Job Termination Issues Don’t Belong in Courts

The California Supreme Court took a giant step last week toward ending the state’s wrongful termination lawsuit “lottery” in which many gambled and a few won big. The court unanimously ruled that John Guz, a supervisor at Bechtel who was laid off after a 22-year career, could not sue based on an “implied” contract that he would not be fired without good cause. The decision would seem unremarkable except for the fact that over the past 20 years, courts in California and other states have imposed increasing limitations on an employer’s right to terminate employees. Juries were permitted to second-guess employer decisions and award millions of dollars to employees they viewed as being unfairly treated.

Guz had claimed that his layoff was unlawful because of the company’s implied commitment not to terminate him without cause. Despite the company’s written policy to the contrary, Guz argued that the commitment could be implied from his long service with Bechtel, his record of promotions and the company’s policy of warning employees of their poor performance before terminating them. But the court found that the relationship between an employer and employee is contractual and that it is for the two parties, not judges or juries, to determine the terms of their contracts. While rejecting implied restrictions, the court emphasized that written personnel policies relating to employee terminations could become part of the employee’s contract with his employer.

The lesson is clear. Employers should use great care in preparing employee policies, since they may be enforced in court. The policies should be written in understandable, precise language so that the meaning is clear to employees and, if there is litigation, to jurors. By the same token, employees should inform themselves of an employer’s policies before accepting a job, since those policies will define their rights at work. The court’s rejection of implied promises reaffirms that it is the responsibility of employers and employees to make their own deals.

Some argue that given the inequality of power between a large company and an individual employee, the terms of an employment contract will be too one-sided without the intervention of the courts. But the assumption that employers will adopt unfair policies ignores the realities of today’s highly competitive labor market. An employer with a reputation for treating its employees unfairly is unlikely to be able to hire and retain the employees it needs. Progressive employment policies centered on the fair treatment of employees is one of the principal reasons cited for the decline of unions in the private sector. Where an employer does not follow such policies, employees who are not supervisors or managers can attempt to join with other employees and bargain collectively by forming a union. Of course, unions are not cost-free for employees. The substantial costs are not only dues and fees, but also the risk of strikes and the inflexibility and loss of individual treatment inherent in collective bargaining contracts.

Like most plaintiffs in wrongful termination cases, however, Guz was not a lower-level employee but a supervisor, ineligible to join a union. But even if he had been covered by a collective bargaining contract, it would not have helped him because union contracts almost always recognize an employer’s right to lay off employees.

If government is going to intervene in employment contracts, it should do so only through legislative action, not through the courts, which are poorly equipped to make major changes in the rules by which we arrange our lives. Montana, for example, has enacted a law prohibiting discharge except for “good cause” and many European countries have similar proscriptions. Consider, however, the economic impact of limitations on an employer’s termination rights. Most economists agree that they discourage employers from hiring additional workers and that the resulting labor market rigidity is the main reason for the high rate of unemployment in Europe. Constraints on the smooth functioning of the labor market would be especially imprudent now in California, which has the most vibrant economy in the world.

In evaluating the Bechtel decision, it is useful to compare the way the law governing our two most important relationships, marriage and employment, has changed. Forty years ago, couples had to have a good reason to get divorced, while employment was an at-will relationship that could be severed by either party at any time. To a significant degree, the legal treatment of marriage and employment has been reversed. It is easier now to get divorced than to terminate an employee. The fact that the California Supreme Court recently upheld the enforceability of prenuptial agreements as contracts may be a sign that family law and employment law are returning to their common origin and that contract rules will govern both.

The reasons for enforcing contracts as the parties make them are moral as well as economic and are rooted in respect for individual autonomy. We should be bound by our contracts because we have chosen to be. A society based on private ordering requires that the courts enforce the terms of negotiated contracts, not rewrite them.