Avoiding Implied Contracts In Your Employee Handbook

Every business, from the smallest startup to the largest multinational corporation, needs clear rules and guidelines. Employee handbooks quantify this vital information and provide it in a way workers can understand, but in some cases those handbooks could do more harm than good.

If you do not understand the guidelines, you could end up with an employee handbook that contains misleading, contradictory and even illegal policies. That is why it is so important to seek legal advice and guidance when creating, updating and maintaining the employee handbooks and other materials used in your business.

No matter where your business is headquartered, it is important to be aware of local laws as well as federal employment guidelines. Arizona-based companies in particular can run afoul of state law, creating what is known as an “expectation of employment” in their handbooks.

The Arizona Court of Appeals has already ruled on this matter, giving business owners clear guidelines on how to avoid conflicts and protect themselves from future lawsuits. In particular, the court has ruled that employers can avoid the expectation of employment risk through the use of a disclaimer indicating that the employee manual is not a statement of contractual rights.

“At Will” Employment

In order to remain compliant with state law, the employee manual should also state that employment is terminable at will by either the employee or the employer, and that the employment termination can come without notice and with or without cause. While employers cannot terminate employees for discriminatory reasons, the employee handbook should make it clear that employment is at will.

While the use of the at will disclaimer and exclusion of contractual employment obligations is important, the courts in Arizona have cautioned employers that disclaimers in their employee handbooks may not always shield them from liability. Arizona employers, no matter what kinds of disclaimers they write into their employee handbooks, may still be held liable for wrongful terminations, and for breaches of explicit or implied employment contracts.

Avoiding Implied Contracts

The court has further noted that should an employer give oral or written assurance during the employment interview or subsequent performance review, that assurance could reasonably be viewed as an implied contract. That implied contract would then supersede and alter the at will nature of the employment.

What that means from a practical standpoint is that management teams should make sure their hiring managers and supervisors follow all applicable employment laws, and that they avoid the creation of implied contracts during their interviewing and performance review processes.

Demasse vs. ITT Corporation

The litigation surrounding implied employment contracts and confusing employee handbooks dates back decades. A 1999 case known as Demasse vs. ITT Corporation is one of the most important examples. In that case, the Supreme Court of Arizona found that a statement included in the employee handbook is contractual in nature if it discloses a promissory intent that the worker would reasonably interpret as a commitment on the part of the employer.

That 1999 case served as fair warning for other Arizona employers, and it is further proof that businesses should seek help and guidance when creating their handbooks and other employer-facing documents. The best defense against inadvertent blunders and implied contractual obligation is a handbook that clearly states that handbook should not be construed as a contract of employment.

Guidance For Employees

The disclaimer in the employee handbook should further state that the document is presented merely as guidance for employees. This basic structure allows the employer to modernize and update their employee handbooks as they need to. Since the disclaimer included in the employee handbook states that no contract is created, future revisions should not change its legal status.

It is important to note that the disclaimer in the employee handbook must be expressed in clear and easy to understand language. if the language is held to be misleading, complete or otherwise confusing, it could be ruled null and void by a future court, putting the employer at risk and creating a contractual representation that could land the firm in hot water down the line.

Arizona law also requires that all changes to the official employee handbook be made with the mutual consent of both parties, and that they be made for consideration. This consideration requirement means that the employer must provide the affected employees with something of value, such as monetary compensation. The courts have ruled that continued employment is not enough to satisfy the consideration requirement.

How To Avoid Implied Contracts

The good news is that there are ways for Arizona employers to avoid creating an implied contract when developing or altering their employee handbooks. In order for employers to avoid this implied contract, they should either:

  • Not issue an employee manual or handbook at all
  • Make sure the employee manual or handbook clearly and conspicuously states that the manual in question is not part of an employment contract, and that the worker’s job is terminable at will

It is also important to note that even the most well-written employee handbook does not shield Arizona employers from wrongful termination situations. The Employment Protection Act (EPA), passed by the Arizona legislature does limit the number of situations in which terminated employees are allowed to sue their former employers, but wrongful termination is still explicitly prohibited.

Arizona employers can take solace in the fact that the passage of the EPA legislation effectively shifted the burden of proof from the employer to the employee. After passage of the EPA, terminated employees must prove that the at will nature of their employment had changed, and that a contract of employment had been created. Even so, Arizona employers should not use the EPA as an excuse to write sloppy employment manuals or be lackadaisical in how they update and modernize those documents. The employee manual is still the foundation on which the hiring process is built, and that foundation needs to be a strong one.

Need Help Drafting or Reviewing An Employee Handbook?

If you have questions regarding your own employee handbook then contact JacksonWhite’s employment law team today.

Call our Employment Law team at (480) 464-1111 to discuss your case today.

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