A Return to At-Will Employment

John Guz appeared to have a lot going for him. He’d started out as anadministrative assistant at Bechtel Corp., earning $750 a month, and had risenby age 49 to financial reports supervisor. His salary had increased to $5,940 amonth, and his employer, a San Francisco-based defense contractor, had given himgenerally favorable performance reviews.

    But in December 1992, Guz’s immediate superior dropped the bombshell. Hisunit was being disbanded, the manager said, and he was being laid off. Aconfirmation letter from Bechtel referred to “the downturn in ourworkload.”

    Guz did not go quietly. He sued Bechtel, alleging wrongful termination andhoping to take advantage of California law that protects at-will employees.According to the landmark 1988 ruling in Foley vs. Interactive Data Corp.,employees who meet certain criteria-including longevity, promotions, raises, andfavorable reviews-can show an “implied-in-fact” contract, to bedismissed only for good cause.

    The case of Guz vs. Bechtel National, Inc., went all the way to theCalifornia Supreme Court. The court’s unanimous ruling, issued in October,turned out to be another bombshell.

    The so-called Foley criteria established 12 years earlier do not, in and ofthemselves, “constitute a contractual guarantee of future employmentsecurity,” the justices said. Since Bechtel’s own written personneldocuments “imposed no restrictions upon the company’s prerogatives toeliminate jobs or work units, for any or no reason,” Guz had noimplied-contract case to take to a jury.

    Plaintiffs’ attorneys were shocked. “The implied contract that [anemployee] had an option of proving based on the Foley decision is now almostimpossible to prove,” laments David H. Fielding, a partner with the firm ofBushnell, Caplan & Fielding in San Francisco.

    While the Guz case applies only to California, its impact may be more widelyfelt. As labor law experts note, the state has led the country in moving awayfrom reliance on at-will language in employee manuals to more nuanced theoriesof implied contract. At least 20 states from Maine to Hawaii limit discharges inparticular circumstances. “Some have been moving [toward implied contracts]a piece at a time, others more rapidly,” says Peter Eide, director of laborlaw policy at the U.S. Chamber of Commerce.

    Montana in 1987 enacted a comprehensive statute making termination withoutgood cause unlawful. But the act also severely limited the amount ofcompensation that employees could receive for a wrongful discharge.

    In California, the presumption of at-will employment goes back to the 19thcentury. Section 2922 of the Labor Code states: “An employment, having nospecified term, may be terminated at the will of either party on notice to theother.” However, starting in the politically more liberal 1970s, courtsbegan applying the doctrine of implied contracts to the employment relationship.

    In 1973, Wayne Pugh was fired by See’s Candies after 32 years with the candymaker. When he asked for a reason, See’s president told him only to “lookdeep within [him]self.” Eight years later, a state court of appeals handedPugh a landmark victory in his wrongful-termination case. Reversing a trialjudge, the court said there was evidence that See’s had breached an impliedpromise not to discharge without good cause.

    With the Foley case, employers attacked the Pugh precedent. Complaining thatit “destroys the centuries-old solid and settled principle” of at-willemployment, they urged the state supreme court to accept only express contractprovisions as evidence that an employee required good cause for termination. Butthe court held fast, concluding that the Pugh decision “correctly appliedbasic contract principles in the employment context.” The Foley case, whichinvolved a plaintiff who had worked his way up the corporate ladder fromdishwasher to vice president, also endorsed Pugh’s criteria for proving animplied contract. “Plaintiff here alleged repeated oral assurances of jobsecurity and consistent promotions, salary increases, and bonuses during theterm of his employment, contributing to his reasonable expectation that he wouldnot be discharged except for good cause,” the court said.

    HR departments took notice. They made it their standard practice to avoidliability by stressing at-will provisions in their employee materials and bydocumenting good cause. “There can be … close to no doubt that there areactual grounds for termination,” says Marty Palecki, HR director for RanchoSanta Fe Technology in San Diego. Adds Fielding: “Every HR department isalways very concerned about having justified their actions” in terminatingan employee. And California cemented its reputation as one of the morepro-employee states.

    But states such as New Mexico, Nevada, and Idaho have remained resolutelypro-business. Longevity and a policy of warning before discharging an employeeare not sufficient to infer an implied contract, an Idaho appeals court ruled in1996. And now California, with the Guz decision, appears to have turned back theclock.

    In his lawsuit, Guz claimed that he and Bechtel had an agreement that hewould be employed as long as he was performing satisfactorily and would bedischarged only for good cause. While there was no express understanding, hesaid it could be inferred from several of the Foley criteria. Bechtel, on theother hand, insisted that Guz’s at-will status was “conclusivelyreinforced” by its own personnel policy, which specified that employees”have no…agreements guaranteeing continuous service and may be terminatedat [Bechtel’s] option.”

    The Supreme Court conceded that “disclaimer language in an employeehandbook or policy manual does not necessarily mean an employee is employed atwill.” But after declaring that Guz’s longevity was not enough for him torequire good cause, it then described Bechtel’s written personnel documents as”the sole source of any contractual limits on Bechtel’s rights to terminateGuz.” And those documents, in turn, “imposed no restrictions upon thecompany’s prerogatives to eliminate jobs or work units, for any or no reason,even if this would lead to the release of existing employees such as Guz.”

    The court’s ruling left Guz with virtually no case to take to a jury. It leftplaintiffs’ attorneys dismayed. “The court was out of sync withreality,” says Fielding, noting the way HR departments have adapted toFoley’s restrictions. “They placed undue reliance on the at-will languagein the Bechtel employee manual.” But those who represent employers believethat the justices returned to fundamental legal principles. “This is a signthat California is going to honor what the [Labor Code] statute says –employmentcan be made at will,” says Wendy M. Lazerson, an employment attorney atHolland & Knight in San Francisco. “Maybe the courts are realizing thatif you’re going to have a healthy economy, you can’t make it so difficult to dobusiness.”

    Lazerson does not see the ruling as anti-employee. “It’s just a balanceddecision. [After Foley], things were so skewed to employees, there were reallyno rules that employers could follow.” At the California Chamber ofCommerce, general counsel Fred Main calls the implied contract “close to afiction,” for plaintiffs to use in order to avoid at-will provisions.Employees can still claim wrongful termination on the basis of a violation ofpublic policy, such as discrimination, he says. But “run-of-the-millclaims…are going to have a very difficult, if not impossible, hurdle toovercome.”

    Main does warn, however, that the labor lobby may turn to the Californialegislature. “I would be very surprised if there’s not some bill [thisyear] that either completely overturns Guz by eliminating at-will doctrine orsubstantially limits it,” he says. One limit could establish length ofservice as evidence of an implied contract.

    “The ability to limit in some way at-will employment has been an issuefor 20 years,” Main adds. “I think it would be another toughfight.”

Workforce, May 2001, pp.42-46 — Subscribe Now!