Employee Handbooks May Be Implied Contracts

Employee Handbooks May Be Implied Contracts
The National Law Journal

New Jersey's highest court adds a new wrinkle to the controversy over employment manuals.

As federal and state governments continue to enact legislation and promulgate regulations affecting the workplace, employers are compelled to regulate their employees' conduct more closely and to re-evaluate their employment practices.

Many employers have employee handbooks in which they identify the company's policies and practices, including those mandated by, or in response to, new laws. The manuals permit employers to set forth company policies in a single location in order to avoid misunderstandings.

Against this backdrop, the enforceability of personnel policies contained in employee handbooks or manuals has become a hotly litigated issue. Two recent New Jersey Supreme Court decisions reached a new plateau with this issue.

These opinions allocate much of the decision-making process on this issue to juries. In the past the issue was within the province of the court. Historically, employer and employee relationships were terminable at will by either party absent an express employment contract providing to the contrary.

Within the last decade, courts in several states have held that in appropriate circumstances, representations made by employers in employee handbooks can create binding implied employment contracts. When a court recognizes the contractual enforceability of an employee handbook, all of the policies contained in that handbook are binding upon the parties.

The most significant issue, however, is often whether the handbook contains a policy which transforms the employment relationship from one that is terminable at will to one in which the employee can be terminated only for cause. The policies likely to support an employee's claim are those dealing with termination and progressive discipline.

Among the courts that have begrudgingly acknowledged the concept are those that require the employee to demonstrate that the employee manual contains clear and definite language, offers the employee specific terms of employment and the employee accepts the offer in exchange for consideration.

This analysis, finding its genesis in basic common-law contract principles, more often than not has resulted in the plaintiff walking away empty-handed. Other states have provided varying degrees of judicial blessing to handbooks giving rise to contractual obligations under far less restrictive standards.

The New Jersey Approach

Two recent New Jersey Supreme Court decisions express a new willingness to enforce employee handbooks as contracts. These two decisions, Nicosia v. Wakefern Food Corp. and Witkowski v. Thomas J. Lipton, Inc. focus more on the reasonable expectations of the employee than on the intention of the employer as that intention is communicated to the employee in the handbook.

The New Jersey high court's allocation of the decision-making process is perhaps even more significant. Both Nicosia and Witkowski delegate to juries the decision as to whether the policies contained in a handbook are enforceable.

Although this approach has not been recognized extensively by courts in other jurisdictions, it is likely that it represents, at the very least, a harbinger of plaintiffs' arguments to come. New Jersey has been at the forefront of the employee handbook issue since its Supreme Court's 1985 decision in Woolley v. Hoffmann-La Roche.

The Woolley court held that a handbook is an enforceable contact when the terms and conditions of employment outlined in the handbook, particularly those dealing with termination and employee discipline, are comprehensive. The court further required that the handbook be widely distributed, though not necessarily to all employees or even to the plaintiff, to create binding contractual obligations.

The decision provided one safety hatch. If a handbook contains a clear and prominent disclaimer, the employer may avoid any purported contractual obligations contained in the handbook.

This doctrine evolved further in 1992 when a New Jersey appellate court held that an implied employment contract could be created even without a written manual if a company's non-written policies are orally communicated to employees and uniformly applied.

Jury to Decide

The two recent New Jersey decisions' most significant impact may be that it will be a jury's decision whether "an employee could reasonably expect that the [manual] provided job security, thereby creating an implied contract of employment." The jury also may be responsible for assessing whether the content of a disclaimer is effective.

Although these principles are not inconsistent with earlier New Jersey case law, the two decisions seem to reflect a change in judicial attitude and signal a willingness to permit a disgruntled former employee to have his or her claim of breach of contract decided by a jury.

In Witkowski, the trial court granted the employer's motion for summary judgment, rejecting the plaintiffs argument that he had been terminated in violation of an implied employment contract. The trial court found as a matter of law that "the [defendant's] manual...was not intended to be a comprehensive treatment of the subject of employment termination ant therefore there was no contract between plaintiff and defendant." The court noted that because the handbook contained some, but not all, possible grounds for termination, an employee could be terminated for reasons not set forth in the handbook.

The New Jersey Supreme Court rejected this analysis, however, holding that an employee still might reasonably expect continued employment from the language of the manual. the court then remanded the case for trial by jury. Witkowski departed from earlier New Jersey precedent by abrogating the requirement that a handbook contain an express promise to terminate only for cause in order to create a binding employment contract on this subject.

The Nicosia court addressed the issue of disclaimers in employment manuals. It found, as a matter of law, that the following disclaimer was ineffective: "A. Introduction This manual contains statements of Wakefern Food Corp. and its subsidiaries' Human Resource policies and procedures. (Hereafter referred to as "the Company"). The terms and procedures contained therein are not contractual and are subject to change and interpretation at the sole discretion of the Company, and without prior notice or consideration to any employee."

Two-Prong Test

This disclaimer is similar to those used by many employers that are sensitive to the enforceability of handbooks. In fact, it was probably prepared or reviewed by an attorney who had reason to believe from other cases that the disclaimer would be effective. The court found, however, that it failed a two-prong test.

First, the disclaimer was not sufficiently prominent. Despite being near the beginning of the manual, the disclaimer failed the court's test because it was not "highlighted, underscored, capitalized, or presented in any other way to make it likely that it would come to the attention of an employee reviewing it." The court found that the prominence question, unlike the other issues involved in these cases, is one for the court to decide.

Second, the court held that while the effectiveness of the content of a disclaimer will often be a question for the jury, the content of this disclaimer was os inadequate it was ineffective as a matter of law. The disclaimer failed because it contained "confusing legalese," such as the terms "not contractual," "subject to...interpretation" and "consideration."

According to the court, an effective disclaimer must contain language that a reasonable employee, against whom the disclaimer operates, can understand. Although the Nicosia court was careful to recognize that an employer could prepare an effective disclaimer, it appears the best an employer can expect is a factual issue for a jury to decide, regardless of what language is used in the disclaimer.

Recurring issues

Courts in some other states have been considerably more reluctant to chip away from the traditional rule of at-will employment by acknowledging that employee manuals create implied contracts. Other states have also been less demanding with respect to the content and location of disclaimers.

For example, the Oklahoma Supreme Court recently restated that an employee handbook can only form the basis of an employment contract if four traditional contract requirements exist. They are competent parties, consent, a legal object and consideration.

In direct contradiction to New Jersey's Witkowski decision, the Oklahoma court also held that a manual that lists some, but not all possible grounds for termination does not give rise to a right to be terminated only for cause.

An Illinois appellate court reached a similar conclusion in Ahlgren v. Blue Goose Supermarket Inc. The court acknowledged that a handbook could create enforceable contract rights. For this to occur, the proponent of such a contract must demonstrate that the handbook or other policy contained a promise clear enough that the employer had made an offer to convert the employee's at-will employment into one terminable only for cause.

The policy must also be disseminated in a such a manner that the employee is not only aware of its contents, but also reasonably believes it to be an offer.

The magic word is "reasonable." As that word creeps into the holdings of more courts dealing with different issues implicated by handbook claims, employers and employees alike will be compelled to present their positions to juries. Some courts have held that "whether [a] personnel manual creates contractual rights for an employee is a factual question for the jury."

The Supreme Court of Idaho earlier this year had occasion to assess the effectiveness of a handbook's disclaimer. the plaintiff in Mitchell v. Zilog Inc., argued that the purported disclaimer was ineffective because it was neither clearly written nor prominently displayed.

The Mitchell court rejected these arguments, holding that so long as a provision in a handbook specifically negates any employer intention to create an employment contract the court may conclude that the handbook creates no contractual obligations. The Mitchell decision, released two months earlier than Nicosia in New jersey, places a far greater burden on the proponent of the implied employment contract than does Nicosia.

Not only does it allow an employer to avoid creating contractual obligations through its handbook by including disclaiming language anywhere in the handbook, it assigns the decision-making authority to the court, not the jury. By allocating the roles of the court and jury in this manner, the Idaho high court may also be implicitly rejecting Nicosia's requirement that the disclaimer be in straightforward lay person's terms rather than in confusing legalese.

It is likely that Witkowski and Nicosia will represent the trend of the future. Although neither opinion says so expressly, the basic premise of these decisions appears to be a recognition on the part of the New Jersey Supreme Court that if an employer is going to use handbooks as a way of communicating its policies to its employees," then the employer should be expected to comply with those policies.

The court also has implicitly refused to allow employers to avoid the effect of its representations by using a lawyer's "tricks" or subtle language through techniques such as a disclaimer. This raises questions as to whether there should be handbooks. The elimination of employee handbooks, however, may be an overly reactionary decision.

There are still good reasons to have handbooks. They are a good way to communicate policies and priorities to employees that the employees must know; they reduce the likelihood of confusion or misunderstanding of a company's policies by placing the policy as part of its employment manual to its employees is placing itself at unnecessary risk.

Nevertheless, employers should anticipate and be aware that what they say in their handbooks is likely to be contractually enforceable in many jurisdictions, notwithstanding a disclaimer. As a result, employers need to carefully prepare their handbooks, as well as subject the policies contained in those handbooks to periodic review.