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Supreme Court Confirms Doctrine of At-Will Employment

The California Supreme Court has been faced with numerous controversies regarding the nature of relationships between employers and their current or former employees. As early as 1889, the Supreme Court was presented with a question regarding the meaning of an employment relationship that was defined by an employer and employee as being “permanent.” Lord v. Goldberg, 81 Cal. 596 (1889). In response to that question, the court held that defining an employment relationship as permanent “was not intended to be for life, or for any fixed or certain period.”

Early court decisions in California regarding at-will employment relationships tended to favor an employer’s absolute right to discharge an employee. As the Supreme Court held in 1910, “it is the unquestioned right of the employee to leave the employment at his pleasure, and it is equally the right of the employer to discharge at his pleasure. Union Labor Hosp. Assoc. v. Vance Redwood Lumber Co., 158 Cal. 551 (1910).

Today, private-sector employment in California is generally presumed to be terminable at-will, meaning that the employment relationship can be terminated at any time by either the employer or employee with or without cause. This presumption was codified by the California Legislature in 1937: “An employment, having no specified term, may be terminated at the will of either party on notice to the other. Employment for a specified term means an employment for a period greater than one month.” California Labor Code Section 2922.

There are numerous exceptions to the general rule that private-sector employees in California may be terminated at the will of their employers. For example, the California Fair Employment and Housing Act forbids employers from terminating employees because of their race, national origin, sex, age, disability, marital status, sexual orientation, medical condition or religion. California Government Code Section 12900 et. seq. Moreover, an employee cannot be terminated in violation of a fundamental state or federal public policy.

Contractual agreements also can limit an employer’s ability to terminate an employee without good cause. An agreement to terminate an employee only for good cause does not have to be made in writing, and it can be established based on a oral assurance to an employee by the manager that he or she is entitled to continued employment. Such contracts are often referred to as implied-in-fact contracts. Because careless actions by employers can alter the at-will status of their employees, it is essential for employers to take steps to minimize the risk of unintended agreements to terminate employees only for good cause.

In 1988, the California Supreme Court delineated the factors that are used to determine whether an employer and employee have created an implied-in-fact contract: 1) the employer’s personnel polices and practices; 2) the employee’s length of service; 3) actions or communications by the employer reflecting assurances of continued employment, such as commendations, raises, bonuses, promotions and lack of criticism; and 4) the practices of the industry in which an employee is engaged. Foley v. Interactive Data Corp., 47 Cal.3d 654 (1988).

After determining the relevant factors to review, the Supreme Court held that a plaintiff stated a cause of action for breach of an implied-in-fact contract based on the following: The plaintiff worked for the employer for more than six years; the employer told the plaintiff that he had job security; the employer gave him consistent salary increases, promotions and bonuses; and the employer imposed limitations on its power to discharge an employee without cause in its written termination procedures.

In an effort to avoid creating such implied-in-fact agreements, employers often adopt policies and procedures that stress the at-will employment status of their employees. This includes defining the at-will employment relationship in job applications, offer letters, employment agreements and employee handbooks with the following or similar language: “Employment at-will” means that you are free to resign from your employment at any time, for any reason or no reason at all, with or without cause and with or without notice. Similarly, the employer may terminate your employment at any time for any legal reason, with or without cause and with or without notice.”

Questions about an employee’s at-will status have been the subject of significant litigation in California. Many of these lawsuits involve disputes over whether a purported at-will employment provision is ambiguous or creates some doubt as to the employment status of a particular employee. When such ambiguities exist, courts often have concluded that an employee is not at-will.

For example, in Saubert v. McKesson Corp., 223 Cal.App.3d 1514 (1990), a regional sales manager brought an action against his former employer alleging wrongful termination after he signed an employment application that stated “if hired, my employment is for no definite period and may, regardless of the date of payment of my wages and salary, be terminated at any time without any prior notice.” Despite the language in the employment application presumably defining the employment relationship as being at-will, the court nonetheless looked to extrinsic evidence and held that an implied-in-fact contract to terminate the regional sales manager only for cause existed.

The California Supreme Court recently was faced with a dispute regarding an alleged ambiguity in an at-will provision in a letter of employment. In Dore v. Arnold Worldwide Inc., 2006 DJDAR 10153, the Supreme Court concluded that an employee was at-will despite the employer’s failure specifically to define at-will employment to include the ability to terminate the employment relationship “without cause.” This case likely will be viewed as a victory for employers in their quest to avoid erroneously providing a seemingly at-will employee with for-cause termination rights. Moreover, the holding in this case signifies the Supreme Court’s re-affirmation of the doctrine of at-will employment.

The facts of the Dore case are as follows: Brook Dore was employed with an advertising agency in Colorado as a regional account director during the 1990s. In late 1998, Dore applied for a promotion to a management position in the agency’s Los Angeles office. Dore interviewed with various agency officers and ultimately was promoted to the management position in spring of 1999.

During his interviews for the promotion, Dore was never told the position was at-will. Furthermore, Dore alleges he found out that the two previous individuals who held his position were terminated by the agency for cause.

A senior vice president for the agency sent Dore a letter confirming the terms of his promotion in April 1999. This letter indicated that his employment was at-will and that the agency has “the right to terminate your employment at any time, just as you have the right to terminate your employment with the [agency] at any time.” The letter did not state that Dore could be terminated without cause.

Dore was terminated from his employment without cause in August 2001. He subsequently filed a lawsuit against the agency alleging 1) breach of contract, 2) breach of the implied covenant of good faith and fair dealing, 3) intentional infliction of emotional distress, 4) fraud and 5) negligent misrepresentation. The primary basis for Dore’s lawsuit was that the agency’s failure to communicate to him that he could be terminated without cause led him to believe that he would not be discharged from his employment except for cause.

Dore argued that the definition of the phrase at-will in the offer letter was ambiguous. According to the court, an ambiguity in contract language arises when language is “reasonably susceptible of more than one application to material facts.” The Supreme Court disagreed with Dore and held that the phrase at-will entails the notion of termination “with or without cause” as a matter of simple logic. Consequently, the Supreme Court ruled that the at-will language in Dore’s employment letter was not reasonably susceptible to an interpretation that the agency needed cause to terminate Dore.

The Supreme Court was compelled by the trial court’s observation that Dore “read, signed, understood and did not disagree with the terms of the letter.” In addition, because the letter used language similar to the at-will employment language in Labor Code Section 2922, the Supreme Court ruled that the letter did not contain any patent or latent ambiguities.

This case undoubtedly will have a favorable impact on employers in their quest to avoid altering the at-will status of their employees. Nonetheless, employers inadvertently still can provide seemingly at-will employees with for-cause termination rights. In Dore, had the employer made affirmative statements that Dore could be terminated only for cause or that he should not worry about being let go like the past two managers because he was doing such a good job, it is reasonably possible that the Supreme Court could have reached a different conclusion regarding Dore’s employment status.

While the holding in Dore could be argued to provide employers more flexibility in defining employment relationships, careful employers still define the at-will status of their employees adequately and thoroughly. This can be accomplished by having employees sign off on a comprehensive at-will acknowledgement, which affirmatively states that “the at-will employment relationship can only be altered by a written agreement signed by both the employee and the president of the company.”