California Supreme Court Approves Termination Based On Reasonable Belief That Employee Misconduct Occurred

In a decision that seeks to balance an employee's rights and an employer's needs, the California Supreme Court recently affirmed the Court of Appeal's decision in Cotran v. Rollins Hudig Hall International, Inc., establishing what constitutes "good cause" to terminate an employee under an implied contract requiring good cause. Invoking a pragmatic analysis, the Court held that in such cases an employer does not have to prove that allegations of misconduct are true, just that the employer fairly formed a reasonable belief that they were true.

The decision provides guidance to employers faced with complaints that one of its employees engaged in sexual harassment or similar misconduct: After a fair and objective investigation, the employer may draw reasonable conclusions and take warranted disciplinary action to address the conduct in question.

Ralph Cotran, a senior manager at Rollins Hudig Hall, was fired after a neutral investigator looked into charges that Cotran had sexually harassed two subordinates. The investigator interviewed 21 witnesses over a two week period, and determined the charges were probably true. Because Cotran denied the allegations, Rollins Hudig Hall found itself confronting a familiar quandary for employers: the conflict between the duty to provide a workplace free from sexual harassment or discrimination and the possibile requirement of proof of good cause for terminating an employee accused of misconduct.

After surveying the law of California and other states on the issue of employer liability for wrongful termination based on an implied promise to terminate only for "good cause," the Cotran Court sought to strike a balance between two positions: (1) that the employer must actually be correct that the employee in question engaged in the conduct alleged, and (2) that the employer had a "reasonable, good faith belief" that the employee engaged in the conduct in question. The Court held that the employer must do more than simply assert that it believed the employee engaged in misconduct. Rather, the employer is held to what the law calls an "objective standard."

Under this standard, an employer must show not just that it honestly believed the charges, but also that it was reasonable to believe them. The Court also held that an element of such reasonableness is "an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond."

The Court declined to explicitly define the essentials of an adequate investigation or how to implement the due process concerns it addressed. Instead, it set some broad parameters -- the procedure may be less formal than a civil trial, but the fact finders involved should not jump to a conclusion before the end of the process.

The Court also reaffirmed that a "good cause" termination must be based on "fair and honest reasons, regulated by good faith on the part of the employer, that are not trivial, arbitrary or capricious, unrelated to business needs or goals, or pretextual." Thus, the disciplinary action taken must be supported by substantial evidence, and cannot be motivated by illegal reasons, such as discrimination.

Although the Cotran decision leaves some significant questions unanswered, it reflects an attempt by the California Supreme Court to strike a balance between concern for an employee's interest in continued employment and an employer's interest in effective and efficient personnel management.