Beware of Exceptions to the Employment at Will Rule

Let’s now look at the exceptions to the U.S. employment at will rule which provide some additional protection for U.S. employees. And let’s start with this case, we’ve got a situation where a job candidate is negotiating with a company. The candidate wants a job as director of marketing, and during the negotiations, the company says to the candidate, “If you are doing the job, you can be assured that you will not be discharged.” This is an actual quote from the case. And the question is, if this person is hired and then fired without cause, is the person entitled to damages? Please hit pause. Write down your answer and then we’ll look at the result.

In this case, the court decided that normally this person could be fired without cause. That’s the general U.S. approach. However, when the company said, “If you are doing the job, you can be assured you will not be discharged.” That became a contractual obligation of the company. The company in effect was changing the usual employment at will rule, and so the employee won the case. So we’ve got one exception, and that’s where there’s a contract formed that overturns the employment at will rule. OK, let’s try a second case. How do you come out on this one? You’ve got a salesperson who works for a company for 25 years.

He obtains a $5 million order, and the next day the company fires him in an attempt to avoid paying the bonus that would go with his kind of order. Would the salesperson be entitled to damages? Hit pause and write down your answer. In this case, again under the normal employment at will rule, the company could fire the sales person and there would be no liability. However, the courts in some states, in a few states say, “Look this is not fair, and therefore in situations like this the employees should be entitled to damages.” In other words, the company has to act in good faith in firing employees.

So, we’ve got a second exception to the employee-employment will rule and that is, was the discharge, was the firing fair and in good faith. OK, let’s try a third scenario. We’ve got a nurse who goes on a camping trip with hospital staff including her supervisor. And they’re sitting around the campfire one evening and the employees begin to moon other people who are on the camping trip. And the supervisor says, “Hey, why don’t you join them?” They’re mooning each other while they’re singing Moon River. Now, if you’re from outside the United States I’m not sure if you understand the verb mooning, but basically it means dropping your pants and bending over backwards, that’s called shooting a moon at other people.

So she said, “No, I’m not going to do that. I’m not going to participate.” She returns to the hospital, and she’s fired even though she has had good performance reviews. Would she be entitled to damages? Well, here again under the normal employment at will rule, the answer would be no. The hospital could fire her without any cause. However in this case, the Arizona Supreme Court started by saying, “Look, we have little expertise in the techniques of mooning, but we do know that an employer may fire somebody for a good cause or for no cause. But the employer may not fire somebody for bad cause, which means a cause that violates public policy.

And firing somebody for refusal to participate in public exposure of one’s buttocks is a termination contrary to the policy of this state.” So, here we have a third exception used by both states which is a violation of public policy. So bottom line, courts have developed these three exceptions to the employment at will rule in the United States, and where the exceptions apply. The damage consequences in the United States can be fairly consequential, and I’ll discuss that in a minute. But first, let’s return to our situation involving the bank manager. So, you’ll recall that as a manager of the bank you discover the bank is not complying with consumer credit law.

You try to convince your superiors to comply, when they don’t, you disclose the incriminating files to the bank auditors. The bank fires you. Can you recover damages? Now, think about this again. You wrote down an answer earlier, but think about it again. In the United States, would the manager be able to recover damages? Please hit pause, and write down your answer. And the answer is that, yes, the bank manager would be allowed to recover damages in most states because of the public policy exception. There’s a policy that people should disclose incriminating files, and that was the reason for the firing. And therefore, in this case the bank was liable.

Now as I mentioned in cases like this, the damages can be substantial. A few years ago, I was teaching at Stanford University as a visiting professor, and I returned home one night, picked up the local paper, and read an article about the Silicon Valley employee. The employee was fired. File a wrongful discharge lawsuit. The company investigated the case, and then said, “Oh sorry, we lost our file.” And so according to this article the previous day, a jury had awarded the employee $6 million in actual damages and tacked on to another $55 million in punitive damages to punish the employee. Now, this is California where damages tend to be high in lawsuits like this. But it’s not just California.

For example Kentucky, two Ashland Oil employees were awarded $70 million after a wrongful discharge because they protested illegal foreign payments. And in Texas, an energy company employee was awarded a $124 million for wrongful discharge after refusing to prepare documents containing misleading information. These are violations of public policy. Now in cases like this, often you read the headlines where the damage awards are huge after the jury gives the verdict. However, often these cases are settled afterwards in order to avoid an appeal. So both of these cases for example, settled for $25 million.

The other side of the story, however, is that in some cases like the ones I’ve just described, the employee wins the lottery, but in other cases employees who are wrongfully terminated don’t win much at all. Here’s a quote from an ACLU attorney, “The average employee who has been wrongfully terminated has as much chance of getting a jury trial as sprouting wings and flying to the moon.” And the reason for that is the employment at will rule.

So one final note about these damage awards and that is, as a result of the three exceptions to the employment at will rule in the United States, employers have become very cautious about firing employees, and actually according to this RAND study, the indirect costs of firing are much greater than the costs of jury awards. In fact, they’re a hundred times greater than the jury awards. Now why is that? Well, it’s because companies are afraid to fire employees even poor performers. So they keep poor performing employees on the job at a cost to the company. They make huge severance payments to employees, and they spend a lot of time going through various processes to discharge someone.

So the development of these three exceptions to the employment at will rule has had a huge impact on employment practices in the United States. Now next, we’re going to take a look at how you can manage this risk of damage award after discharging an employee.