Employee Relations Law Journal 49 Vol. 31, No. 1, Summer 2005

Terminating the Employee-Employer Relationship: Ethical and Legal Challenges

Dan Van Bogaert and Arthur Gross-Schaefer

On late Wednesday afternoon, the day before Thanksgiving, the Director of Development for a small community non-profit organization is called to the Executive Director’s office. The Director of Development has been in her position for two years, and while she has not yet been able to raise large sums of money, she has worked hard and all of her performance reviews have been positive. Upon entering the office, she is surprised that there is another member of the senior staff present, and she can feel a tenseness that is highly unusual for this non-profit which prides itself on its warm, caring, family envi- ronment. She is quickly informed that she is being terminated and, in lieu of notice, she is being given a generous two-week severance payment. When she requests the reason for this sudden termination, the Executive Director slides a legal document entitled Waiver and Confidentiality Agreement over to her. When she refuses to sign the Agreement, the Executive Director tells her that he cannot discuss anything related to the termination. He then tells her that the other senior staff member will accompany her to her office, and that she has 20 minutes to remove all of her personal items. The Executive Director instructs her to not touch her computer, make any phone calls, or take any items belong- ing to the organization. Moreover, she is not to talk to any of the staff members. The other senior staff member walks with her to her office and stands watching carefully as she quickly gathers her personal items. He then escorts her out of the premises to her car.

Many employers and managers consider only the legal conse- quences when terminating an employee. In the real-life sce-

nario introduced here, the choreography of the termination, from its timing late in the afternoon the day before Thanksgiving, to what was and was not said, to the use of another senior staff mem- ber to watch over the actions of the terminated employee, were carefully planned and directed by the non-profit’s attorney to reduce legal liability. The Executive Director, when asked why he followed this procedure, shared that he was not a legal expert and felt that he had no option but to follow the advice of their attor- ney even though it felt a little unfair, and he knew this process would cause a great deal of stress to the employee. What the Executive Director and counsel failed to consider fully was the

Dan Van Bogaert, JD, and Arthur Gross-Schaefer, PhD, are in the Department of Marketing

& Business Law at Loyola Marymount University in Los Angeles. Dr. Gross-Schaefer may be

reached at [email protected] and Dr.Van Bogaert at [email protected]/lmu.edu.

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Terminating the Employee-Employer Relationship

impact of this action on the terminated employee, the other employees, the donors, community leaders, and the organization itself. There are inevitable negative consequences when only legal risks are reviewed and other considerations are ignored.

The new concept of termination management has emerged from ethical and legal challenges associated with the process of terminating the employer-employee relationship. Terminating the relationship may be one of the riskiest tasks facing an employer because of numerous legal hurdles, and the profound impact on the terminated employees, co-workers, future employees, customers, suppliers, donors, investors, board members, and community leaders. Moreover, the way in which an organization manages the termination process will influence the working environment and its core values. In short, how one termi- nates an employee is like throwing a pebble into a pond and watch- ing its rippling effects on many individuals and the organization itself.

A long list of legal pitfalls can trip up an organization and provide ammunition for wrongful termination lawsuits. Human resources pro- fessionals and attorneys justifiably exercise great caution before mak- ing the ultimate decision to terminate an employee. Consideration of alternative solutions prior to reaching “last resort” layoffs should be part of the decision-making process. (Refer to “Alternatives to Involuntary Terminations,” as follows.) Prudent employers attempt to avoid wrongful termination lawsuits by following procedures that thoroughly review each employee’s circumstances before making the discharge decision. The fear of lawsuits can be alleviated when the decision process involves professionals, trained in termination man- agement, who understand the nature of “high risk terminations,” requirements of proper record keeping and performance evaluations, exceptions to the at-will employment doctrine, and ethical issues.

Alternatives to involuntary termination are in effect quasi-ethical considerations. Implementation of such alternatives strengthens an organization’s ability to avoid or minimize legal liability, and coinci- dentally satisfy important ethical obligations. (Refer to “Effective Inclusion of Ethical Consideration,” as follows, for suggested approach- es to ethical issues.) Even though an organization is on firm legal ground to initiate layoffs based on legitimate and compelling business necessity, maintenance of core values, decency, and respect for affect- ed employees may be equally important. There is a wrong and a right way to handle involuntary terminations of employment, in addition to a long list of legal considerations. Proper termination management examines both ethical and legal challenges. (The use of the term “lay- off” is intended in the generic sense, unless otherwise specified in con- nection with statutory law.)

The purpose of this article is to examine the best practices of ter- mination management, including alternative solutions for avoiding wrongful termination lawsuits.

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AT-WILL EMPLOYMENT DOCTRINE

Based at least in part on the free-enterprise system philosophy, early court decisions established a US common-law rule: the at-will employ- ment doctrine.1 Eventually, this doctrine was codified in most states.2

The doctrine essentially provides that either the employee or employer for any reason or for no reason may terminate the employee-employer relationship.

Ever since the 1980s, starting with the California Supreme Court ruling in Tameny v. Atlantic Richfield 3 that fired employees could sue their employers for emotional distress caused by the termination, employees who lose their jobs are more inclined to sue their employers. Coincidentally, employers are more hesitant to rely on the at-will doctrine as the sole basis for involuntary terminations, or at least they should be.

The premise of private-sector employee-employer relationships is generally based upon the at-will employment doctrine. (This doctrine usually does not apply to public-sector employee-employer relation- ships because of federal and state statutory prohibitions.) But the increase in wrongful termination litigation in the past decade has made the prospect of terminating an employee more fearful and onerous for many employers. The increase is understandable in light of the fact that employees are more aware of their legal rights. Employee complaints may be easily investigated and litigated by the Equal Employment Opportunity Commission and state agencies.

EXCEPTIONS TO (AND EROSION OF) THE AT-WILL DOCTRINE

Notwithstanding the fact that most states have codified at-will employment relationships, certain employees’ rights frequently protect against implementation of the doctrine by employers. Following are examples of legal exceptions and statutory restrictions relating to the at- will doctrine:

Constructive Discharge

An employee who apparently voluntarily quits may claim later that the termination was actually forced because of intolerable working con- ditions.4 The elements of constructive discharge include: (1) actions and conditions so intolerable or aggravated at the time of resignation that a reasonable person in the employee’s position would have resigned, and (2) that the employer had actual or constructive knowledge of the intol- erable actions and conditions and their impact upon the employee, and (3) the employer could have remedied the situation but did not.

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Statutory Restrictions

Federal or state anti-discrimination statutes prohibit terminations of employees who belong to any one of several protected classes, e.g., race, color, religion, national origin, sex, age, disability, veteran or mar- ital status, pregnancy. These anti-discrimination statutes preempt an employer’s right to exercise the at-will doctrine.5

Public Policy

State courts may apply a public policy exception. Even at-will employees cannot be terminated for an unlawful reason that violates public policy. An example would be where an employee refuses to commit perjury during testimony that would have protected the employer for wrongdoing.

In Foley v. Interactive Data Corporation, the California Supreme Court held that “the employer’s right to discharge an at-will employee is still subject to limits imposed by public policy, since otherwise threat of dis- charge could be used to coerce employees into committing crimes, con- cealing wrongdoing, or taking other action harmful to the public weal.”6

Employment Contracts

The employment at-will doctrine does not apply to jobs covered by contracts that state a specific employment period. In other words, an employment contract may override the doctrine. Employers need to avoid creation of unintended contractual obligations to terminate only for cause.

When an employee can establish an implied or oral (unwritten) con- tract, the employer may not utilize the employment at-will doctrine to discharge the employee. Contracts may be implied from indirect lan- guage in employee handbooks, policies, verbal presentations at new hire orientation, incomplete written offers of employment, and other factors in the workplace interpreted to require “for cause” termination. But even where an employer implements a procedure in which the employee signs an acknowledgement form to the effect that an employ- ment contract cannot be implied, and that at-will employment relation- ship exists, some courts have still required proof of “just cause” for the termination by employers.7

Implied contracts may also exist as a right that an employee acquires based on the employer’s actions, without a written contract. A contract may be implied when the employee can reasonably assume, based on statements in company policy or communications, that involuntary ter- mination of employment will not occur without cause. A concrete

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example of an implied contract may be merit pay raises that are based on favorable performance evaluations but inconsistently applied.

Use of a “probationary period” for new hires as a provision in an employment contract, or as part of written company policy, can also create problems for employers. Successful completion of a probationary period may be intended as the last step of the selection process. But it may also be misconstrued as a contractual guarantee of continued employment once the probationary period is over, unless the language is carefully crafted and communicated. For example, the policy or con- tract may include the following language: “successful completion of the probationary period may not, however, be interpreted as a guarantee to continued employment. Rather, employment is still intended to be an at-will relationship, as defined under California Labor Code section 2922, et al.”

Implied promises of continued employment except for cause may prevent the exercise of at-will termination.8

Collective Bargaining Agreements

Collective bargaining agreements typically preclude at-will termina- tions, and permit only for-cause terminations. And employees may not be punished or terminated on the basis of union membership. Such an adverse employment action would also constitute an unfair labor prac- tice under various labor codes, for example, the National Labor Relations Act (NLRA).9

Section 7 of the NLRA gives most non-supervisory employees the right to form and join a union. The NLRA also permits unions to col- lectively bargain over “terms and conditions of employment.” As a result, essentially all union contracts do not allow employers to use the at-will doctrine. Further, Section 8(a)(1) makes it illegal for employers to interfere with, restrain, or coerce employees in their exercise of Section 7 rights, particularly with employer threats that imply loss of job.

Disability

Lacking provable business necessity, a fired disabled employee may be protected from application of the employment at-will doctrine, par- ticularly if the affected employee is able to perform the essential func- tions of the job after reasonable accommodation.10

The Americans with Disability Act (1990)11 and state statutes prohibit discrimination in employment activities, including involuntary termina- tions against people with a qualifying disability.12

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Special Public Policy Exception: Retaliation and the Whistle Blower

Many statutes prohibit termination or other adverse employment activities in retaliation against an employee for the exercise of a legal right. For example, Title VII of the Civil Rights Act of the 1964, as amended, makes it unlawful for an employer to retaliate against an employee who files a complaint with the Equal Employment Opportunity Commission. This prohibition applies whether or not dis- crimination actually occurred.13

Employees may not be terminated in retaliation for exercising a right or for engaging in a protected activity, such as “whistleblowing” to reveal to an appropriate regulatory agency an employer’s illegal dumping of toxic waste material. California prohibits employers from preventing employee disclosures of their alleged illegal activity to appropriate governmental authorities.14 Examples of whistleblower statutes include the federal Whistle Blower Protection Act of 1989 for federal workers; parts of the Clean Air Act, Safe Drinking Water Act, Solid Waste Disposal Act, Federal Water Pollution Control Act, and the Occupational Safety and Health Act of 1970 (OSHA). Most of these statutes were enacted to address activities in industries with a propen- sity for employers to harm the environment.

Provisions of these statutes prohibit employers from discharging or otherwise punishing employees in retaliation for disclosure to appro- priate governmental agencies of the wrongful acts of their employer; however, these statutes exclude from protection the disclosure of haz- ards deliberately caused by an employee, as well as “frivolous” com- plaints.

Activities of employees protected by statute against employer retali- ation include disclosure of wages, serving on jury duty, military serv- ice, and maintaining the privacy of arrest records that do not lead to convictions.15

Employment Torts

An employee who is terminated for an unlawful reason in violation of public policy may bring suit for wrongful termination, and the at-will doctrine would not apply. But making proper ethical decisions may actually help to minimize potential tortuous conduct and related law- suits.16

Other employment torts that may give rise to wrongful termination claims by terminated employees include defamation (e.g., an unprivi- leged untrue communication, intentional or unintentional, causing harm to the reputation of another during the layoff determination process, based on performance evaluation records), interference with contractu-

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al relations (e.g., employer induces a prospective employee to break a confidentiality agreement), interference with economic benefit, invasion of privacy, and fraud (e.g., enticing a job applicant with false represen- tations during recruitment efforts).17

Attempting to help employers overcome their fear of providing more than just the standard “date of hire—date of termination” in reply to reference requests, the majority of states have enacted ref- erence immunity legislation. Although California does not have an employer reference immunity statute, California Civil Code Section 47 (c) allows privileged publications, which may give employers lim- ited protection against defamation claims.18 These state laws are rel- evant because they may protect employers from defamation claims by former laid-off employees. The purpose of the privilege is to pro- mote candid and open communication without the fear of being sued for defamation and other employment torts. Like the common law protection afforded by qualified privileges, these statutes protect employers, unless it is proved that the privilege was abused because of lack of good faith, knowing falsity, recklessness, or malicious pur- pose.19

JOB AND BENEFIT PROTECTION STATUTES

While US workers’ jobs are not inherently guaranteed for life, sever- al federal and state statutes may grant temporary job protection. Similarly, employee benefits are generally not guaranteed except those as protected under applicable statutes, or in certain instances, under group insurance contracts. Following are some of the more important applicable job and benefit protection statutes.

Family and Medical Leave Act of 1993 (FMLA)

A covered employee is entitled to up to 12 weeks of unpaid leave for the care of a spouse, parent, or child who suffers from a “serious health condition.”

Uniformed Services Employment and Reemployment Act of 1994 (USERRA)20

Prohibits discrimination against persons who are members of, apply to be a member of, perform, have performed, apply to perform, or have an obligation to perform service in a US uniformed service.

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Worker Adjustment and Retraining Notification Act (WARNA)21

WARNA applies to organizations with 100 or more full-time employees (part-time workers are not included); must give 60 days’ advance notice of a mass layoff or plant closure, as defined under WARNA. WARNA requires employers to provide a 60-day notice before the effective date of a mass layoff or plant closure. The California Labor Code has similar but not identical notice and cover- age requirements.22

Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA)23

This federal statute gives workers and their families who lose group health plan benefits (medical, dental, or vision) the right to choose temporary continuation of such benefits. Usually, a general notice must be furnished within the first 90 days of coverage under a health plan; however, the deadline is accelerated to the date that the election notice must be provided if a qualifying event occurs during the 90-day period.24

Older Workers Benefit Protection Act (OWBPA)25

Prohibits certain employers from discriminating against employees, age 40 and older, in early retirement and other benefits. Older workers must be given benefits that are at least equal to those provided to younger workers, unless the employer can prove that the cost of pro- viding an equal benefit would be more for an older worker than a younger one. OWBPA imposes strict guidelines on employers who seek to have employees sign agreements that waive their rights under the Age Discrimination in Employment Act. Generally, a valid waiver must be voluntary, and must include employee rights under the Employee Retirement Income Security Act (ERISA), a 21-day (45 days if group incentive offered) waiting period for signature and seven days to revoke afterwards. The employees also must be given benefits greater than those to which they would already be entitled.

These job protection statutes partly address ethical issues relating to job protection, and the need for advance notice in the event of invol- untary termination or certain leaves of absence. Related ethical issues and moral obligations may be balanced against the need for business organizations’ inherent right to compete in a free enterprise system without undue regulatory interference.

There is a healthy democratic tension, not unlike the democratic ten-

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sions that exist in the balance of powers between the judicial, legisla- tive, and executive branches, between employers’ use of the at-will employment doctrine and job protection rights of employees. The his- torical imbalance originally favoring employers has been brought back into balance because of the substantial erosion of the at-will doctrine by exceptions based on legal concepts and statutory restrictions.

The Employee Retirement Income Security Act establishes minimum national standards and protection of participant rights for certain retire- ment and health and welfare benefits, as defined under the Internal Revenue Code.26

Employers who sponsor ERISA plans are required to disclose princi- pal plan features to participants and beneficiaries in a timely manner via a summary plan description (SPD). Employees who lose their jobs who are also participants in such plans must be given a statement of their vested benefits, payment options, and other pertinent information regarding their benefits that may impact decisions precipitated by ter- mination of employment.

HIGH-RISK TERMINATIONS AND POTENTIAL CONSEQUENCES

High-risk terminations are those instances in which employers are faced with decisions to terminate employment of employees whose cir- cumstances likely fall within one or a combination of the foregoing exceptions to the at-will doctrine

The risk of being sued is reduced when there is a clear and well-doc- umented cause for termination. Justifiable causes include gross insub- ordination, performance below expectations, excessive absenteeism without excuse, and workplace violence. Terminations without cause, in connection with job restructuring based on a compelling and legiti- mate business necessity, are also generally protected from wrongful ter- mination lawsuits.

Many times, the reasons for involuntary terminations are open to dis- pute. In these circumstances, employers must conduct a careful review of the affected employee’s work history and surrounding circumstances, as well as the possible application of exceptions to at-will employment. Ethical issues should not be overlooked either.

REMEDIES FOR WRONGFUL TERMINATION

Remedies for wrongful terminations in violation of public policy, implied contract, and covenant of good faith and fair dealing may include back pay and benefits, “front pay,” reinstatement, damages for pain and suffering, and even punitive damages.27

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ALTERNATIVES TO INVOLUNTARY TERMINATIONS

Problems associated with involuntary terminations may be avoided by choosing positive alternatives. Before leaping to the conclusion that involuntary terminations are necessary, employers should first consider other alternatives. Besides the advisable caution prompted by legal rea- sons, such as potential costly discrimination and wrongful termination claims, employers may discover practical alternatives that coincidental- ly satisfy ethical considerations. Following are several effective practical alternative solutions. Whether or not they are practical depends upon the financial condition and nature of the organization. Obviously, these alternative actions require well-thought-out communications and sensi- tivity to concerns of employees.

Lower Incentive Payouts/Salary Freezes or Voluntary Salary Cuts

Adjustments to employee compensation may offer ways for employ- ers to avoid the more drastic step of involuntary termination. Delaying merit pay increases and lowering incentive pay or base salaries may be preferable to actual loss of job. Creative variations of adjustments to employee compensation may include special leave without pay during vacation periods, and elimination of executive perks and other discre- tionary benefits.

These actions adversely affect employee morale, and probably pro- ductivity, in the short run; however, if successful in avoiding involun- tary terminations, morale and productivity may eventually be restored.

Temporary Layoffs

Temporary layoffs are an alternative that may save permanent loss of jobs. This alternative has been common for unionized airline companies, particularly during the initial deregulation of the airlines industry in the 1980s. The temporary layoff approach avoids wrongful termination claims because many long-term temporary layoffs compel affected employees to seek and obtain other jobs. Employers still need to heed advance notice and final pay requirements under applicable state and federal statutes. (Refer to “Advance Notices & Final Pay Issues,” as follows.)

Reduced Workweek/Job Share

If the nature of work performed allows for cutbacks in the regular workweek, then such action may prevent the need for involuntary ter-

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mination. Results of a reduced workweek also necessarily include over- all salary expense and incentive pay reductions.28

In this connection, some state unemployment agencies have flexible programs that allow willing employers to permit claims for “partial unemployment benefits” when workweeks are reduced (e.g., California Employment Development Department).

SEVERANCE PAY PLAN

A severance pay plan offers substantial advantages to both the employer and affected employees. A written plan provides an effective defense against claims that an employee was promised more severance. It is especially effective against alleged oral promises. And, severance payments alleviate much of the stress from financial worries associated with unexpected job loss.

If feasible, an employer should offer compensation, as well as group insurance plan benefits coverage extended beyond the termination date, such as medical and life insurance. The length of coverage extension would typically depend upon each eligible employee’s length of service.

The plan itself should be a formal written document that includes an employer policy and procedures. The policy would specify the com- pensation and benefits employees receive in the event of involuntary termination without cause. It is a flexible tool, especially for layoffs and restructurings, to help assure some uniformity in the terms and amounts of severance pay.29

Severance pay plans are generally considered to be “employee welfare benefit plans” governed by ERISA;30 therefore, the plan must state who is eligible, the amount of compensation, and other requirements, such as a written release or settlement agreement, and the ERISA-required state- ment of rights and administrative procedure for appealing the denial of benefits under the plan. As with other employee welfare benefit plans, a summary plan description must be given to all eligible employees.

The advantages to employers’ treating the plan as a formal ERISA plan are that the plan may be changed or terminated at any time for any reason, and the employer has complete discretion regarding the amount of severance pay. In other words, severance pay plan benefits are not subject to ERISA vesting provisions. Also, the plan does not affect an employer’s right to terminate at-will employment.

OUTPLACEMENT SERVICES

Outplacement services paid for by the employer may be part of effective termination management, but they are in connection with, rather than in lieu of, individual involuntary terminations and group

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