EMPLOYMENT CONTRACTS IMPLIED IN FACT
By Alan Hyde(1)
Everyone who has a job has a contract for employment. Contracts for employment may not be
written at all, or are at best partly written. They necessarily include terms formed by employer
conduct and employer speech. They are formed over an entire worklife, and consist therefore of
oral promises made to the employee, and consistent employer practices that have come to be
regarded by reasonable employees as part of the employment contract. While such contracts may
present difficult problems of proof, when proven, courts enforce them. In so doing, courts
impose no controversial social policies, but merely hold employers and employees to the very
contracts they have made.
None of this should seem controversial.(2) The employment contract implied-in-fact however, despite substantial judicial recognition, remains something of an orphan in most treatments of employment litigation. In most casebooks and treatises, it is barely a walk-on.(3) It is frequently misunderstood or confused with other, more controversial doctrines. It lacks academic champions, I think because academics have tended to line up in favor either of employment contracts terminable only for just cause, or employment contracts terminable at will. Employment contracts implied-in-fact are not reliable vehicles for either of these results. As I hope to show, relatively few Americans have employment contracts that impliedly promise that termination will be only for just cause. Relatively few Americans have employment contracts that genuinely provide that termination may occur at will. Most people work instead under employment contracts in which employers have impliedly promised some restrictions on termination at will, but far less than termination only for just cause.
I think the comparative obscurity of employment contracts implied-in-fact is a shame. The
employment contract implied-in-fact is, in my view and as this Article hopes to show, the most
important doctrine of employment law to emerge from American state courts in the last two
decades. It applies to all employees. It puts courts in a comfortable and familiar role, so should
continue to win wider judicial acceptance. It requires no fancy economics to be understood;
indeed, its appeal is precisely as a way of avoiding questions controversial among economists.
Finally, it offers solutions to a number of vexed problems in employment law, which I shall
illustrate by considering a standard three: the definition of "public policy" in tortious discharges in
violation of public policy; the definition of "good faith" in employment contracts; and the kinds of
privacy rights that job applicants and employees can enforce against employers.
Basic Elements of the Doctrine and Three Illustrative Cases
To analyze a given employment relationship as a contract implied-in-fact means: that it thereby
contains legally enforceable terms; that it is formed over time, not in an instant; that its terms are
formed partly in word and partly in deed; and that no single writing could therefore integrate it.
These are familiar concepts from contract law and better fit the reality of employment contracts
than the contrary assumptions. Let me start with three cases that correctly apply these concepts
to employment contracts.
Christine Garvey was manager of an Open Pantry Food Mart store when she was fired. The
president of the chain had made a purchase at the store that Garvey managed and had not been
offered stamps that were being distributed as a promotion. The following morning, the clerk who
had failed to offer the stamps, and Garvey, were both fired. Garvey had begun work at the store
as a clerk eight years earlier and had eventually been promoted to manager. She alleged that her
discharge breached her employment contract. There was no written document that even arguably
promised her anything but at-will employment. The sum of relevant documents were a form in
which she had acknowledged that violation of the alcohol sale law would result in termination, "a
company polygraph policy, a standard of conduct form and two company manuals."
Garvey alleged nonetheless that "her supervisors had communicated to her that there was a
company policy whereby an employee would be terminated after the receipt of three pink
disciplinary slips within a six-month period and that she had come to rely on this policy as a
condition of her employment. Affidavits of two of her past supervisors corroborate this." The
company denied the existence of this policy. This factual conflict precluded summary judgment
for the company. Garvey had successfully alleged a breach of her employment contract.(4)
Garvey's alleged employment contract is the model illustrated throughout this Article. It is
formed partly in word and partly in deed. It is judicially enforceable. In this case, it is not
particularly murky: three pink slips is potentially a far easier standard to administer than "just
cause", though of course the standard in fact was more probably some variant of "three pink slips,
unlesss..." No writing sets out the whole contract. Nor does any writing integrate the
relationship, so as to bar parol evidence as to its terms.
The opinion is also helpful on some things that Garvey's alleged contract is not.
It is not, necessarily, a contract providing for "just cause" for terminations. An employee might
indeed have a contract, implied in fact, and limiting discharge to cases of just cause, but Garvey
did not. The opinion is explicit on the question. Garvey had expressly contended that her
contract required "just cause" for termination, but apparently later switched to the contention that
she had only narrower implied contractual limitations on discharge. The switch was well-advised.
"Just cause" is a term of art in labor and employment law. It is one of the most stringent
limitations on employer power known to law. "Just cause" is found chiefly in collectively
bargained agreements: discharge for "just cause" is discharge that an employer can demonstrate
was justified, to the satisfaction of a neutral third party, typically an arbitrator, on grounds
expected by the employee, normally part of a system of progressive discipline.(5) Not
surprisingly, relatively few private employers voluntarily promise "just cause" protection to
nonunionized employees. Perhaps surprisingly, some employers make just this promise, or choose
not to dispute it in litigation, in which case it is enforceable as part of the employment contract,
Garvey's termination was not a wrongful termination in violation of public policy. The Wisconsin
court is explicit about this one too, dismissing Garvey's claim to that effect. This seems right too.
Very few American discharges really violate public policy, as that term has been defined, as we
shall see infra. Very many more discharges violate implied contracts between employers and
employees. Certainly there is no public policy, of Wisconsin or the nation's, on how strictly
employers may enforce their rules. There are public policies, however, that prevent employers
from becoming strict, after they have promised something quite different. That policy is called the
law of contracts.
Garvey's implied contract of employment is probably not helpfully classified as bilateral or
unilateral. The Wisconsin court noted that Garvey "extensively argues the law of unilateral
contracts, an approach which we do not find particularly helpful."(7) This may simply reflect the
burial of these old concepts by the Restatement (Second) of Contracts.(8) The rejection of
unilateral contract analysis might also reflect, I would hope, the idea that the meaning of
employment contracts is rarely illuminated by the search for a moment of their creation, for surely
they are created and modified each day.
Two other contracts that Garvey's is not deserve more extended treatment. It is not a contract
for employment at will--though many employment contracts are terminable at will, precisely, I
shall argue, when employer and employee have impliedly contracted for at-will employment. It is
also not an implied contract for lifetime employment, with backloaded benefits and employee
vulnerability to employer opportunism late in the contract. This particular contract, which has
been extensively modeled in the economic literature and discussed in the legal, will be discussed
infra, where it will be seen as just a special case of the broader category of employment contracts
implied-in-fact. Before turning to these cases, however, I would like to summarize two additional
state court cases correctly applying the basic concept of employment contract implied-in-fact.
Theresa Ann Gilbert, like Christine Garvey, successfully alleged an implied contract to warn
before discharge, and with similar proof; unlike Garvey, she actually recovered a jury verdict of
$150,000, affirmed on appeal. It is worth examining her proof for a moment, for it helps establish
a realistic portrait of how employers and employees actually form employment contracts, as well
as suggesting just how many employees probably have implied contracts limiting discharge, even
when those discharges are not limited to cases of "just cause."
Gilbert's proof was found legally sufficient to establish an implied contract to warn before
discharge. It consisted of her own testimony that warnings were common; her testimony that a
supervisor had told her that only insubordination would result in "immediate discharge";
testimony of a supervisor in a different department, that maintainted a formal policy of initial
verbal warnings followed by three written warnings, which (the supervisor thought) would
eventually be implemented on a plant-wide basis; and testimony of other employees and
supervisors who testified that in their experience, discharges were always preceded by warnings.
On these facts, the jury was permitted to find, in the words of the appellate court, that the
employer "created an environment in which she and other employees reasonably believed that a
warning policy existed."(9) I view this as a realistic sense of how employment contracts are
formed and communicated to employees: a process of multiple diffuse communication. A less
realistic court, that nevertheless wanted to come out for Gilbert, might have been tempted to put
all its weight on the oral statement by the supervisor that there could be no immediate discharge
except for insubordination. The New Jersey court instead had a much more realistic sense of how
employers actually communicate their policies to employees, and how employees learn of them.
Much the same sense pervades a California case on behalf of a particularly unsympathetic plaintiff,
a bank officer fired on fairly clear evidence of accepting a gift from a customer and potential loan
guarantor, and approving a second customer's overdraft so that she could repay a personal loan
to plaintiff. The bank's "employee handbook and the voluminous [Service and Operations
Manual] provided that employment with the Bank was for no specified term or length and could
be terminated with or without cause by either party." Wilkerson, the officer, nevertheless
presented a declaration of a retired former executive vice president of the bank, who declared that
Wilkerson's purported misconduct would normally result only in removal of authority or transfer,
not immediate termination. The declaration was held admissible, and barred summary judgment
for the bank in Wilkerson's suit for breach of an implied-in-fact contract. The handbook and
manual were not integrations and did not bar other evidence of the actual employment contract.(10)
I confess to little sympathy for Wilkerson but nevertheless believe that the court was correct. It
would have been easy to seize on a manual and reify it into the contract; many courts would. The
emerging trend, I believe the more realistic one, is to follow the court here and treat the
employment contract as the total of all communications on the job, that is, to recognize that
actions may indeed speak louder than words, especially words in a document that may not ever
have been treated as the contract itself.
Other applications, explicit and implicit, of the doctrine of employment contract implied-in-fact
will be discussed below.(11) It is time to use it to explain some vexed puzzles in employment law.
Employment-at-Will as a Special Case of Employment Contract Implied-in-Fact
Of course it is entirely possible for a given employee to have a contract with her employer, partly
explicit and partly implied-in-fact, a term of which is that employment is terminable at will by
either party at any time for any reason or none at all. From this, one might conclude that there is
no practical difference ("distinction without a difference") between a traditional presumption of
employment-at-will, and my proposed regime of employment contracts implied-in-fact, where
plaintiff, as always, bears the burden of producing evidence and the risk of nonpersuasion. This
conclusion would be wrong, however, as Duff and Phelps, Inc., once discovered.
That closely-held corporation offered employees the opportunity to buy its stock but required that
shares be sold to the corporation at book value on an employee's resignation, discharge, or
retirement. The company accepted James Jordan's resignation for personal reasons, without
telling him of ongoing merger talks that eventually caused a substantial increase in the value of the
stock. Jordan sued under the securities laws, and the case is of interest to scholars of employment
law only because the company's defense rested largely on Jordan's employment at will, which, the
company argued, negated not only any obligation to keep Jordan on, but any fiduciary obligations
respecting Jordan's stock. The employer's reliance on employment at will hardly pressed the
limits of the doctrine, and, at oral argument, when the employer learned that the panel included
Judges Posner and Easterbrook (along with Cudahy), it must have silently uttered the sports star's
The employer lost, however, with Easterbrook writing a majority opinion and Posner dissenting.
While those two law-and-economics judges disagreed about the outcome of the case, they agreed
with each other, and with me, about the nature of employment-at-will in America today, and the
difference, between our joint view and the view of earlier times, turned out to matter a great deal
to the employer. Employment-at-will, Easterbrook, Posner, and I all agree, is, if anything, an
implied term in an employment contract. Where not express, it may normally be implied by a
judge only as part of a story explaining why employment at will was an efficient term that would
have been adopted by parties themselves had they addressed the matter. The employer failed to
provide that story, and lost the case. Even Posner, J., who found for the employer, thought that
employment at will was just an efficient term that people might adopt, not an eternal verity; he
was more willing than his brethren to provide an efficiency justification for employment at will in
this contract. So the first and simplest lesson of Jordan v. Duff and Phelps, Inc. to employer
counsel in the era of employment contracts implied-in-fact is that employment at will is not, even
in the Seventh Circuit, a laydown anymore; counsel for employers have to be prepared to explain
why a rational employee and employer might have agreed to it.
Against Default Rules
Judge Posner, as I've said, was willing to provide such a defense of employment at will, though
the employer did not, and it's by no means a bad one. Posner argued that Jordan was unlikely to
have negotiated any implied restrictions on discharge, since he would inevitably pay for such
restrictions in reduced salary, and since the restrictions, even if he had them, would be "difficult
and costly to enforce." Duff and Phelps, the employer, on the other hand, would have been
expected to offer only employment at will, because this doctrine in no way constrained them.
With merger talks underway, the company would make offers as generous as necessary to hold
employees who were materially contributing to the firm's market value, and would let the rest slip
away. To note this employer interest, however, as Judge Posner did not recognize, is to explain
precisely why an employee might indeed negotiate for restrictions on discharge, or be drawn to
firms that impliedly contracted for such restrictions. Not every employee is an academic whose
"contributions" can be metered by adding up footnotes in law reviews. Posner supposes that
only the employee who expects to shirk would want restrictions on termination, since good
employees will be rewarded by employers maximizing firm value, but of course that's not true (of
academics either, one might note). Of the many ways in which implied limitations on discharge
might have benefited both Jordan and the firm, Jordan, and Duff & Phelps, might have feared
precisely that the firm would be unable to judge, precisely enough, who was contributing what to
firm value, in order to allocate credit properly, or, perhaps, could make such determinations only
by monitoring minute aspects of work assignment that would be expensive to the firm and, in the
end, motivate employees, and prevent shirking, less efficiently than would a high wage and
benefits policy.(12) If implied restrictions on employment at will induced greater productivity, such
as by encouraging knowledge sharing, or simply raising the distance between the paid wage and
the opportunity wage, they might "pay for themselves" and would not necessarily be paid for by
employees. Indeed, jobs with implied limitations on discharge are normally, one would think, not
the lowest paid jobs, though rigorous data are probably lacking.
Judge Easterbrook, writing for the majority, held both that it was inappropriate for the court to
"put words in a party's mouth and use them as the grounds on which to decide," and also that
implied restrictions on the employer might well have commended themselves to the employee and
employer as wealth maximizing. Judge Easterbrook mentioned implied obligations of good faith,
to minimize employer opportunism and encourage employee longevity.
Both judges are applying the lately fashionable technique of default rules analysis, in which courts
are encouraged to fill contractual gaps with rules that probably would have been adopted by the
parties, or similarly-situated parties, had they thought about the issue.(13) Since the judges are
Easterbrook and Posner, the disagreement is at a level of economic sophistication that could
hardly be matched in any contemporary American court. Am I alone in thinking that greater use
of the doctrine of employment contract implied-in-fact is appealing because it would direct courts
away from this debate? I think that most real world judges, and perhaps even Judges Easterbrook
and Posner, would be better off asking in particular cases what were the implied terms of this
contract for the employment of this employee by this employer, than they would by asking
generally what sort of terms would be efficient for employers generally to offer employees
generally. The latter question is almost impossible to answer in Jordan's case; it all depends. It
usually does. Far better for counsel for employers and employees to brief the question of what
was impliedly going on with this employment contract. My students snicker when we discuss
default rules, and I think it is because they are thinking of the activist judges (on all political
directions) with whom they are familiar (judges doubtless overrepresented in the law school
curriculum, but present, to be sure, in the real world). Putting default rules analysis in the hands
of these judges is like putting a nail gun in the hands of a three-year-old.
In short, there is no general conflict between employment-at-will and employment contracts
implied-in-fact. Indeed, when employees are plaintiffs and bear the burden of proof, employment-at-will remains a kind of default rule--the only legitimate default rule I see in the area. Once a
factual dispute arises as to the implied-in-fact contract of employment, courts should enforce the
actual employment contract as made and experienced by the parties, in word and deed, and not
some hypothetical contract that some legal academic thinks would be efficient practice.(14) As
courts become more attuned to the analysis of this article, they will begin to think naturally of
employment as a contract, largely implied in fact, and sometimes, but not always, for employment
at will. Self-described advocates of "employment at will" will then have to decide whether they
don't really just favor freedom of contract, or whether, as I doubt, they will insist on employment
at will in the teeth of freedom of contract. If I'm right, there won't be too many genuine
advocates of employment at will.
A Second Special Case: The Implied Life-Cycle Employment Contract
Much has been written in the law reviews in recent years, perhaps too much, about a distinctive
contract for employment modelled originally by economists: the lifetime employment contract in
which employees are induced to make careers at a given employer by a promise, express, implied,
or implicit, that compensation will increase over time, even after the employee's productivity has
declined below that compensation. This is a specialized case of what economists (somewhat
confusingly) call an "efficiency wage", that is, a wage above the employee's opportunity wage, to
which we have already referred. An "efficiency wage" can occur at any point in a career at which
it serves the employer to offer wages above that at which the market will clear, because the
employer dislikes searching for new employees all the time; or in an underdeveloped country,
because the wage at which the market will clear will not permit the employee to feed himself or
herself adequately; or because the employer wishes to deter shirking by creating an economic loss
if the employee is terminated.(15)
One particularly powerful model of the employment contract however is one in which it is an
efficiency wage agreement only over part of its life cycle. In this contract, an employee will be
induced to make a career with a company by being paid more than her opportunity wage at the
beginning of her career (to induce her to acquire firm-specific human capital), less than her
opportunity wage in the middle of her career, but more than her opportunity wage, indeed more
than her marginal productivity, later in her career. Devices for accomplishing this bonding include
"backloading" benefits through pensions and health benefits (often more valuable to older
employees), as well as simply not reducing compensation. Such arrangements may be ex ante
efficient for employers and employees, but they may leave employees vulnerable to opportunistic
ex post appropriation of their firm-specific investments, during the long later period when the
implicit contract calls for the employee to be paid above her marginal productivity.(16)
Given the perspective of this Article, my position should be obvious. Employees who can prove
the existence of such life cycle contracts, implied in fact, should (and, as we have seen, can today)
enforce judicially such implied-in-fact contracts. In fact, many American employees, I shall argue
more fully in the next section, can prove that they were hired under such lifetime arrangements,
and should be (and are) able to enforce them judicially. On the other hand, it would be entirely
inappropriate for courts to adopt the life cyle model as a default rule in contract litigation--since
many employees are hired without any such expectations.(17) The life cycle model of employment
is thus extremely valuable, but only in its place: as a particular example of the larger phenomenon
of employment contracts implied in fact.
II. New Applications of the Employment Contract Implied-in-Fact
If all has proceeded to plan, at this point the employment contract implied-in-fact should appear
fairly uncontroversial, and perhaps a little boring. I think that the concept should be
uncontroversial. Contracts implied-in-fact are a part of every contracts class, approved by the
Restatement, and applied to employment relations by every state court I have seen that has
squarely confronted the issue. They are hard to find when courts focus unduly on a supposed
magic moment when the entire employment relationship was supposedly "presentiated" (in Ian
Macneil's lovely word), such as occurs when courts obsess about the precise language used at a
job interview or in an isolated document.(18) However, in most of those cases, it is not clear that
plantiff's counsel was advancing the alternative view of this article, the realistic view that
employment contracts, like other relationships, are worked out over a lifetime, and include the
sum total of all communication and regular employer conduct as well. As I said, there is no
articulate judicial rejection of this view of contract, and I expect it to have a bright future.
Still, it may appear that the judicial applications to date are pretty boring. Implied contracts for
just cause in discharge, or to avoid arbitrary discharge, are a nice thing to have, of course,
especially when courts then go on to interpret these implied contracts as requiring, for example,
that discharge require proof of actual misconduct, not merely employer good faith belief that such
misconduct had occurred.(19) Otherwise, courts have implied, as we have seen, obligations of
good faith, in the narrow sense of promising not to discharge so as to deprive an employee of
earned bonuses or other non-wage compensation,(20) obligations to warn as in consistent firm
practice;(21) and a promise not to enforce a written antinepotism policy.(22) Are there more
exciting obligations that employers impliedly promise in fact that courts might enforce under this
Yes, definitely. Part A reviews some well-known features of employment contracts that courts
could well find were impliedly promised in particular cases. Part B discusses the advantages of
contract implied-in-fact analysis for solving some recognized, but vexed, problems in employment
A. What Do Employers Impliedly Promise?
Nearly all employers impliedly, in fact, promise some restrictions on employment at will. It is rare
for employers to promise to discharge only for "just cause", that is, discharge only where provable
by the employer to a third party. Scholars who assume that employers promise only "employment
at will" normally assume that the only alternative is "just cause."(23) There are, however,
1. Restrictions on termination at will that are contracted for relatively frequently
It is relatively common for employers impliedly to contract for the following limitations on
employment at will. Procedurally, they impliedly promise employees to provide reasons for a
discharge, in writing if requested; not to discharge until warnings have been given for previous
offenses; and to follow other procedures that have been followed in like cases, for example,
whatever provisions on advance notice or severance pay have been observed in the past and come
to be regarded by employees as ordinary company practice. Substantively, employers promise to
follow substantive grounds for discharge applied to other employees or give notice of changes.
Now, I argued above that an advantage of conceptualizing employment as a contract implied in
fact is to focus decision makers on the facts of individual cases, avoiding default rules. It would
be idle to make any of the above promises a default rule, since the employee would have to prove
the precise standard anyway. Nevertheless, they are such common promises that I think courts
could appropriately enforce them in many employment contracts, though certainly not all.
In a survey of employed persons in the Chicago area, 78.7% of respondents (and 79.5%of
nonsupervisory respondents) reported that their employers must give reasons in order to fire
someone. Must the reasons be in writing? Yes, said 48.9% of respondents (49.4% of
nonsupervisory respondents). Must the employer give advance notice, or pay severance? Yes,
said 62.3% of respondents (56.7% of nonsupervisors). "If employment-at-will is defined as the
ability of employers to sunder employment relationships without having the account for their
actions in any way, only about 20% of the workers were vulnerable to this form of day-to-day
uncertainty...clearly an exceptional form of employment relationship in today's labor market
rather than the typical one..."(24)
Do the results change when the question is asked the other way around, that is, without
suggesting any specific limitations on employment-at-will? Not really. A telephone survey in
Omaha asked: "Does an employer have the right to fire an employee without giving a reason?"
The authors, irritatingly, report responses only by age group, but only 15% of those under 35,
22% of the 35-49 age group, 8% of the 50-65 group, and 20% of the over 65 group said yes.(25)
Verkerke compiled some fifty-five responses from employers only, in what he described as "data [that] make it possible to impose some empirical discipline on this theoretical debate," a debate which Verkerke characterized as based on "only two reliable, though incomplete, sources of empirical data concerning the formal contractual practices of nonunion employers."(26) Since Verkerke surveyed only employers, and only about their formal documents, it is perhaps surprising that only 52% of employers claimed to contract explicitly for an at will relationship.(27)
These fragmentary data suggest to me that many American employees are impliedly hired with the
understanding that (perhaps after a probationary period) they will not be terminated arbitrarily or
randomly, but only if they do something wrong, only under standards known in advance, and
applied equally to other employees. Put this way, it hardly seems surprising; only a lawyer could
think the contrary. Of course some employees are clearly hired at will, without any expectation of
longevity or even fair treatment. Temporary employees normally understand the relationship.(28)
Waiters and waitresses often expect to be fired if the boss disapproves of a new haircut or for any
disagreement(29). But these examples stand out by their very atypicality. Consider some more
examples of implied employment contracts.
Until recently, "everyone knew" that International Business Machines (IBM) rarely fired anyone.
How can this be? Was this promise ever made in so many words in a company handbook? Or
was this just something that employees, and the general public, inferred from IBM's conduct?
A popular book on good companies to work for lists Hallmark Cards as one of the seventeen best
companies for job security. Hallmark insists that it has never promised a "no-layoff policy," but
that it has a "no-layoff history." Asked to explain the difference, CEO Hockaday said: "Through
all kinds of economic cycles and market cycles, we have found ways to keep people....We have
yet to find a situation where we have to deviate from that practice. Do we anticipate that we will
ever have to deviate from it? No. Is it conceivable that we might have to deviate from it
someday? Yes, but only conceivable. I still don't think it is likely."(30) How would this have been
coded in Verkerke's survey? Do Hallmark employees have contracts providing for discharge only
for cause? Of course not. Hallmark refuses to put this into documents, and Verkerke looked
only at documents. Moreover, as we have noted, just cause is very stringent, and few employers
promise it voluntarily. (Verkerke's unpublished finding is one of the few bits of data suggesting
that any do).(31) But are Hallmark employees employed at will? Of course not. While Hallmark
might retreat from its "no-layoff history," as other employers have, I think an abrupt and
unmotivated departure would violate implied contracts with employees.
Charles Heckscher opens his most recent book by noting that, until roughly a decade ago, "In
most large companies [middle managers] were virtually guaranteed lifetime employment security;
when cost pressures arose, cuts were made in the blue-collar force, but never among managers.
They were treated as permanent members of permanent enterprises."(32) This is hardly a
controversial statement; people say things like this all the time. Who can doubt that the
generation of middle managers hired under these implied contracts now feel betrayed and are
disproportionately represented in the ranks of today's wrongful termination and age
discrimination plaintiffs? Yet few of these managers ever had written contracts.
Even ordinary working people know that some employers hardly ever fire anyone. Workers in the
factory studied by Marc Lendler describe it as a "good place to work," the meaning of which
term, according to Lendler, is exhausted by the fact that nobody ever gets fired.(33) The factory
would not show up as one in which documents promised discharge only for cause, yet employees
expect not to be fired arbitrarily and, I argue, should be allowed to prove the existence of such
Of course it is impossible to form a reliable judgment on the percentage of American employees working under contracts that impliedly limit termination. The beauty of the approach is that this reliable judgment is completely unnecessary. Employees and managers who can prove such contracts can enforce them. Anyone who still supports employment at will in such a case does so to the denigration of freedom of contract. Which advocate of employment at will wants that responsibility?
1. Professor and Sidney Reitman Scholar, Rutgers. The State University of New Jersey, School of Law--Newark, NJ, 07102-3192. email@example.com. (973) 353-5463
2. The Restatement (Second) of Contracts provides: 4. How a Promise May Be Made. A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct.
3. Employment contracts implied-in-fact are mentioned in Steven L. Willborn, Stewart J. Schwab, & John F. Burton, Jr., Employment Law: Cases and Materials 54-59 (1993), and Mark A. Rothstein & Lance Liebman, Cases and Materials on Employment Law 911-18 (3d Ed. 1994), where they are identified with implied contracts for lifetime employment, at best a highly special case of the general theory. In each book, the only illustration is Pugh v. See's Candies, Inc., 171 Cal.Rptr. 917 (Ct.App. 1981). They are not mentioned at all in Matthew W. Finkin, Alvin L. Goldman, & Clyde W. Summers, Legal Protection for the Individual Employee 125-71 (2d Ed. 1996).
4. Garvey v. Buhler, 430 N.W.2d 616 (Wis.App. 1988).
5. See generally Roger I. Abrams & Dennis R. Nolan, Toward a Theory of "Just Cause" in Employee Discipline Cases, 1985 Duke L.J. 594, 611-12 (1985).
6. See, e.g., Pugh v. See's Candies, Inc.,250 Cal.Rptr. 195, 202 (Ct.App. 1988)(employer--after losing an earlier round of litigation, 171 Cal.Rptr. 917 (Ct.App. 1986)--conceded that it "had a long-standing, unwritten policy that employees would not be discharged unless their work performance was unsatisfactory, that is, without good cause"); Fowler v. Varian Associates, Inc., 241 Cal.Rptr. 539, 543n.6 (Ct.App. 1987)(employer conceded policy was to discharge only for cause). In Sanders v. Parker Drilling Co., 911 F.2d 191 (9th Cir. 1990), cert. denied 111 S.Ct. 2014 (1991), the jury found that the employer had impliedly promise to discharge only for just cause, although the evidence that the employer had actually made such a generous promise was not particularly impressive. As we shall see, however, many large companies made such implied promises, that discharge would only be for cause, for years, apparently reasoning, like See's Candies and Varian Associates, that they would reap gains in recruiting and morale from public perception of such a policy.
7. 430 N.W.2d at .
8. Restatement (2d) of Contracts supposedly abolished the distinction between unilateral and bilateral contracts. See Mark Pettit, Modern Unilateral Contracts, B.U.L.Rev.
9. Gilbert v. Durand Glass Mfg. Co., 609 A.2d 517 (N.J.App.Div. 1992).
10. Wilkerson v. Wells Fargo Bank, 261 Cal.Rptr. 185, 188 (Ct.App. 1989).
11. I should perhaps mention two adoptions of the theory by state supreme courts. First is the well-known case of Foley v. Interactive Data Corp., 765 P.2d 373, 383-88 (Cal. 1988). The case may be more commonly remembered for the limitations it put on the doctrines of tortious discharge in violation of public policy and good faith. Nevertheless, the court was unanimous in holding that an employer's course of conduct may give rise to a contract, implied-in-fact, not to terminate arbitrarily. The California Supreme Court later expanded the theory in Scott v. Pacific Gas & Elec. Co., 904 P.2d 834 (Cal. 1995)(implied-in-fact contract not to demote without cause). I also read Wright v. Honda of America Mfg., Inc., 653 N.E.2d 381 (Ohio 1995) as adopting the theory of employment contract with terms implied-in-fact, there, that the employee would not be fired as violating a no-nepotism rule despite the presence on the payroll of a half-brother with whom she had had little contact. The absence of a majority opinion may limit the case's precedental value. Moreover, a later court might read the case as resting on a specific promise to the named plaintiff not to enforce the antinepotism rule as to her alone. However, all the justices voting for reversal mentioned company practices as potentially part of the plaintiff's implied employment contract.
12. On above-market wages as a means of reducing shirking and other efficient results, see the articles collected as Efficiency Wage Models of the Labor Market (George A. Akerlof & Janet L. Yellen eds. 1986), particularly Edward P. Lazear and Robert L. Moore, Incentives, Productivity, and Labor Contracts, 99 Q.J.Econ. 275 (1984).
13. See generally Symposium, 3 So.Cal.Interdisc.L.Rev. (1993);[others]
14. Stewart Macaulay has long contrasted "transactional policy" (enforce the bargain-in-fact) with "market functioning policy" (enforce form documents as written); this entire essay reflects his influence. See, e.g., Private Legislation and the Duty to Read--Business Run by IBM Machine, the Law of Contracts and Credit Cards, 19 Vand.L.Rev. 1051, 1056-65 (1966).
15. See generally the Akerlof and Yellin anthology cited supra n. For the underdeveloped world application, see Harvey Leibenstein, Economic Backwardness and Economic Growth 58-76 (1957). For deterring shirking, see Carl Shapiro & Joseph E. Stiglitz, Equilibrium Unemployment as a Worker Discipline Device, 74 Am.Econ.Rev. 433 (1984); Richard J. Arnott & Joseph E. Stiglitz, Labor Turnover,Wage Structures, and Moral Hazard: The Inefficiency of Competitive Markets, 3 J.Lab.Econ. 434 (1985). "Efficient" (above market) wages, paid at any or no particular point in an employee's career, might also; (1) attract "better" workers with higher, though unobservable, human capital, Andrew Weiss, Job Queues and Layoffs in Labor Markets with Flexible Wages, 88 J.Pol.Econ. 526 (1980); (2) forestall union formation or labor strife, William Dickens, Wages, Employment, and the Threat of Collective Action by Workers, Working Paper No. 1856, National Bureau of Economic Research, March 1986; (3) displace shirking or absenteeism into increased rates of internal grievance filing, Peter Cappelli & Keith Chauvin, A Test of an Efficiency Model of Grievance Activity, 45 Indus. & Lab. Rel.Rev. 3 (1991).
16. Stewart Schwab has written an excellent introduction to this economic literature and used it to synthesize a legal theory of the employment contract in Life-Cycle Justice: Accommodating Just Cause and Employment At Will, 92 Mich.L.Rev. 8 (1993). A lengthy critique of Schwab's legal applications, though not his analysis of the economic literature, is J. Hoult Verkerke, An Empirical Perspective on Indefinite Term Employment Contracts: Resolving the Just Cause Debate, 1995 Wis.L.Rev. 837. An extensive law review literature assumes the existence of such implicit contracts for lifetime employment, as applied to various issues in labor or employment law. Paul C. Weiler, Governing the Workplace: The Future of Labor and Employment Law 63-71, 134-52 (1990)(common law of employment termination); Samuel Issacharoff, Contracting for Employment: The Limited Return of the Common Law, 74 Tex.L.Rev. 1783 (1996)(default rules for common law termination suits); Katherine Van Wezel Stone, Policing Employment Contracts Within the Nexus-of-Contracts Firm, 43 U.Toronto L.J. 353 (1993)(implications for law of union organizing and corporate law); Katherin Van Wezel Stone, Employees as Stakeholders under State Nonshareholder Constituency Statutes, 21 Stetson L.Rev. 45 (1991)(justifying stakeholder statutes); Robert Howse & Michael J. Trebilcock, Protecting the Employment Bargain, 43 U.Toronto L.J. 751 (1993)(enforcing employment contracts, with emphasis on inside-the-firm, nonjudicial enforcement); Marleen A. O'Connor, Restructuring the Corporation's Nexus of Contracts: Recognizing a Fiduciary Duty to Protect Displaced Workers, 69 N.C. L.Rev. 1189, 1203-18 (1991); Alan Hyde, In Defense of Employee Ownership, 67 Chi.-Kent L.Rev. 159 (1991)(emphasizing inefficiencies of the hierarchical organization and low trust associated with such lifetime employment contracts; advocating partial employee share ownership as a solution); Michael L. Wachter & George M. Cohen, The Law and Economics of Collective Bargaining: An Introduction and Application to the Problems of Subcontracting, Partial Closure, and Relocation, 136 U.Pa.L.Rev. 1349 (1988)(defining employer's duty to bargain under National Labor Relations Act).
17. Many observers, myself included, believe that few such implicit contracts for lifetime employment are in fact being made today, though they were typical of employment in large corporations, particularly at skilled, supervisory, managerial, or professional levels, in the 1950's and 60's. Breach of those contracts is today a fertile source of litigation, and, as I have said, employees who can show such contracts should (and do) recover for their breach. I believe, however, that few employees are hired today with any explicit or implicit promises of longevity; they know that they face downsizing. The point is controversial. I review the empirical literature in a companion article, AlanHyde, Work Without Jobs: Emerging Legal Issues in High Velocity Labor Markets. While it would burden this Article unduly to insert it here, interested readers might consult Peter Cappelli, Laurie Bassi, Harry Katz, David Knoke, Paul Osterman, & Michael Useem, Change at Work (1997).
18. Ian R. Macneil, Restatement (Second) of Contracts and Presentiation, 60 Va.L.Rev. 589 (1974). "To presentiate: 'to make or render present in place or time; to cause to be perceived or realized as present.'"(quoting 8 Oxford English Dictionary 1306 (1933)).
19. This was the employment contract implied in fact found by the jury, then interpreted by the court, in Sanders v. Parker Drilling Co., 911 F.2d 191 (9th Cir. 1990), cert. denied, U.S. (1991). Other cases finding that employees had proven employment contracts that, implied-in-fact, limited discharge to cases of just cause, include Foley v. Interactive Data Corp., 765 P.2d 373, 383-88 (Cal. 1988); Pugh v. See's Candies, Inc.,250 Cal.Rptr. 195, 202 (Ct.App. 1988); Fowler v. Varian Associates, Inc., 241 Cal.Rptr. 539, 543 n.6 (Ct.App. 1987).
20. Jordan; Covell; Fortune
21. Gilbert; Garvey.
22. Wright v. Honda
23. Verkerke, supra n. 15 at 866, is subject to this criticism. In his survey of employers as to their discharge policies, employers were coded either as "(1) no contract language concerning discharge, (2) express at will, and (3) just cause." This omits, in my opinion, most American employees, who have implied contracts that limit discharge to offenses dischargeable under the employer's customary practice (so aren't employed at will), but don't have full "just cause" protection either.
24. William P. Bridges & Wayne J. Villmez. The Employment Relationship: Causes and Consequences of Modern Personnel Administration 61-63 (1994).
25. Frank S. Forbes & Ida M. Jones, A Comparative, Attitudinal, and Analytical Study of Dismissal of At-Will Employees Without Cause, 37 Lab.L.J. 157, 165 (1986).
26. Verkerke, supra n.15, at 864, 865. Verkerke cites Bureau of National Affairs, Employee
Discipline and Discharge (1985)(PPF Survey No. 139), and John R. Sutton & Frank Dobbin, The
Two Faces of Governance: Responses to Legal Uncertainty in American Firms, 1955-1985,
Am.J.Soc. (Forthcoming 1996). He also mentions John T. Delaney, David Lewin, & Casey
Ichniowski, Human Resources Policies and Practices in American Firms (1989), but does not,
apparently, consider it a "reliable, though incomplete, source of empirical data concerning the
formal contractual practices of nonunion employers," for reasons that do not appear in text.
There are of course many other sources of empirical data on the employment contracts of
nonunion employers. Verkerke limits himself to formal written documents, thus providing no data
on the subject of this Article, that is, regular employer practices that employees have come to
regard as expected and therefore can appropriately be seen as implied in their employment
contracts. Id. 866n.125, 916. (Verkerke also collected data on employers' oral statements, but
he chose not to report those statements, deciding post hoc that "I doubt that the respondents were
able to provide sufficiently complete and reliable information about oral statements to make such
an analysis meaningful." Id. 867.)
However, even as to the formal documents that interest Verkerke, other data sources exist. David Lewin at UCLA has the largest data base on explicit employment contracts. David Lewin, Explicit Individual Contracting in the Labor Market, in Labor Economics and Industrial Relations: Markets and Institutions 401 (Clark Kerr & Paul D. Staudohar eds. 1994). The fullest treatment of employee handbooks that I have seen is Richard Edwards, [Brookings study]. Formal grievance procedures are described in Fred Foulkes, Personnel Practices of Large, Non-Union Companies (1980); and David Lewin & Richard B. Peterson, The Modern Grievance Procedure in the United States (1988).
27. Verkerke, supra n.15, at 867. Between the lines of Verkerke's article lie findings that grant even more support for my thesis. Verkerke observes, without further explanation, that "Interview notes from the survey confirm that a significant proportion of employers are woefully ignorant about the legal consequences of their employment practices." Id. 901 n.222. In correspondence with me, Verkerke confirmed that this meant that employers report that they are offering employment with termination only for "just cause," and believe that they are offering such employment, but are not complying with Virginia's rather formalistic writing requirements for the making of such an offer. Electronic mail, Verkerke to Hyde, March 18, 1997. This finding of course contradicts Verkerke's basic thesis that the default rule in American hiring is for employment at will. When his article was in press, I suggested as much to him, and further suggested that he had chosen to suppress this aspect of his data because it was inconvenient for his prescriptive thesis. Letter, Alan Hyde to J. Hoult Verkerke, September 22, 1995. I'm sorry to say it, but I still believe that it's true.
28. See the interviews in Robert E. Parker, Flesh Peddlers and Warm Bodies: The Temporary Help Industry and its Workers (1994).
29. See, e.g., Alex Stepick & Guillermo Grenier, The View from the Back of the House: Restaurants and Hotels in Miami, in Newcomers in the Workplace: Immigrants and the Restructuring of the U.S. Economy 192 (Louise Lamphere, Alex Stepick, & Guillermo Grenier eds. 1994); Dorothy Sue Cobble, Dishing It Out: Waitresses and Their Unions in the Twentieth Century 34-51 (1991).
30. Robert Levering, The 100 Best Companies to Work for in America (1993).
31. Supra n.26.
32. Charles Heckscher, White-Collar Blues: Management Loyalties in an Age of Corporate Restructuring 4 (1995).
33. Marc Lendler, Just the Working Life: Opposition and Accommodation in Daily Industrial Life (1990). Lendler is not happy about the situation and wishes his subjects would demand more.