate. Thus, the plaintiffs sued for breach of an implied contract not to demote them without good cause. In recognizing a contractual claim for wrongful demotion, the California Supreme Court held that an employee may rebut the presumption of an employers right to demote with evidence of a contractual agreement, express or implied, limiting that power. The court also instructed that employers can limit their exposure to contractual liability by consistently articulating and implementing policies designed to maintain their managerial prerogatives.

20

11 Cal. 4th 454 (1995).

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Scott therefore suggests that it is important for employers with progressive discipline policies to expressly reserve the right in those policies to impose discipline at the employers sole discretion, at any time, including demotion or termination. In addition, employers should expressly reserve the right to modify the terms of employment, such as through transfers, promotions, demotions, reclassification and reassignment. E. The Implied Covenant of Good Faith and Fair Dealing.

California law implies a covenant of good faith and fair dealing in every employment contract. The covenant assumes that employers will act in good faith and fairly in performing and enforcing the employment contracts terms. However, in Guz v. Bechtel National, Inc.,21 the California Supreme Court made it clear that a claim for breach of the covenant of good faith and fair dealing adds little or no value to a plaintiffs wrongful termination lawsuit. In Guz, the California Supreme Court confirmed that where an employer and an employee have an enforceable at-will employment agreement, a claim for wrongful termination in breach of the covenant of good faith and fair dealing will generally fail. The court reasoned that where there is an at-will agreement, the implied covenant cannot impose limits on the employers termination rights that are more restrictive than the express contractual at-will agreement. Alternatively, the court held that if breach of an implied contract requiring good cause for termination is established, a claim for breach of the implied covenant of good faith and fair dealing is superfluous. The court reasoned that plaintiffs are limited to recovering contract damages for breach of the implied covenant (generally, back pay plus lost future earnings, less all interim or reasonably available interim earnings). Tort damages, such as for emotional distress and punitive damages, are not available. Because the implied covenant claim therefore provides no remedy in addition to those remedies available on the plaintiffs contract claim, the implied covenant claim is superfluous. As tort damages are not available on claims for breach of an implied contract or breach of an implied covenant of good faith and fair dealing, few terminated employees limit their lawsuits to these contractual claims. Instead, plaintiffs often add claims for wrongful termination in violation of public policy,

21

24 Cal. 4th 317 (2000).

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which allow for the recovery of tort damages. This type of tort claim is discussed below.

III WRONGFUL TERMINATION IN VIOLATION OF PUBLIC POLICY

A. General Requirements for Public Policy Claims. To prevail on a claim for wrongful termination in violation of public policy, a plaintiff must prove that he or she was terminated for a reason that violates a fundamental public policy. Public policy claims generally fall into two categories: (1) whistleblower claims and (2) claims that duplicate statutory claims. Because emotional distress and punitive damages are available for such claims (unlike breach of contract claims), it is not surprising that many terminated employees bring public policy claims. Over the years, the California Supreme Court has repeatedly revisited and developed the doctrine governing claims for wrongful termination in violation of public policy. Stevenson v. Superior Court22 sets forth the minimum requirements that a public policy must meet to support a wrongful termination claim: The policy must be delineated in either a constitutional or statutory provision. The policy must inure to the benefit of the public rather than serve merely the interest of the individual. The policy must have been well-established at the time of the employees discharge. The policy must be substantial and fundamental.

22

16 Cal. 4th 880 (1997).

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As discussed below, other cases have clarified these requirements. 1. The Public Policy Must Be Tethered to a Constitutional or Statutory Provision. In Gantt v. Sentry Insurance,23 the California Supreme Court held that public policy claims must be carefully tethered to fundamental policies that are delineated in constitutional or statutory provisions. The Gantt decision was important because it required public policy wrongful termination claims to be carefully tethered to a statutory or constitutional provision. However, following Gantt, it was still unclear how closely tethered the public policy had to be. In Green v. Ralee Engineering Co.,24 the California Supreme Court answered this question, by allowing a public policy claim based on administrative regulations to proceed to trial. In so doing, the court suggested that the standard of carefully tethered may be fairly broad. The Green case is significant because, for the first time, the court recognized a claim based on regulations that implement statutory provisions. 2. The Public Policy Must Benefit the Public at Large.

In Turner v. Anheuser-Busch, Inc.,25 the California Supreme Court held that a public policy claim must be based upon a violation of a fundamental public policy that benefits the public at large, not simply private individuals. In Turner, the plaintiff claimed that he was forced to quit his job after complaining about suspected illegal acts by his supervisors. The court found the plaintiffs public policy claim to be invalid because his complaints alleged only violations of the employers internal policies or its collective bargaining agreements. However, in some cases, an individuals interests may also implicate the publics interests. In Gould v. Maryland Sound Industries, Inc.,26 the
23

1 Cal. 4th 1083 (1992). 19 Cal. 4th 66 (1998). 7 Cal. 4th 1238 (1994). 31 Cal. App. 4th 1137 (1995).

24

25

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court concluded that an employee may state a public policy claim by alleging that he was terminated because the employer wanted to avoid paying his or her wages. Gould held that the California Labor Code sections governing an employers obligation to promptly pay wages due to employees involve a fundamental public policy that benefits the public at large, even though they appear to relate to a purely private and individual dispute between an employer and employee. Thus, at a minimum, plaintiffs must identify something more than violations that harm a company or an individuals interest. Instead, the plaintiff must implicate a broader, public interest. 3. Fundamental. The Public Policy Must Be Well-Established, Substantial and

Not all public policies are deemed well-established, substantial and fundamental. Sullivan v. Delta Air Lines27 provides an example of a policy that did not meet this requirement. In Sullivan, an employee alleged that he was terminated in violation of California Labor Code section 1025, which requires the reasonable accommodation of employees involved in alcohol or drug rehabilitation programs. The court held that this statute could not support a public policy claim because the policy in the statute was not fundamental and substantial. The court reasoned that, although the statute protects an employees right to participate in a rehabilitation program, the statute does not prohibit discharging an employee who is unable to perform his duties due to current use of alcohol or drugs. The court concluded that this conflicting language could not reflect one clear public policy that was fundamental and substantial. Similarly, in Lagatree v. Luce, Forward, Hamilton & Scripps,28 the court rejected an employees claim that requiring compulsory arbitration agreements at the beginning of employment violated a fundamental public policy guaranteeing the right to a judicial forum and a jury. The court concluded that the conflicting public policy favoring the resolution of disputes through arbitration precluded the employees claim.

27

58 Cal. App. 4th 938 (1997). 74 Cal. App. 4th 1105 (1999).

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It should be expected that the courts will continue to clarify the requirements of the public policy claim. Indeed, the list of statutes that may support a public policy claim is lengthy and growing. A practical approach to preventing these claims is to become familiar with the factual circumstances that commonly give rise to them. Typical circumstances involve alleged whistleblowers or alleged statutory violations by employers. B. Whistleblower Claims.

Whistleblower claims are the more recognizable public policy claims. In the typical whistleblower claim, a plaintiff alleges that he or she was terminated (1) for complaining of some illegal activity that is prohibited by a statute or a constitutional provision or (2) for refusing to perform some illegal act requested by the employer. In this way, whistleblower claims are retaliation claims; the employee alleges that he or she was terminated in retaliation for complaining about or refusing to engage in illegal activities. 1. Claims Based on Complaints of Illegal Activity.

Whistleblower claims that are based on complaints of alleged illegal activity are common. The general scenario is that the employee is terminated after complaining about some improper activity prohibited by law. The case of Green v. Ralee Engineering Co.29 provides a prime example of a whistleblower claim based on an alleged complaint. In Green, a quality control inspector reported to his supervisors that the company was shipping defective components to airplane manufacturers. When he was later terminated, the inspector claimed that he was a whistleblower who was terminated in retaliation for his reports. Weinbaum v. Goldfarb Whitman & Cohen30 provides another example. In Weinbaum, the plaintiff alleged that his former employer and several individuals participated in an unlawful scheme to misrepresent the financial condition of six corporations. The plaintiff alleged he was fired for objecting to these misrepresentations.

29

19 Cal. 4th 66 (1998). 46 Cal. App. 4th 1310 (1996).

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Significantly, California courts have recognized public policy claims based on reports of conduct that the employees made pursuant to their job duties. For example, in Holmes v. General Dynamics Corp.,31 a business manager who supervised the analyzing of financial data on government defense contracts reported to his supervisor that the company was violating various provisions of its defense contracts, which resulted in excessive billings to the government. After the employee was terminated, he sued for wrongful discharge in violation of public policy. The court affirmed the jurys verdict, finding that the employer had wrongfully discharged the plaintiff. 2. Claims Based on Refusals to Perform Illegal Acts.

The second type of common whistleblower claim occurs where an employee alleges that he or she was terminated in retaliation for refusing to perform an illegal act. Parada v. City of Colton32 provides an example of this type of whistleblower claim. The plaintiff in Parada was an Assistant Building Director who was responsible for managing the citys building inspectors and ensuring the enforcement of local building codes, ordinances and regulations. When the employee became aware of garage conversions that violated building codes, he issued stop-work orders. The employees immediate supervisor was involved in allowing the illegal garage conversions that the employees conduct halted. When the supervisor terminated the employee, he responded with a claim for wrongful discharge in violation of public policy, arguing that he was terminated for refusing to allow the illegal building to continue. 3. California Whistleblower Statute.

California Labor Code section 1102.5 prohibits employers from making, adopting, or enforcing a policy that prevents an employee from disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation of a state or federal statute, or a violation or noncompliance with a state of federal rule or regulation. The statute also prohibits an employer from retaliating against an employee for disclosing such information. The statute further prohibits an

31

17 Cal. App. 4th 1418 (1993). 24 Cal. App. 4th 356 (1994).

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employer from retaliating against an employee for refusing to participate in an activity that would result in a violation of a state or federal statute, or a violation or noncompliance with a state or federal rule or regulation. The California Attorney General is required to maintain a whistleblower hotline to receive calls from persons who have information regarding possible violations of state or federal statutes. Lastly, employers are required to post a new workplace poster providing information on employees rights and responsibilities under Californias whistleblower laws, including the telephone number of the whistleblower hotline. 4. Post-Enron Federal Whistleblower Protections.

While the Enron-driven Sarbanes-Oxley Act of 2002 (the Act) made sweeping reforms to corporate governance law, the Act also created federal protection for whistleblowers. The Act provides whistleblower protection to employees of public companies when they act lawfully to disclose information (within the corporation or to outside investigators, regulators, etc.) about fraudulent activities within their company. The Act also provides that an employee claiming a violation of the Act must file a complaint with the Federal Department of Labor. Importantly, the Act does not preempt or supplant existing state law tort actions for wrongful termination in violation of public policy. Thus, the Act provides an additional statutory basis for public policy whistleblower claims. 5. as follows: Implement Complaint and Investigation Procedures. An employer should maintain an effective complaint policy which provides procedures for receiving and addressing employee complaints. Alternative persons can be designated to receive complaints, to address the scenario where an employee fears retaliation for complaining to an alleged violator of the law. A written policy on the complaint procedure can be distributed to all employees, and all managers should be trained on how to facilitate the handling of complaints. Investigations of complaints should be handled promptly and in a confidential manner, and investigations should adhere to the impartial standards discussed above in this article. Treat Complaints Seriously. It is important to listen to and seriously consider each complaint made by employees. The employer should document the complaint, any investigation conducted in response to the complaint -22 2006 DLA Piper Rudnick Gray Cary US, LLP

Avoiding Whistleblower Claims. Steps that employers can take to avoid whistleblower claims are

and any conclusions. The employer should also respond to the employee with its conclusions. Beware of Close Timing of Discipline or Discharge. Complaints that are made by an employee shortly before discipline or discharge are troublesome. Where a complaint is closely followed by an adverse employment action, such as discipline or termination, there may be a presumption of a retaliatory motive. In these circumstances, legal counsel should be consulted before moving forward with any discipline or termination. C. Public Policy Claims That Duplicate Statutory Claims.

An alleged violation of a statute can support not only a statutory claim for wrongful termination but also a tort claim for wrongful discharge in violation of the public policy embodied in that statute. For example, public policy claims brought by terminated employees often supplement statutory race or sex discrimination claims brought under Californias Fair Employment and Housing Act (FEHA) or the federal discrimination statutes, even though the tort and statutory claims rely on the same facts. A duplicative public policy claim should fail if the employer is exempt from the underlying statute. For example, in Kelly v. Methodist Hospital of Southern California,33 the California Supreme Court rejected a public policy claim based on alleged age discrimination in violation of the FEHA that was brought against a Methodist hospital. In rejecting the plaintiffs claim, the court reasoned that the hospital met the definition of a religious entity under the FEHA, as defined at the relevant time. The court concluded that as the hospital was exempt from liability under the FEHA, it could not be held liable on a duplicative public policy claim. Similarly, in Jennings v. Marrale,34 the California Supreme Court held that a public policy claim based on alleged age discrimination could not be stated against an employer with less than five employees because age discrimination by such small employers is not covered by the FEHA.

33

22 Cal. 4th 1108 (2000). 8 Cal. 4th 121 (1994).

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In addition, a public policy claim that is based on a discrimination statute should fail if the employee is unable to prove, under the statutory standard, that his termination was motivated by unlawful discrimination. For example, in Nelson v. United Technologies,35 an employee was granted a leave of absence to care for his sick wife and their child. When the employer discovered that the employee worked elsewhere during his leave of absence, the employer terminated his employment. In response, the employee brought a statutory claim for violation of the California Family Rights Act (CFRA) and a public policy claim based on the same statute. The court found that no evidence suggested the employers proffered reason for the termination decision (i.e., the employees work during a leave) was phony. The court thus concluded that the termination decision did not violate the employees rights under the CFRA. Accordingly, the court ruled for the employer on both the statutory and public policy causes of action. In contrast, where a statutory claim is barred due to the terminated employees failure to follow administrative procedures required by statute, the employee may still be able to bring a public policy claim based on the same statute. In Rojo v. Kliger,36 the California Supreme Court determined that a terminated employee can bring both a statutory sex discrimination claim under the FEHA and a public policy claim based upon the same incidents of sex discrimination. The court also held that employees do not have to exhaust their administrative remedies under the FEHA before bringing a public policy claim. This is significant because terminated employees bringing statutory discrimination claims are normally required to exhaust their administrative remedies. Following Rojo, terminated employees may sue for wrongful termination based on discrimination without jumping through the procedural hoop of filing a charge with the state or federal administrative agency. D. Liability for Punitive Damages on Public Policy Claims.

An important distinguishing feature between the contract causes of action discussed earlier in this article (i.e., claims for breach of contract or for breach of the covenant of good faith and fair dealing) and the public policy cause of action is that punitive damages may be awarded against an employer in

35

74 Cal. App. 4th 597 (1999). 52 Cal. 3d 65 (1990).

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connection with a public policy claim. The purpose of punitive damages awards is to punish defendants whose conduct is the result of oppression, fraud or malice and, in so doing, to deter future wrongful conduct by way of example. As punitive damages awards can be quite significant, exposure to such liability should be seriously considered by employers making termination decisions. California Civil Code section 3294 governs awards of punitive damages against employers. An employer may be held liable for punitive damages based on an employees conduct if (1) the employer had advance knowledge of the unfitness of the employee and employed him with a conscious disregard of the rights or safety of others, (2) the employer authorized or ratified the wrongful conduct, or (3) the employer was personally guilty of oppression, fraud or malice. A corporate employer can be held liable for punitive damages if such wrongful conduct was on the part of an officer, director or managing agent of the corporation. In White v. Ultramar, Inc.,37 the California Supreme Court clarified the definition of managing agent by limiting the term to those employees who exercise substantial independent authority and judgment over decisions that ultimately determine corporate policy. The court made clear that this definition does not include supervisors who hire or fire employees but who have no authority to make decisions that determine corporate policy. Given the potential liability for punitive damages awards on public policy claims, employers should be especially careful to instruct all supervisors who may qualify as managing agents on preventive measures when disciplining and terminating employees, especially those employees who have access to sensitive information concerning the company and employees who have voiced concerns about company practices.

37

21 Cal. 4th 563 (1999).

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IV CLAIMS BASED ON PREEMPLOYMENT AND POST-EMPLOYMENT CONDUCT

An employee who sues for wrongful termination may allege related causes of action based on the employers actions in inducing his or her acceptance of employment or in giving employment references after he or she leaves the company. These types of preemployment and post-employment claims provide additional avenues of tort relief for terminated employees. A. Fraud in Inducing Employment.

An employer can be held liable for falsely inducing a job applicant to accept employment in reliance on representations of job security and then terminating the employment relationship. In Lazar v. Superior Court,38 the California Supreme Court held that a terminated employee may sue for fraud if he or she was fraudulently induced to accept employment. In Lazar, the plaintiff was induced by falsehood to leave a secure job in New York and uproot his family to take a job in California. When he was terminated two years later in a management reorganization, he sued for fraud, along with other claims. The court concluded that employers were not absolutely shielded from traditional tort liability for fraud in wrongful termination cases. To the extent an individual is fraudulently induced to enter an employment contract, he or she can recover all detriment proximately caused by the fraud, such as the cost of relocation or loss of job security and income from his or her former employment. Future lost income is also recoverable provided the damages are not speculative or remote.39 B. Withdrawal of Job Offer: Promissory Estoppel.

An employer may be held liable for failing to fulfill a promise of employment where an individual relinquishes his or her current job in reliance on

38

12 Cal. 4th 631 (1996). Helmer v. Bingham Toyota Isuzu, 129 Cal. App. 4th 1121 (2005).

39

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the unfulfilled promise of other employment. In Toscano v. Greene Music,40 the plaintiff was a manager at Greene Musics competitor. Greene Music offered plaintiff a manager position and, in reliance on that employment offer, plaintiff resigned his current employment. However, prior to the date that plaintiff was scheduled to begin his new job, Greene Music withdrew its offer of employment. The California Appellate Court held that an employee who resigned an at-will employment position with a former employer in reliance on an unfulfilled promise of employment may recover reliance damages, under a promissory estoppel theory, based on wages lost from the prior employment. However, the lost wages damages must not be speculative or remote. C. The Letter of Recommendation.

The court in Randi W. v. Muroc Joint Unified School District41 held that a previous employer can be liable for making fraudulent representations in a letter of recommendation. In Randi W., an employee worked for three different school districts before being employed by the school district in which the plaintiff was a student. The three school districts provided letters of recommendation that offered general and unreserved praise for the employees character and personality (e.g., dependable and reliable, pleasant personality, high standards, and relates well to students), despite their knowledge that he had a history of sexually assaulting students. After the plaintiff student was sexually assaulted by the employee, she sued, claiming that the letters of recommendation were fraudulent misrepresentations that caused her harm. The California Supreme Court held that the letters of recommendation could create liability for fraud. The court concluded that the writer of a letter of recommendation owes a duty not to misrepresent facts in describing the qualifications and character of a former employee if making these representations would present a substantial, foreseeable risk of physical injury to the prospective employer or a third person. Employers cannot avoid lawsuits by requiring job applicants to sign releases that authorize prior employers to provide job references. In McQuirk v. Donnelley,42 the plaintiff signed a release in which he released the prospective
40

124 Cal. App. 4th 685 (2004). 14 Cal. 4th 1066 (1997). 189 F.3d 793 (9th Cir. 1999).

41

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employer and all others from any liability or damage which might result from references given by his prior employers concerning his work record. Relying on this authorization, a prior employer gave the plaintiff a bad reference which cost the plaintiff his new job. The plaintiff sued the prior employer for defamation. In so doing, the plaintiff sought to invalidate his signed release by claiming that California law prohibits shielding defendants from future liability for intentional torts such as defamation. The court agreed with the plaintiff and allowed his defamation claim to proceed to trial. Thus, under McQuirk, employers should not rely on written releases as guaranteed protection against claims associated with job references. These cases emphasize the care that employers must take in providing employment references. Generally, a reference should provide merely the employees name, job title, and dates of employment. An employer who provides additional information (1) runs the risk under Randi W. that full disclosure may be required and (2) runs the risk under McQuirk of a defamation claim if full disclosure is provided. As providing explicit references about employees may pose legal risk, the business benefits of doing so should be weighed carefully against the risks.

V TERMINATION GUIDELINES
The cases discussed above emphasize the importance of defining the employment relationship clearly at its inception in order to avoid problems at the end of the relationship. It is also important to ensure that termination decisions are fair and justified. The following guidelines can assist an employer who must contemplate the termination of an employee. Although an employer who follows these guidelines may still be sued for wrongful termination, the employer will decrease the likelihood of such claims being filed and will increase the chance of defeating such claims if they are filed. Have all employees sign written, integrated at-will employment agreements that can be modified only by a subsequent document signed by the employee and an authorized representative of the company. Place at-will language on employment applications, in job offer letters, in employment contracts (if used), in employee handbooks and the

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accompanying acknowledgment forms, in personnel policy manuals, in reductionin-force guidelines and in operations manuals. Practice progressive discipline so that employees with performance problems are given notice that their performance is unsatisfactory and an opportunity to improve. However, reserve in writing the right to impose any discipline, including demotion and termination, at the companys sole discretion. Any investigation of a complaint about an employees performance should be well-documented. The investigator must be impartial. A paid suspension of the employee may be appropriate during the investigation. It is very important to ask for the employees side of the story before making a decision to terminate employment. This should involve a face-to-face meeting with the employee that is documented. More than one meeting may be needed. Have an objective third party review all proposed terminations. This need not be an outsider, but it should not be the employees supervisor. Human Resources or company counsel are often effective in this role. Consider all potential issues relating to an employee that is being considered for termination before the termination, including (1) the employees seniority, (2) the employees past performance appraisals, (3) prior disciplinary action, if any, (4) whether the termination is in compliance with relevant personnel policies, (5) any mitigating circumstances, (6) whether the present termination is consistent with past terminations, (7) prior complaints or concerns raised by that employee and (8) any assurances that were initially made to encourage the employee to accept employment with the company. When terminating an employee, the decision should be announced to the employee personally and privately. It is helpful to have a company witness also attend the meeting, in the event of future litigation. However, having more than two company representatives present may be overbearing and intimidating. Consider putting the reason for termination in writing so there is no misunderstanding. If a reason is given, be sure it is truthful and complete. Reasons for termination will not be credible to a jury if they change or are supplemented at a later date. Do not discuss the reason for an employees termination either inside or outside the company, except with other employees who have a need to know -29 2006 DLA Piper Rudnick Gray Cary US, LLP

that information. If a third party requests information concerning the employee, confirm only the employees dates of employment and positions held.

VI CONCLUSION
Wrongful termination litigation is a major area of concern for employers. The employer who does not meticulously create and maintain at-will employment relationships will find it more difficult to defeat an employees claim that the employer promised that he or she could be terminated only for good cause. In addition, public policy claims are gaining momentum as courts identify new statutes that provide additional bases for such claims. The California courts are also loosening their grip on alternative tort claims in the employment context, such as fraud claims. Thus, employers must take appropriate preventive measures to enhance their ability to avoid and defend wrongful termination claims. Employers should also approach employee terminations with great care in order to avoid the expense, uncertainty and disruption caused by wrongful termination lawsuits.

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