In a landmark decision, the California Supreme Court ruled on January 5, 1998, that an employer is entitled to terminate employees for misconduct under a good-cause standard, provided the decision to terminate is based upon an honest and reasonable belief that the employee committed acts of misconduct serious enough to warrant termination. Even if the allegations that trigger the termination are later determined to be untrue, the jury's role is now limited to assessing the "objective" reasonableness of the employer's factual determination under the circumstances known to the employer at the time the decision was made.
The Supreme Court decision in Cotran v. Rollins Hudig Hall International, 97 C.D.O.S. 58, explicitly invalidates the 1989 State Court of Appeal ruling in Wilkerson v. Wells Fargo Bank, 212 Cal. App. 3d., holding that in order for an employee to be terminated under a good cause standard, a jury had to determine that the alleged misconduct actually occurred.
The Cotran decision makes it clear that an employer must act in good faith and base its decision on an honest assessment of the facts after an appropriate investigation. The Court did not spell out the essentials of an adequate employer investigation, leaving the traditional case-by-case analysis in tact. However, the Court did indicate that an adequate investigation includes notice of the claimed misconduct and a chance for the employee to respond.
The Facts in the Cotran Case
Richard Cotran sued his former employer Rollins Hudig Hall International Inc., an insurance company, after the company fired him from his Senior Vice President position. The termination occurred following an investigation of allegations that Cotran had sexually harassed two female employees. The company's investigation included interviews with 21 people who worked with Cotran.
A jury in the underlying Superior Court trial decided that Cotran had not sexually harassed the two female employees and,therefore, the company should not have terminated Cotran. The jury awarded Cotran $1.78 million in lost compensation. An appellate court overturned that verdict, ruling that the company had conducted an adequate investigation of the allegations and had a reasonable belief Cotran had engaged in the alleged harassment.
The Supreme Court, in a 6-1 ruling, agreed with the appellate court. As a result, the only question for the jury is whether the factual basis on which an employer bases its decision to terminate is reached "honestly, after an appropriate investigation and for reasons that are not arbitrary or pretextual."
The Court dismissed plaintiff's argument that requiring the jury to determine that the investigation was reasonable, and not that the underlying facts were true, destroys the protections afforded by the implied good-cause contract. The Court stated that "the rule we endorse today, carefully framed as a jury instruction and honestly administered will not only have the effects plaintiff claims, but by balancing the interests of both parties, will ensure that 'good cause' dismissals continue to be scrutinized by courts and juries under an objective standard, without infringing more than necessary on the freedom to make efficient business decisions."
Writing for the majority, Justice Brown explained that "if an employer is required to have in hand a signed confession or an eyewitness account of the alleged misconduct before it can act, the workplace will be transformed into an adjudicatory arena and effective decision making will be thwarted."
Practical Implications
As a preliminary matter, employers must keep in mind that the analysis made by the Court related to the application of an implied contract to terminate only for good cause. As the Court noted in footnote one of the decision, employers may explicitly agree to a more onerous good-cause standard requiring proof of actual misconduct prior to termination. Accordingly, to the extent employers have written contracts with executives or other employees requiring good cause for termination, the employer should carefully analyze what contractual restrictions may exist with respect to the particular termination. This case also highlights the advantages of having established, written at-will policies specifying that employment with the company may be terminated with or without cause.
The good news for employers is that a good faith determination that an employee has engaged in misconduct is recognized as a legitimate basis for termination regardless of whether the determination ultimately proves to be erroneous. This should not, however, be interpreted to give employers free reign to terminate accused employees. Rather, it emphasizes the utility of conducting and documenting thorough and unbiased investigations.