Rights Provided by Employee Handbook, Quirky Question # 54

Quirky Question # 54:

We have an employee who has missed a fair amount of work due to various surgeries.  As set forth in our handbook, we offer FMLA leave for employees who have worked 1250 hours in the preceding 12 months.  When we were informed that our employee would need to miss additional time due to some follow-up surgeries, we belatedly explored the issue with our attorneys.

Our lawyers advised us that although our employee had worked the requisite number of hours under the FMLA, he was not FMLA eligible because we don’t have enough employees in the office where he works or within 75 miles of his worksite.  Based on those facts, we informed our employee that he was not eligible for FMLA leave and told him that he could not take time off.  When he went forward with his surgery and took leave anyway, we terminated his employment.  He now has sued us under the FMLA and other legal theories, including “promissory estoppel.”  Given that he was not FMLA eligible, do we have anything to worry about?

Dorsey’s Analysis:

As you may have perceived, QQ # 54 was derived from a 7th Circuit case, decided just last month, Peters v. Gilead Sciences, Inc., No. 06-4290 (July 14, 2008). In Peters, a case based on Indiana law, the employer had provided its employees with an employee handbook which paraphrased the language of the Family and Medical Leave Act (FMLA). The handbook described the FMLA eligibility requirements of 1250 hours of work in the preceding 12 months, combined with one year’s employment. The employer’s handbook, however, did not address the other nuances of the FMLA or its other applicability criteria. For example, the handbook did not address the FMLA requirement that there must be 50 employees at the worksite of the employee seeking FMLA leave, or within 75 miles of that worksite (sometimes referenced as the 50/75 rule).

Peters experienced a work-related neck and shoulder injury in late 2001. He re-injured his shoulder about one year later, leading to corrective surgery that required a brief (11-day) leave. Compounding the imprecision of its handbook, Gilead Sciences then sent Peters a letter explaining the FMLA and restating, in part, the FMLA’s eligibility requirements. Again, however, the letter omitted any reference to the 50/75 rule. The letter specified when Peters would need to return to work, and promised him reinstatement in the same or an equivalent position.

As noted above, Peters quickly returned to work and was reinstated into his job. Several months later, however, he took a second leave, caused by an adverse reaction to a prescription medication he had been using. The company sent Peters another letter, largely mirroring its first FMLA communication and specifying the date by which he needed to return to work. Somewhat carelessly, the company miscalculated the mandatory return date, miscounting the amount of leave Peters actually had taken and consequently, underestimating the amount of leave he had left.

When the incorrectly calculated leave “expired,” the company hired a new employee to fill Peters’ job. The company explained its decision to Peters by referencing another FMLA provision, the company’s right to replace an employee occupying a “key” position. Gilead Sciences offered Peters another position but he rejected it, at which point he was terminated.  Peters then sued the company on a number of different legal theories, including FMLA violations, breach of contract and promissory estoppel.

Once it examined the FMLA more closely, the company discovered that Peters was not FMLA-eligible because he did not work at a site that had at least 50 employees and the company did not have 50 employees in the aggregate working within 75 miles of Peters’ work location. Peters, however, argued that his employer was “equitably estopped” from denying him coverage under the FMLA due to the company’s representations in its employee handbook and the two letters the company sent to him. Despite Peters’ equitable estoppel argument (the notion that given its representations to him in the handbook and the letters, the company was prevented, or “estopped,” from making an argument based on the eligibility requirements) the District Court granted summary judgment, dismissing Peters’ case.

The 7th Circuit reversed, though on slightly different grounds. The appellate found that it did not have to decide the “equitable estoppel” issue, since there were two other potential bases on which Peters could prevail. First, the 7th Circuit found that Peters might be able to prevail on his claim for “promissory estoppel.” Promissory estoppel is a quasi-contract theory in which the court finds that certain promises may rise to the level of a binding agreement if the person to whom the promises were made takes action in reliance and is injured as a result. For example, if a company made a job offer to an individual (the promise) and encouraged him to move across the country to accept the position, and the employee moved across the country to take the job (the reliance), and was damaged thereby (e.g., quitting his other job, selling his house, etc.) (the injury), the employer is prevented (or estopped) from denying the employee the benefits of the promises previously made.

In the Peters case, the court found that the employer’s handbook and the statements set forth in the letter could constitute promises under Indiana law upon which Peters had relied to his detriment.

Second, the court observed that the statements made in the employee handbook could simply be a unilateral contract offer, which Peters accepted by working for Gilead Sciences. The 7th Circuit noted, however, that the Indiana Supreme Court had not decided the issue of whether employee handbooks could rise to the level of binding contracts. Even if a handbook in Indiana did not constitute a contract, the appellate court concluded that Peters had set forth enough facts to pursue a claim under the legal theory of promissory estoppel.

As the 7th Circuit noted, “There is no reason employers cannot offer FMLA-like benefits using eligibility requirements less restrictive than those in the FMLA, and that is what Gilead did. Peters statutory ineligibility is irrelevant to the contract-based theories of liability.”

The Peters lawsuit is illustrative of several critical points. First, as I have observed in this Blog before, much of employment law is state law dependent. In Indiana, the courts apparently have yet to resolve the issue of whether the promises in an employee handbook can rise to the level of contract. Other states, however, have resolved that issue. In Minnesota, for example, our state Supreme Court decided about 25 years ago that handbooks could constitute unilateral contracts. Of course, that led to the use of disclaimers, boldly set forth in handbooks, to disabuse employees of the notion that it would be reasonable to view handbooks as contractually binding.

Second, there are times when state law provisions do interact with federal law. Here, the handbook analysis had direct bearing on the FMLA, a federal statute. Indeed, in some ways the federal statute complicated the situation because the FMLA requires that information about employee FMLA leave rights be included in employee handbooks (if the employer uses such a document). Moreover, the appellate court considered, but did not decide, whether Peters’ “equitable estoppel” argument would have required the employer to provide the otherwise ineligible Peters with rights provided by the FMLA. In the absence of Peters’ state law contract and quasi-contract claims, presumably the court would have reached this issue.

Third, the case illustrates the importance of crafting your employee handbook carefully. If you reference eligibility for statutory benefits, you’d better get it right. If you omit key statutory provisions, you may be obligating your company to provide benefits that exceed those of the statute or that apply to individuals who otherwise would not be eligible for the statutory benefits. There are at least two ways to address this potential problem. You could analyze each statute carefully and ensure that your summary descriptions are correct. Or, you could include a provision in your handbooks, specifying that the handbook only provides a short synopsis of the statute and, to the extent that the statute contains provisions governing eligibility or benefits not summarized in the handbook, the statute (not the handbook) will govern. This may not completely exculpate an employer that mischaracterizes a statute but it is better than the alternatives — either omitting key statutory provisions or attempting to incorporate the entire statute into the handbook.

Fourth, the Peters case also illustrates the importance of conveying information clearly, and accurately, in other employee communications. Don’t send out letters that paraphrase statutory provisions inaccurately. Don’t advise employees that they are entitled to benefits for which they would not be eligible. Do your homework before sending out the letters. Get legal advice to ensure that you are not making promises you do not intend to make. Otherwise, you may find yourself in the position of Gilead Sciences, having promised benefits that are quite likely to be enforced, regardless of the limitatons of the statute.

Finally, purely from an advocacy perspective, limit your arguments to those which are credible. As referenced above, one of the explanations that Gilead Sciences offered to Peters for why he had been replaced was that he was a “key” employee under the statute. The FMLA definition of a “key” employee is very circumscribed and there is no way Peters would have fit that definition. By including an argument that has virtually no chance of success, the company merely diminished its own credibility with the court.

Dorsey & Whitney

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