The Arizona Supreme Court has ruled that employers may not change employee handbooks or other personnel policies, under certain circumstances, unless the employees accepted the proposed changes and were compensated for the policy modification. Demasse v. ITT Corp.
In Demasse, six hourly employees were laid off in 1993 and 1994 in Phoenix. Each was hired when ITT's layoff guidelines were based upon seniority. In 1993, ITT changed its policy and told employees that layoffs would now be merit-based. The Demasse plaintiffs were laid off ten days later. They sued ITT in federal district court and lost because the judge determined that the seniority layoff provision was not an enforceable contract. On appeal, the Ninth Circuit asked the Arizona Supreme Court to interpret Arizona law and decide whether:
- ITT could unilaterally change its layoff policy, and
- If the employees had to exhaust the complaint procedure described in the handbook before they could sue for breach of contract.
First, the Court decided that if a reasonable person would interpret a handbook policy as a promise, then that term was an "implied contract" that could not be unilaterally modified by ITT. The Court assumed that the ITT handbook was a contract. Second, the Court held that, if a handbook's complaint procedure is mandatory for termination-related grievances, failure to exhaust the procedure will preclude a terminated employee from filing a lawsuit.
What does this decision mean for employers?
Handbook disclaimers are now required to avoid claims under your handbook. In the absence of good disclaimers, certain employment policies or assurances may not be modified without giving employees something of value for their consent to the change. It does not mean that at-will and contract disclaimers are now void. Indeed, they may be preferred.
Are employers trapped with outdated handbooks or policies?
No. This case does not nullify all changes to employee handbooks or automatically turn each employment policy into a binding contract. Employers may still add, alter, and rescind employment policies by providing notice and value to employees for the changes. This case is significant but it is not a cause for alarm. It only impacts handbook provisions that are binding contractual terms.
What are some examples of handbook terms that create contractual terms?
Any statement that conveys a promise may be considered binding. Old and new provisions pertaining to job security, pay, vacation time, layoff preferences and benefits should be carefully analyzed in light of this case.
What are some examples of non-contractual policies?
Information pertaining to the company's mission, the dress code, job duties, and policies regarding opening and closing hours, is non-promissory and non-binding.
What should I do as a result of this case?
Review all employee handbooks and published policies and determine:
- What, if any, changes have been made;
- Whether those changes could be binding contract terms;
- Who has been affected by the changes;
- Whether the affected employees agreed to the change and the documentation for that agreement;
- Whether anything was given to the affected employees in exchange for their consent;
- Whether the company retains a copy of policies that are revised.
Assuming my employee handbook contains promissory language that I have altered over time, may any employee sue to enforce the old terms?
No. Employees may only sue to enforce the terms of the handbook which were in effect at the times of their hiring. For example, if in 1990, you promised all employees one month of vacation, and in 1995, you reduced that benefit to two weeks, those employees who worked for you prior to 1995 may be able to sue you to enforce the one month vacation benefit if you made that change without giving them something in exchange for their acceptance of the new policy. There may also be statute of limitations defenses, but this was not addressed by the Court.
What do I have to offer employees in exchange for modifying or rescinding promissory language?
Examples include new policies providing for alternative dispute resolution, a 30 day notice for termination, or continuation of certain fringe benefits that were previously unavailable to terminated employees may be examples. A bonus or pay increase would also suffice.
In light of this case, how do I effectively change the contractual terms in my employee handbook?
A court will require:
- notification of the modification;
- the employees' agreement to the changes; and
- evidence of something of value given to the workers in exchange for their consent.
Legally adequate notice is more than the employee's awareness of or receipt of the newest handbook. An employee "must be informed of any new term, aware of its impact on the pre-existing contract, and affirmatively consent to it to accept the offered modification." A plain language explanation of any and all policy changes should be attached to the modifications and distributed to all affected employees. Businesses that employ a significant number of non-English speaking workers, should consider publishing the policy and explanations in the appropriate languages.
This case may present some unfortunate practical implications for employers. Policy modifications are not automatically enforceable, and the burden will remain on the employer to show that the employee accepted the proposed change with an understanding of its impact on the underlying contract. At a minimum, it is time to evaluate all handbooks and policies to determine if Demasse creates any issues.