Employees usually have the most rights under an employment contract that either says the employee will be employed for a specific period of time, or says the employer is restricting its ability to fire the employee to specific circumstances, such as “for cause,” with a definition of the term. Employers trying to recruit high-level managers, or persons with hard-to-find skills, find “for cause” agreements a powerful tool in persuading the desired prospects to leave what they were doing and sign up with the employer.
The alternative is usually an “at will” employment contract that allows employers to fire employees at any time, for any reason or for no reason at all, as long as the employer does not fire an employee for an unlawful reason such as forbidden discrimination or retaliation for engaging in a legally protected activity. It allows employers to be arbitrary and unfair, and to act in bad faith. Without an employment contract, most non-union employees in the United States in States not bordering the Pacific Ocean are “at will” employees and have very few protections against arbitrary firing. To see my blog explaining “at will” employment, click on http://bitly.com/1LYuBGM or insert http://www.rickseymourlaw.com/what-does-it-mean-to-be-an-at-will-employee into your browser.
A. Why Have an Employment Contract?
Contracts are wonderful things, because with some exceptions they control the relationship between the parties. In employment, they set down the law of the workplace, which has to be considered along with all of the laws that regulate and control the workplace. Contracts cannot legally say that Federal, State, or local laws do not apply in the workplace—for example, sexual harassment will always be unlawful regardless of what a contract says—but may set out provisions that legitimately affect how an enforcement agency or a court may apply the law to the workplace.
Working arrangements usually work better—preventing or minimizing disputes and the distractions and expense they create—when all parties understand what is expected from them, and what they can expect from each other.
To understand how the law works, it is important to recognize two kinds of contract terms: “material” terms and all other terms. “Material” terms are the critical terms that most people would want to have resolved before they would agree to be bound by an agreement. They are likely to make a difference in the parties’ willingness to enter into an agreement. The amount of a payment, for example, will almost always be a material term. What is to be done or provided in return for the payment is also often a material term. The date of delivery or performance will also often be a material term. The packaging for what is being shipped might or might not be material. (Cereal boxes are normally shipped in cardboard boxes with no cushioning so the containers would not ordinarily be material. The shipping containers and cushioning for delicate scientific equipment, on the other hand, would very likely be material since they would affect the value and usefulness of the equipment after delivery.)
Contracts must specify the material terms, but may or may not specify other terms for the simple reason that the parties do not regard them as material, and there is little reason to complicate the contract by spending time and money negotiating things that do not make a difference.
As to all the terms governing performance, there is a common law duty of good faith and fair dealing that in most States governs all contracts except “at will” employment contracts. See the link above to my blog on “at will” employment contracts.
B. State Law Normally Controls Contract Questions, so the Answers May Differ from State to State
Most contract questions are decided under State law, although a few are decided under Federal law. Some contracts are governed by statute, some are governed by regulations, and some are governed by “common law”—the decisions of courts in similar cases.
The important take-away is that the answers to contract questions may be different if the question is being decided under different sets of laws, or different sets of common law.
It is sensible for the parties to contracts to agree on a reasonable “choice of law” provision, to provide clarity for both sides and to avoid expensive and time-consuming litigation over threshold issues in the event of a serious dispute.
C. Critical Terms Need to Be Definite, to Have a Binding Contract
Contracts can be oral or written, but require that the parties intended to enter into a binding agreement. It often happens that parties reach an “agreement in principle” on major terms of the agreement, and agree to negotiate further about other terms. Agreements in principle should always make clear whether they are binding, of just an important stage in reaching a later binding agreement.
What’s the worst that can happen if the parties leave this question open? In one of the most famous contract cases of the 1980s, the answer was 7.53 billion dollars in compensatory damages and $ 3 billion in punitive damages. The case was Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex.App.-Hous. (1st Dist.) 1987), writ refused n.r.e. (1987), cert. dismissed, 485 U.S. 994 (1988). The Texas appellate decision is available from https://www.courtlistener.com/opinion/2443517/texaco-inc-v-pennzoil-co/. As the court described the case, Pennzoil had reached an agreement to buy Getty Oil, and the parties agreed to a Memorandum of Agreement and issued a press release. The boards of the corporate entities on both sides approved the transaction. Texaco made a later and better offer, which Getty accepted. Pennzoil sued, contending it had a binding agreement, and Texaco and Getty claimed it was not binding, but only an agreement to continue working on terms and that both sides were free to walk away. Pennzoil won, the damages award was upheld, Texaco went into bankruptcy, and the case was reportedly letter settled for $3 billion.
Does this ever happen in ordinary litigation? All the time. It is common for attorneys on both sides to tell a judge, just before a trial or a major deadline, that the case has been settled, that the terms are “X and Y and Z” as shown on the term sheet, and that they are working out the details. And they do not tell the judge whether the settlement on the announced terms is final, or whether it is contingent on reaching agreement on other terms still awaiting negotiation. Then the parties disagree over one of the remaining terms, or one party gets cold feet and wants to withdraw from the settlement whether or not there was a disagreement over a term that was supposed to be worked out, and the judge then has to decide whether the announcement was a binding agreement.
The Maryland Court of Appeals had just such a case before it in January 2015. In Falls Garden Condominium Ass’n, Inc. v. Falls Homeowners Ass’n, Inc., 441 Md. 290, 107 A.3d 1183 (Md. 2015), available from https://www.courtlistener.com/opinion/2773527/falls-garden-condo-v-falls-homeowners/, the parties signed a letter of intent as to the leasing of parking spaces. The letter stated:
This Letter of Intent dated this 17th day of August, 2011, is meant to memorialize certain aspects of a formal Settlement Agreement and separate Lease to be entered into between Falls Garden Condominium, Inc. (“Falls Garden”) and The Falls Homeowners Association, Inc. (“The Falls”).
441 Md. at 295, 107 A.3d at 1185. It was clear that the parties intended to enter into subsequent formal documents. Before that happened, one side had second thoughts—sometimes called “buyer’s remorse”—and decided that litigation was better than settlement:
In the following days, counsel for The Falls and Falls Garden exchanged emails, culminating in the parties executing a Letter of Intent. Problems arose, and The Falls filed a Motion to Enforce Settlement Agreement to implement the Letter of Intent. The Motion to Enforce professed that, in accordance with the Letter of Intent, The Falls successfully obtained the requisite votes of the members of its Association and, thereafter, sent a proposed lease to Falls Garden’s counsel by email for “review, comment and execution”. Falls Garden did not respond to the email containing the proposed lease, according to the Motion, and, subsequently, disavowed the Letter of Intent by inquiring about “returning to pre-litigation status.” Falls Garden responded to the Motion, asserting that the Letter of Intent was not enforceable and that it objected to terms included in the proposed lease.
441 Md. at 294-95, 107 A.3d at 1185 (footnotes omitted). The question was whether the parties intended to be bound by the interim letter of intent. The court held that the letter of intent contained definite terms resolving all material issues, and was enforceable on its own. Although the letter of intent contemplated a future agreement that could include other terms, the court held that the parties intended to be bound by it because the possible additional terms were not material terms. The court held that the letter of intent was a valid, enforceable contract.
Take-away: As the old advertisements for Holiday Inn® used to say, “The best surprise is no surprise.” It is always a mistake to leave an open question whether a particular stage in the negotiation is intended to be a binding agreement, or is just a way station on the road to a binding agreement. Even if your side wins, it will have spent time and money fighting the issue, and will likely have had other and better uses for that time and money.
D. Is the Contract Merely Oral?
Oral contracts often present major problems that lead to disputes over questions such as:
(a) Was there really an oral contract? Two persons can in good faith come away from the same conversation thinking different things happened. One might think progress was made in reaching a deal, and the other might think a binding deal had been reached. While the Pennzoil-Texaco lawsuit shows this happens even with written agreements, the problems of proof for both sides are much more difficult when the contract is oral and there is nothing independent at which anyone can look.
(b) What were the terms of the oral contract? Agreements that were never committed to writing have a habit of sprouting differences in memory, even among parties acting in absolute good faith.
(c) Were all the necessary terms specified? If a critical term was missing, there might not be a contract. It is harder to prove agreement to a critical term if there is no documentation of agreement on the term.
(d) Were any of the terms very imprecise? If terms are not adequately defined, or if the parties discussed important terms by using shorthand phrases, each of them may think there was an agreement on the term but each may understand the term very differently than the other. For example, if the oral agreement was for person A to employ person B as long as person B’s work is satisfactory, person A might think it means “as long as person A is satisfied with person B’s work,” while person B might think it means “as long as a reasonable person would find person B’s work satisfactory.” These are two very different thing, with very different legal consequences. Such a failure to pin down critical terms such as duration, or compensation, may mean that there was no “meeting of the minds,” and therefore no contract.
(e) Were any of the terms ambiguous, even if they were not so vague as to prevent a meeting of the minds? When a term in a written or oral contract is ambiguous, it tends to result in disputes and litigation. Without documentation, there is a greater likelihood of disputes, greater risk of an undesired result in litigation, and more difficulty and expense in resolving the question.
An employer’s oral assurances that the employee will have a job for life, or for a long time, are hard to prove and very hard to enforce. If the employee says one thing and the employer another, a judge or jury may need to decide who is more credible.
In many States, written or oral promises of lifetime employment must be very clear before they are enforced. The employee’s assumptions may not count at all, if the promise is not very clear.
Oral assurances may also have problems under a State’s version of the Statute of Frauds. Commonly, State laws require oral contracts for services to be capable of performance within a year, or they cannot be enforced.
E. Is There a Written Contract?
When employees contact me about problems in their workplaces in the hope of finding a solution, and when recently-fired employees contact me to see if they have a good wrongful-termination claim, one of my first questions is whether they have a written employment contract. Many do not know if they have a written contract.
Here are the places I tell them to look:
- Offer letters for hiring, because may contain terms that result in an employment contract, particularly if the job is a high-level or professional job.
- Offers or announcements of promotions to a higher-level job, because they may also contain terms that result in an employment contract.
- Collective bargaining agreements, because they often contain provisions saying that employees in the bargaining unit may only be fired for “just cause.” These provisions are ordinarily enforced through the contract’s grievance and arbitration procedure, not through the courts. Grievance procedures can sometimes be begun by the employees, and sometimes by the union, but the time periods are short, often just a couple of days. The union is in control of these procedures, and decides whether to take a grievance to arbitration. Unions represent all the employees in a bargaining unit, and are not required to “go to the mat” on every employee grievance.
- Written employment policies of the employer that apply to the employees in question, because they may restrict the employer’s ability to fire employees. For example, the Maryland Court of Appeals said in Suburban Hospital, Inc. v. Dwiggins, 324 Md. 294, 305-06, 596 A.2d 1069, 1075 (Md. 1991), available from https://www.courtlistener.com/opinion/2175497/suburban-hospital-inc-v-dwiggins/:
. . . There is no doubt that, in its policy and grievance statements, Suburban made promises to Dwiggins and other employees that the hospital was contractually required to keep. “[E]mployer policy directives regarding aspects of the employment relation become contractual obligations when, with knowledge of their existence, employees start or continue to work for the employer.” . . . If an employee is not afforded the job termination procedures outlined in a handbook, the employee may have a breach of contract action against employer. . . .
- Employee handbooks, which sometimes contain provisions limiting the employer’s broad power to fire or discipline employees.
- C. law recognizes that an employee handbook can create an enforceable employment contract. See Washington Welfare Ass’n, Inc. v. Wheeler, 496 A.2d 613, 616 (D.C. 1985), available from https://www.courtlistener.com/opinion/1958801/washington-welfare-assn-inc-v-wheeler/. The D.C. Court of Appeals stated:
. . . While the contract here had no specified date of termination, the Manual evidences intent of the parties that specific preconditions had to be met before employment could be terminated; the contract was therefore distinguishable from a pure “at will” contract. . . . A jury could decide based on the evidence whether an event had occurred that would terminate the contract—e.g., that specific acts of the employee constituted behavior giving the employer good cause to discharge her . . . .
- If the employer policies or employer handbook has a disclaimer saying that nothing in it should be understood as creating contract rights, it will not create a contract. This was the situation in Smith v. Union Labor Life Ins. Co., 620 A.2d 265, 269 (D.C. 1993), available from https://www.courtlistener.com/opinion/1547929/smith-v-union-labor-life-ins-co/. The D.C. Court of Appeals held that no employment contract could be implied from a handbook with such a waiver. Maryland law is the same. Cutler v. Wal-Mart Stores, Inc., 175 Md.App. 177, 192, 927 A.2d 1, 10 (Md.App. 2007), denied, 401 Md. 173, 931 A.2d 1095 Md. 2007). The Court of Special Appeals stated:
First, the policy statements set forth in PD-07 and PD-43 were included in the Handbook almost verbatim, and were specifically disclaimed as being contractual obligations. Furthermore, this Court has cautioned that “not every statement made in a personnel handbook or other publication will rise to the level of an enforceable covenant…. [G]eneral statements of policy are no more than that and do not meet the contractual requirements for an offer.”
Its decision is available from https://www.courtlistener.com/opinion/2353087/cutler-v-wal-mart-stores-inc/.
- E-mails between the employer and the employee or potential employee describing the terms of the contract.
F. What if the Contract Says One Thing, But Something Different Was Promised Before?
The parties to contracts are supposed to read them carefully before they sign them. Once the contract is signed, unambiguous terms mean what they say.
In most states, it does not matter if one party has a hundred prior e-mails or other prior documents saying something different than the contract, if the contract is clear. The law is pretty clear in most jurisdictions that documents and statements before the contract was signed—called “parol evidence”—cannot be considered if the contract term in question is not ambiguous.
The rule makes perfect sense. Proposed contracts can change a great deal during negotiation, and it would be unfair to sign a contract and try to trick the other party by attempting to enforce a provision that was intentionally dropped from the final draft as part of the changes needed to get both sides to agree.
A contract can, of course, incorporate an outside document by reference, or refer to a standard outside the contract that changes from time to time. These are common, and perfectly proper.
When there is more than one agreement at the same time, a question may arise whether a particular agreement should be construed in isolation from the other agreements at the same time, or whether the set of agreements needs to be read as a whole.
G. Contracts with Inconsistent Terms
Some employment contracts specify that the employment is “at will,” but others may guarantee the employee’s job for a specified time, or restrict the employer’s ability to fire the employees by saying the employee can only be fired for cause, with a definition of “cause.” Still others may say that the employee’s job is guaranteed for a definite period of time, as long as the employee’s performance satisfies the employer. The terms of the contract are important, which is why I ask potential clients to search through their records and e-mails for copies.
In a case before the Supreme Court of Virginia, Progress Printing Co., Inc. v. Nichols, 244 Va. 337, 339, 421 S.E.2d 428, 429 (Va. 1992), available from https://www.courtlistener.com/opinion/1287302/progress-printing-co-inc-v-nichols/, there was an employee handbook that allegedly contained a provision saying employees could only be fired for cause. However, the employee signed an acknowledgment form for receipt of the handbook saying she was an at-will employee:
On January 20, 1987, William H. Nichols began to work as a pressman for Progress Printing Company, Inc. The personnel director provided Nichols with a copy of the company’s Employees’ Handbook. The Handbook section entitled “Discipline and Discharge” stated that the company would not discharge or suspend an employee “without just cause and shall give at least one warning notice … in writing” except under certain circumstances. On February 2, 1987, the personnel director gave Nichols a form which stated that the employment relationship between Progress Printing and Nichols was “at will and may be terminated by either party at any time” (emphasis in original). Nichols and the personnel director both signed the form.
The court held that the two provisions could not be harmonized; they were in direct conflict. Because the acknowledgment form was later, it controlled and the employee was “at will” despite the provisions of the handbook.
. . . We conclude that the employment relationship between Nichols and Progress Printing was at will employment which, under the terms of the acknowledgment form, either party could terminate at any time. Therefore, Progress Printing did not breach the employment contract when it terminated Nichols . . . .
Progress Printing Co., Inc. v. Nichols, 244 Va. at 343, 421 S.E.2d at 431 (see the link above).
H. The Need for Sound Legal Advice
It is very important to consult an attorney when you have questions about whether you have an enforceable employment contract requiring some kind of “cause” before you are fired. This is a technical area of law, and conflicting facts may bite one side or the other.
For example, the role of the judge and jury may differ, depending on the kind of contract in question. The Maryland Court of Appeals explained this in its 2004 decision, Towson University v. Conte, 384 Md. 68, 82-85, 862 A.2d 941, 949-50 (Md. 2004), available from https://www.courtlistener.com/opinion/2351582/towson-univ-v-conte/:
. . . In the at-will employment context, we have held that a jury may not review any aspect of the employer’s decision to terminate and that the employer may, absent a contravening public policy, terminate an employer for any reason, even a reason that is arbitrary, capricious, or fundamentally unfair. . . . For our purposes, the significant point is that courts and juries may not review either the employer’s (1) motivation or (2) factual bases for termination in the context of an at-will employment relationship.
A jury’s review, however, is ratcheted up one step when the employment is pursuant to a “satisfaction” employment contract. . . . A satisfaction employment contract typically conditions employment on the employer’s satisfaction. . . . when an employee is subject to a satisfaction contract, the jury may not review the employer’s factual bases for termination, but the jury is permitted to review the employer’s motive for termination—specifically, the employer’s subjective motivation. Subjective motivation means whether the employer was genuinely or honestly dissatisfied with the employee’s services or merely feigning dissatisfaction. . . . In contrast to at-will employment in which a jury may review neither the motivation nor the factual bases of the employer’s decision, a satisfaction employment contract permits a jury to review (1) the employer’s motivation, limited to his subjective motivation, but not (2) the factual bases for termination, the prerogative of which remains with the employer. . . .
Finally, there are employment contracts that grant a greater level of protection from termination than both the at-will and satisfaction employment contracts, by which we mean the just cause employment contract. . . . [T]he jury may not review whether the factual bases for termination actually occurred or whether they were proved by a preponderance of the evidence submitted for its review. Instead, the proper role of the jury is to review the objective motivation, i.e., whether the employer acted in objective good faith and in accordance with a reasonable employer under similar circumstances when he decided there was just cause to terminate the employee. The jury’s inquiry should center on whether an employer’s termination was based upon any arbitrary, capricious, or illegal reason, or on facts not reasonably believed to be true by the employer. But the fact-finding prerogative remains with the employer, absent some express intention otherwise. . . .
(Emphases in original.) These are only a few of the many considerations in determining whether there is an enforceable contract. It is important to consult an attorney who is familiar with these questions when confronted with a question about contracts.
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Richard T. Seymour
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