Why businesses need to understand how policies affect employment laws

Many businesses assume that employment at-will means the employer can terminate the relationship at any time. While the default assumption is that employment is at-will, some actions taken by employers can create an implied-in-fact contract.

“That’s where employers can often get into trouble with a disgruntled employee. At-will employment allows the employer to fire an employee at any time without having to show good cause, as long as it’s not for a discriminatory or punitive reason. But an employee, if they’re upset about getting fired, can claim they had an implied-in-fact contract and can only be dismissed for good cause,” says Stacy Monahan Tucker, a partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Tucker about what at-will employment means and how businesses unknowingly create an implied-in-fact contract.

What types of interactions can be interpreted as an implied-in-fact contract?

Courts will look at the totality of an employer’s relationship with its employee when determining if an implied-in-fact contract exists. The key question is whether an employee had a reasonable expectation of an implied-in-fact employment contract. A court will consider many factors, including the written and verbal policies and procedures used by the company, the employment manuals, any employment-related agreements such as confidentiality agreements or noncompete agreements, and the interactions between the employer and the employee, as well as the employer and other employees. While many factors will not create an implied-in-fact contract alone, combined they can weigh heavily in favor of such a finding.

Factors considered by courts include the length of employment, the use of progressive discipline to make its termination decisions, statements made to an employee that he or she doesn’t have to worry about losing his job unless a mistake is made, and a requirement of signing a noncompete agreement or confidentiality agreement as part of the employment arrangement.

An employer might have written policies or employment documents in place that it thinks make it clear employment is at-will. Many handbooks state the employment arrangement is at-will. But frequently those handbooks also state that nothing in them is intended to create a contractual relationship. That can inadvertently invalidate all previous statements supporting the at-will relationship, as the document specifically states it does not define the contractual relationship. Moreover, the requirement that an employee sign a noncompete or confidentiality agreement can support the argument that the employee paid consideration by signing such an agreement and thus entered into an implied-in-fact contract. Many employers do not realize the importance of having employment documents reviewed for consistency.

How should companies approach handbooks and policies?

Companies should have their employment documents drafted by an employment attorney rather than just a human resources person, who often has cobbled together information from previous handbooks without fully understanding the legal ramifications. An employment attorney can ensure that the documents are clear and work well together.

A best practice is to have a written employment agreement that every employee signs. It should clearly state that the arrangement is at-will employment and the agreement is integrated, which means that if a provision is found to be ambiguous or unenforceable, the rest remains in full force. That reduces the chance of an employer being able to invalidate the entire agreement.

Many of these employment issues can be avoided by careful review of internal policies and documents before problems arise. That’s why it’s important to develop an employment contract and a cohesive body of employment documents that work as a unit. Then you can cover issues you want to address and minimize any surprises down the line.

Stacy Monahan Tucker is a partner at Ropers Majeski Kohn & Bentley PC. Reach her at (650) 780-1719 or [email protected].

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