Handbooks as Unintentional Contracts

April 13, 2006

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In most states, an employer may generally discharge an employee for practically any reason, or for no reason at all. This employment relationship is known as employment at will. Besides allowing you to terminate employees "at will," the employment-at-will doctrine allows you to change benefits or employment practices whenever you deem appropriate.

Your freedom to end an employee's employment and to modify benefits and employment practices "at will" is limited, however, where a contract exists that imposes a limit. And, if you're not careful in how you word your employee handbook, the handbook may be found to be a binding contract.

Increasingly, employees are suing their employers under a breach of contract theory when the employers fail to follow procedures outlined in their employee handbooks. Many courts will find an implied employment contract in the handbook for employees who prove that they relied on the handbook and its promises. In other words, employees expect it to be followed — just as they would have if they had an express employment contract. These courts are unwilling to allow employers to set out policies and procedures and then disregard them when the time comes for action.

An employer who states in a handbook that an employee will be terminated for "just cause" limited its own ability to terminate an employee unless it could prove that "just cause" existed. The court basically said that if it was reasonable for the employee to expect the employer to live up to the statements it made in the handbook, then the handbook became part of the employment contract.

In this next situation, it wasn't the reason for the termination that got the employer hung up, but the procedure for terminating an employee.

An employer gave out a handbook that details a specific process for terminating an employee. But when the employer terminated an employee, it did not use the procedure in the handbook. In that situation, the court found that the employee had been improperly discharged.

Avoiding breach-of-contract claims. You can minimize the likelihood of being faced with breach of contract claims based on your employee handbook (and increase your chances of prevailing against any such claims) by:

clearly stating in writing that the handbooks are guides, not employment contracts
making sure that the handbooks are carefully worded to avoid binding language
ensuring that handbooks do not contain provisions that promise, directly or indirectly, permanent, lifetime, or a fixed term of employment
retaining sufficient discretion as to the terms and conditions of employment, by explicitly reserving the right to change the rules, benefits, pay structure, etc., at any time
using a disclaimer