Are Written Policies Contracts? (8/11)

We are a relatively small organization (with less than 100 employees), and feel that we need to create a formal employee handbook.  Up to this point, we have been relying on our managers’ collective memories when it comes to employment issues, and we are worried that we will be inconsistent.  But, should we be concerned that a formal written handbook will create a contract and take away our flexibility?

Employers often worry that their employee handbooks will be used against them in litigation.  In particular, you could be concerned that employees will claim that your policies are contracts that must be followed exactly. However, the simple act of putting your policies in writing should not create a binding contract if the policies are written as guidelines that explain “generally” or “typically” what your requirements are and how employees “normally” will be treated.  At the same time, your policies present a great vehicle for communicating your organization’s values and practices to employees.      Still, it is possible to create a contract by using language that conveys rigid rules that must be followed exactly as written in all circumstances.  Courts typically find that an employee handbook or policy becomes a binding part of the employment relationship when (1) the language of the policy is clear enough that an employee could reasonably believe a contractual offer was being made; (2) the policy is distributed to the employee; and (3) the employee accepts the offer by starting or (in some jurisdictions) continuing to work for the employer.       Courts have treated as contracts promises made by employers regarding job security, use of specific disciplinary or termination procedures, or benefits.  For example, in Gaudio v. Griffin Health Svcs., 733 A.2d 197 (Conn. 1999), the court found that an employer was liable for breach of contract when it terminated an employee without just cause.  The organization’s employee handbook stated that it would treat employees fairly and would terminate only for serious misconduct.       And, in Hudson v. Village Inn Pancake House of Albuquerque, Inc., 35 P.3d 313 (N.M. App. 2001), the court determined that a 32-year employee, terminated without prior notice or cause, could recover damages for breach of an implied contract. The contract was created by three factors.  First, the provisions in the employee handbook said no employee would be discharged without a chance to succeed.  Second, the employer had both a disciplinary policy and practice of warning employees of performance problems and of discharging only for justifiable cause.  And finally, the employer trained its managers not to terminate employees without notice.       “Mixed messages” also can create contract problems for employers.  In some cases, at-will disclaimers may be made ineffective by other statements or practices that contradict the disclaimer.  For example, in Dillon v. Champion Jogbra, Inc., 819 A.2d 703 (Vt. 2002), the court found the at-will statement printed in an employee manual was at odds with the elaborate employee discipline and discharge procedures that the employer said would be applied in a fair and consistent manner.  According to the court, the employer sent mixed messages to employees about their at-will status.  It therefore allowed a terminated employee to pursue her breach of implied contract claim since the employer had set a precedent by following these procedures in almost all other cases.       As the above cases demonstrate, you should build flexibility into your wording and steer clear of any promises that could be interpreted as a contract.  For example, your policies should not:  1.     State that the organization will “only” or “always” do something or “must” act in a particular way;  2.     Describe employees as “permanent;” 3.     State that employees will be terminated only for “cause;”  4.     Make promises of job security; or 5.     Use all-inclusive lists, such as in disciplinary procedures or work rules.  Instead, you should use terms such as “generally,” “typically,” “usually,” and “may” so that managers have flexibility in interpreting and applying the policies.       In addition, you should specifically retain management’s right to update, change unilaterally, and implement all policies as it sees fit.       You also should include a strong “at-will” statement that clearly specifies that all employees (who do not have contracts or collective bargaining agreements specifying otherwise) may quit at any time and for any reason, or may be terminated at any time and for any reason. This statement also should be in your employment documents to ensure that both applicants and employees understand the nature of their employment relationship and cannot claim that they were not informed of the at-will status.       A final safeguard, as always, is to have your attorney review your policies and employment documents to make sure they do not create any unintended contractual obligations.