Quirky Question # 162: Employee Handbooks Creating Vested Benefits


Our company is located in California. We have language in our handbook that says all our employees are “at-will.” Our existing handbook also includes provisions setting out the conditions under which we will lay people off and what benefits they would be entitled to if that were necessary. This was put in place five years ago. Given the current business climate, we may be facing lay offs in the next six months and want to change this policy. Since our employees are at-will and can be fired at any time for any reason, can we unilaterally change this policy now that business conditions have changed?

Answer: By  Karen Wentzel

You are right to be concerned about whether you can unilaterally make changes to policies and benefits in your handbook that your employees may have relied upon for many years.

As a starting point, let’s look at what it means to have “at-will” employees. While it is true that an at-will employee can be terminated at any time for any reason, there are still limits to what is an acceptable reason to terminate an employee. Most immediately, you obviously cannot fire an at will employee for an illegal reason. At-will employees are protected against terminations based on discrimination as a result of their age, race, sex, religion, disability, or any other protected class. And, they are protected against terminations in retaliation for asserting their rights (for example, complaining about sexual harassment or offering testimony in support of someone claiming discrimination), or for being a “whistle-blower” who exposes company practices that are against public policy.

In addition, under certain circumstances an employment contract may modify the presumption under California law that all employees are at-will. The contract may be written or oral, express or implied. Some senior executives, for example, may have a written employment agreement that provides for employment for a specified term, or provides that the employee can only be terminated for specifically defined “cause.” More problematic are oral contracts or contracts that may be implied, either of which can create a duty not to terminate an employee without good cause. Protecting yourself against claims of oral contracts not to terminate without cause can be avoided by training your hiring managers not to make any oral promises during the interview process, and having an explicit “at-will” policy that is set forth in offer letters and handbooks, which should state that that the policy cannot be changed or modified except in a writing signed by the CEO or other high-level executive. A signed acknowledgement of an employee’s at-will status (for example, as part of the receipt of a handbook), also will help overcome claims of an oral contract to the contrary.

But what about claims of implied contracts not to terminate without cause? At one time, employees regularly argued that implied contracts not to terminate without cause could be based on length of employment and other indicators of job security an employee had received. Based on more recent cases, however, for the most part if employers follow the guidelines set forth above about having an explicit “at-will” policy in offer letters and handbooks that is acknowledged in writing, a court will not find a guarantee of future employment based on such factors as longevity, raises, and promotions.

Problems can still arise, however, over whether policies such as yours create contractual rights in favor of the employee if they are not carefully drafted and implemented. Two contrasting cases from California illustrate the pitfalls. In the first, a California Supreme Court case from 2000, (Asmus v. Pacific Bell, 23 Cal.4th 1), the employer had a policy dating from 1986 that promised employment security to management employees who continued to meets its changing business expectations. Employees were promised reassignment to or retraining for other management positions if their present jobs were eliminated. The policy stated that it would be maintained so long as there was no change that would materially affect the achievement of the company’s business plan. In January of 1990, the company first warned its employees that it might not be able to maintain the policy. Then, in October 1991, the company announced that it would terminate this policy as of April 1, 1992, so it could achieve more flexibility in conducting its business and compete more successfully in the marketplace. In announcing the change, the company did not articulate any changes that materially affected its business plan. Several years later, eight employees who were subject to lay off sued to enforce the original policy, claiming that the employer could not terminate that policy absent a showing that there was a change in the market that would materially alter the achievement of its business plan.

The California Supreme Court held that the policy did create a unilateral implied in fact contract accepted by the employees by continuing their employment. This contract was not optional with the employer and was fully enforceable unless terminated or modified. However, the court went on to say that this unilateral contract, which was of indefinite duration, could be terminated or modified so long as it had been in effect for a reasonable time, and employees were given reasonable notice of the company’s decision to change the policy. Significantly, the court found that no vested benefits were lost as a result of termination of the plan.

Employers generally accepted this case as good news – confirmation that they could change their policies so long as it was done with reasonable notice. But a new case puts a bit of caution back into the equation. In McCaskey v. California State Automobile Association (Cal. 6th Appellate Dist. 10/29/10), three employees alleged that they remained with the company for most of their working careers in reliance on a 1973 promise to relax their sales quotas after they reached age 55. Despite this longstanding program, in early 2001, the California State Automobile Association (CSSA) adopted a new plan that did not provide any reductions in quotas for senior agents. The three plaintiffs, who had joined CSAA at age 27, 31, and 25, respectively, and were all over 55 at the time the policy was terminated, declined to sign an agreement acquiescing in the policy change, and were terminated in 2005 following a four-year stalemate over the new policy.

Citing Asmus, the employer argued that it could change the policy and withdraw the promised reduced quotas without incurring contractual liability and that recovery was precluded by CSAA’s at-will employment provisions. The McCaskey court rejected these arguments, stating that the policy in this case had an implied-in-fact durational term as to each qualifying employee who reached age 55 under the terms of the plan, and that therefore Asmus (where the duration was indefinite) did not apply. While CSAA could have revised the plan as to future employees who had not yet qualified for the reduced quotas, they could not renounce the plan as to these employees, denying them of its benefits and then terminating them for insisting it be honored. The question, the court said, was not CSAA’s general power to discharge employees without cause, but its power to discharge them for a reason it had promised not to use as a basis for discharge.

While both of these cases carefully parse the legal rules as to when a unilateral contract is created and becomes binding, and under what circumstances such a contract can be terminated or modified, to a certain extent, I would have to say that common sense actually ruled the day. The employer in Asmus acted within a certain standard of fairness and reasonableness in extending a policy of indeterminate length for so long as business conditions warranted it. The employer in McCaskey took a benefit away from 25- to 30-year employees, a benefit that had been created to induce employees to remain in CSAA’s employ for their entire working careers.

So, what about changing your policy now? Without knowing the specifics of the policy, I can’t comment exactly on whether a court would find that you are entitled to terminate or modify it with six months notice. But ask yourself these questions: Does the policy amount to a contractual promise to give your employees a certain benefit? If so, has the policy been in effect for a reasonable amount of time to allow employees to reap the benefits, and is six months a reasonable amount of notice to give to terminate it? Are there employees who would lose what they had “earned” under the plan if you terminated it now? If so, can it be withdrawn only prospectively as to employees who have not yet qualified for the benefits? Even if you have taken all the steps to properly classify your employees as at-will, have you in effect promised not to fire them for insisting on their entitlement under this program? Last, but certainly not least, are you confident that you are treating your employees fairly and reasonably? If the answer is yes, it will be your best defense against lawsuits most often brought by disgruntled and unhappy employees.

Dorsey & Whitney

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