One of the most difficult decisions for an employer to make is the decision to terminate someone's employment. Termination is also one of the most likely employment decisions to lead to litigation. It is therefore imperative that employers carefully consider the decision and analyze the risks inherent in the termination prior to taking action. 1. An analysis of the risks of litigation, however, involves more than just a review of the personnel file; it involves an analysis of the employee's personal profile, an assessment of the employer's motivation, policies, and documentation, as well as a review of the current status of the law. These factors are interactive rather than independent, and the application of the factors to form a decision is more art than science. Accordingly, even the most thorough analysis and course of action by the employer is not guaranteed to prevent litigation. Nevertheless, careful legal advice can minimize the risks and costs of litigation.
The Reason for the Termination
The first question to consider in evaluating a potential employee discharge is the reason for the termination.
Frequently, the termination decision is related to the employee's performance. Exploring the performance history and documentation of that history is critical to assessing risk. What does the personnel file contain? Often where an employer indicates that the basis for the termination is performance, the personnel file is filled with glowing performance evaluations. Of course at that point, as well as at every interval along the decision tree, it is appropriate to consider whether an alternative to termination, such as demotion, written warning, verbal warning, counseling, etc. might be more appropriate. If the employee will be surprised by the decision to terminate, the employer has likely not taken enough previous measures to inform the employee of the performance or other employment related problem prior to the decision to terminate. On the other hand, if the personnel file contains extensive counseling documents, written warnings and opportunities for improvement, the employee will likely not be surprised and may already have taken steps to find another job or to plan some modicum of financial security. Asking the question, "Will the employee be surprised?" usually leads to a wealth of information regarding the employment relationship. A surprised employee is usually a litigious employee.
Other documents in the personnel file must also be reviewed. For example, employers should determine whether there is an employment agreement. If there is an agreement, it should be carefully reviewed as it may set forth the employee's duties or job descriptions, as well as provide specific definitions for what constitutes "cause" for termination and provide information regarding whether there are any severance requirements. If an employer intends to rely on performance-related reasons as the basis for the termination, the employer must be prepared to establish the essential functions and duties of the position. Accordingly, a clear understanding of those terms, as set forth in any employment agreement, is essential to evaluating the decision to terminate an employee.
A review of the Employee Handbook and other Employer Personnel Policies is also imperative. If the handbook establishes a progressive disciplinary policy without employer discretion, a breach of contract claim may be added to any other potential claims the employee may have. Foley v. Interactive Data Corp., 47 Cal. 3d 654 (1988). Employers should be careful when relying on handbooks, however. Adoption of an excellent Employee Handbook in the absence of an acknowledgment of receipt from the employee and agreement to the terms is not of much value in a legal setting.
If the termination is for misconduct, a review of the employer's specific conduct policies is also essential. The employer should be prepared to establish the accuracy of any charges of bad conduct and to corroborate the charges with detailed proof. If the employer cannot prove allegations of misconduct, the potential for disastrous litigation is multiplied.
An employer's past practices in responding to similarly situated employees may also restrict the employer's options. If there is a basis for distinction with respect to the employee being considered for termination, that basis must be documented. Indeed, documentation of every aspect of the basis for the decision is critical. Even if the document merely summarizes performance problems that were previously undocumented, a summary is certainly better than no documents at all.
The length of employment and date of hire are also important. The long-term employee may be able to assert a claim of an implied employment agreement. Pugh v. See's Candies, 116 Cal. App. 3d 311 (1981). In addition, longer-term employees are more likely to feel aggrieved at losing their job. If the basis for termination is not fully supported in the case of a long-term employee, consideration of an alternative disciplinary measure is again appropriate. Similarly, if the employee has been receiving positive performance reviews over the years and suddenly is a candidate for termination, it is reasonable to review whether a change in supervisors has occurred. A long-term employee who has a problem with the boss is likely to feel victimized and therefore to strike back. Here again there is an opportunity to consider alternatives to the decision to terminate. Should the employee be transferred to another supervisor for review before the final decision is made?
Ultimately, however, employers are motivated not solely by legal risks but also by business requirements. If the decision to move forward with the termination is necessitated by business reasons, the task for the attorney counselor is merely to assess and advise the employer of the risks and to attempt to minimize the risks to the extent possible.
Although at-will employment is presumed in California, the presumption may be rebutted. Cal. Lab. Code section 2922. If there is no integrated written document signed by the employee agreeing to the at-will status, it is likely that the employee will be able to allege some basis for asserting an oral or implied contract that he or she would only be terminated for good cause. Pugh, 116 Cal. App. 3d at 329.
Certainly, any at-will language is better than none at all. However, if the language appears only in the application or in the handbook, neither of which are generally integrated, the employee may claim that there were earlier representations regarding the status of employment. Similarly, without a "no oral modification" clause, the employee may be able to assert that at some point after he was hired, promises regarding long-term employment were made. Additional sources for at-will clauses may include the offer letter, the stock option agreement and the proprietary information agreement, any of which may contain integrated at-will language to preclude the employee from claiming an oral agreement for continued employment and thus cut off the employee's claim. Shapiro v. Wells Fargo Realty, 152 Cal. App. 3d 467 (1984). If the at-will clause is included in the stock option agreement or proprietary information agreement, it likely is integrated. However, without the integration clause, it is unlikely that an employer will be able to obtain summary judgment. Accordingly, any time an employer is requesting review of a termination decision, the attorney should use the opportunity to provide information regarding future practices.
A complete discussion of arbitration is beyond the scope of this article. See Employment Arbitration Agreements . Making Them Stick.
Nevertheless, a review of a decision to terminate is incomplete without inquiry into the existence of an arbitration clause. The questions regarding arbitration clauses are similar in nature to those concerning the at-will clause. Where is the agreement to arbitrate located? Is the agreement integrated? What is the scope of the agreement? Does the agreement meet the new requirements for enforceability? See, i.e., Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519 (1997). If the employer has an enforceable arbitration agreement, the impact is enormous. The expense of arbitration to the employer is significantly less than civil litigation. Moreover, arbitration is generally conducted before an arbitrator or judge who can correctly apply the law and is less likely to make arbitrary decisions based on passion. In view of the foregoing, plaintiff's counsel generally respond to introduction of an arbitration clause by not undertaking the representation or recommending a substantially lower settlement amount.
The Employee Profile
Essentially the most important inquiry is whether the employee is the type of person who is likely to bring suit. The person most likely to sue is one who has already threatened to sue, who will not be able to find another job quickly, who is financially strapped, who will not otherwise be able to support his or her family, who feels victimized, or who is psychologically unstable or volatile. In most cases either the employer, the decision maker or the employee's supervisor can quickly assess this information on the basis of personal knowledge or perception.
The attorney consulted for legal advice must also review the protected classification status of the candidate for termination. Information as to whether an employee is in a legally protected classification is important in determining whether the employee is likely to feel, or to have actually been, victimized, and is thus more likely to sue. Similarly, an employee who is a member of a protected class is more attractive to plaintiff's attorneys. The remedies available to these employees include attorneys' fees and punitive damages in most cases. The case is also more likely, depending on the protected classification, to have significant jury appeal. Summary judgment is unlikely in most cases of alleged discrimination on the basis of a protected classification because there are generally factual questions presented. In view of all of these factors, defense of such a claim will be expensive and perilous for the employer.
The protected classifications include race, color, religion, sex, pregnancy, sexual orientation, national origin, ancestry, citizenship, age and physical or mental disability. In truth, virtually every employee is able to assert the protection of some protected classification. Race and sex are protected classifications even where the race is white and the sex male.
Often times it is appropriate, but particularly in cases of alleged discrimination, to reflect on the termination decision in terms of its timing. For example, if an employee is pregnant and has recently so notified the company, a decision one week later to terminate her employment, even if appropriate and supported by business justification, is reckless. The perception that the decision was improperly based on the pregnancy will be unavoidable. Because a pregnant employee is also likely to have additional financial and benefits concerns, and has tremendous jury appeal, the employer who terminates a pregnant employee is in serious jeopardy regardless of whether the decision is technically legal.
It is also important to assess whether the employee has engaged in any protected activity which might establish a basis for an action. For example, if the employee has filed a claim with an administrative agency and is subsequently terminated, it is likely that the employee may institute a claim of retaliation or a whistle blowing claim. Addy v. Bliss & Glennon, 44 Cal. App. 4th 205 (1996). In particular where charges have already been filed with the Equal Employment Opportunity Commission ("EEOC") or the Department of Fair Employment and Housing ("DFEH") alleging discrimination on the basis of a protected classification, it is likely that a retaliation claim will be added. Similarly, termination following claims relating to wages, workers' compensation, claims to the National Labor Relations Board ("NLRB"), Occupational Safety and Health Administration ("OSHA"), the Office of Federal Contract Compliance ("OFCCP") or any other agencies are also likely to lead to charges of retaliation. In addition, protected activities can include internal activities not reported to any administrative agency. For example, has the employee complained of sexual harassment on an internal level? Has the employee complained of stress, regardless of whether a workers' compensation claim has already been made? Has the employee assisted someone else or made a claim on behalf of someone else with respect to sexual harassment?
If the employee is on a protected leave under the Family and Medical Leave Act or the Americans with Disabilities Act, additional concerns are raised.
Communicating the Decision
Once the decision to terminate has been made, there are several procedures which should be followed to reduce litigation exposure and the likelihood that the employee will sue. The termination decision should be communicated in person to the employee. The termination meeting not only allows for communication of the decision but also provides an opportunity to observe the employee's reaction and assess the likelihood that the employee will bring suit. Two employer representatives should be present during the discussion in order to ensure that there is a witness to the conversation. Optimally, one of these employees would be the employee's supervisor or someone with whom the employee feels comfortable. Of course, the discussion should be documented immediately after its conclusion.
The employer should conduct the termination with as much diplomacy and sympathy as possible but should not make positive comments regarding the employee's performance, regardless of the reason for the termination. The employee must be informed of the decision and the general basis for the decision. The reason provided to the employee should not be limiting or overly specific as this may impact defense of any action. Likewise, it is usually not beneficial to debate with the employee the employer's decision or engage in detailed discussion of the reasons for the termination. The decision should be simply communicated and the focus turned to the future. If the employee requests to leave at any point during the proceeding, it should be permitted. Otherwise, a claim of false imprisonment may accompany the employee's other claims.
The employer should provide assurances with respect to whatever benefits are owing to the employee. The employee must be paid immediately all wages up through and including the date of termination. This amount must include any accrued unused vacation. It is a good idea to have the check prepared prior to the meeting so that it can be presented to the employee during the meeting. Set-offs from wages are rarely permitted and should be analyzed separately with legal counsel. The employee should also be provided information regarding COBRA, HIPPA, stock information and unemployment eligibility. Further, the employee should be permitted to obtain his or her personal belongings, and the company should secure the return of all company property from the employee. In most cases, the employee should also be informed that no negative information will be provided to prospective employers. The recent decisions regarding references and defamation are beyond the scope of this article but confirm that employers may be taking unnecessary risks if they provide anything other than dates of employment and title. See, i.e., Randy W. v. Muroc Joint Unified Sch. Dist., 60 Cal. Rptr. 2d 263 (1997).
In conducting the termination procedure, the most important thing to remember is that if the termination is confrontational and unpleasant, the likelihood of litigation increases. Ultimately the company must be humane.
Severance and Releases
Finally, in view of the full analysis set forth above, the employer should consider whether it is appropriate to offer a severance package in exchange for a Settlement Agreement and Release. The employer may also want to consider offering severance without a release as this reflects favorably on the employer from the jury's perspective. Of course, any severance policies must be honored and the consideration for the release must be in addition to anything to which the employee is already entitled.
The competing concerns that must be balanced in terms of offering severance and a release are whether the offer will make the employee believe that there may actually be legitimate claims to release and the value of actually getting closure and the assurance of a release of claims. If a severance package is offered, the release should be inclusive. There is no sense in obtaining a release if it will later prove to be unenforceable with respect to any claims. If the employee is over 40 years of age, the release will have to include statutory language required under the Older Workers' Benefit Protection Act ("OWBPA") to effectively release any age discrimination claims. Since the requirements under the OWBPA include, inter alia, that the employee be provided twenty-one days in which to consider the agreement and a statement that the employee had the opportunity to speak with counsel, the concerns about offering a package, as well as the benefits of obtaining a release, are heightened. In addition, since a release under the OWBPA can be revoked within seven days of execution, the agreement should provide that any consideration be paid after the revocation period has expired.
The foregoing represents only the beginning point for a review of appropriate factors to consider in assessing a termination decision. Nevertheless, as set forth above, a review of these factors, together with a careful examination of the circumstances of each case and the current status of the law will provide employers the opportunity to minimize the risks and exposure of litigation and focus their resources, both economic and human, on the business itself.
1. Reductions in force or group layoffs are beyond the scope of this article. However, clearly an analysis of the Worker Adjustment Retraining Notification Act as well as the unique provisions regarding Age Discrimination waivers in the group context is required.