Employee Handbooks

Rob Nicks

Though most terms and conditions chronicled in employee handbooks do not create a contract between employer and employee, some terms are indeed promissory. Terms related to vacation accrual, commission rates, perks and other benefits of employment can-and do in most states-constitute unilateral contracts for the stated benefits. The trick is not only determining whether a term does form a contract, but also deciding how and when those terms may be modified without giving rise to liability. For multistate employers, the issue quickly becomes muddled. While a one-size-fits-all employee handbook is fine for the welcome statement, a brief history of the organization, the company’s mission statement and general guidelines regarding conduct and appearance, actual employee-benefit provisions must be addressed on a state-by-state basis. Because the laws of the states regarding the modification of employee handbooks vary so widely, an employer’s attempt unilaterally to modify a handbook applicable to employees in several different states may be effective as to some employees, but not as to all. Say that ABC Corp. is a widget company based in Texas with employees in several states. The company wants to modify the vacation accrual rate found in its employee handbook, and it wants to prospectively reduce the rate at which commission is paid on widget sales. ABC posts the modified handbook reflecting the change to all of its employees on its intranet, and the human resources department sends each employee an e-mail notifying them of the change. Suppose that a salesman immediately complains to his supervisors about the reduced commission rates. Though disgruntled, he works for two months after receiving notice, but is subsequently fired. He sues ABC, saying he is owed the difference between what he would have received in commission had the original handbook terms remained in force and the commission he was paid under the new handbook terms for the two months he worked before being let go. What kind of chance does the salesman or ABC have in litigation? It all depends on where the salesman is located and which state’s laws will apply. State laws on at-will relationships differ vastly Although most states analyze the formation and modification of benefit policies found in employee handbooks as unilateral contracts, these situations are not generic contract issues. Rather, the modification of a benefit of employment in an employee handbook involves legal principles relating to at-will employment relationships. State laws on what constitutes a contract in the first place, and then what consideration supports modification of a policy, differ vastly. Many states’ laws are derived from varying public policy principles of the individual states. In Demasse v. ITT Corp., 984 P.2d 1138, 1142-43 (Ariz. 2000), the Arizona Supreme Court best articulated the unilateral nature of benefit policies in an at-will employment state: “At-will employment contracts are unilateral and typically start with an employer’s offer of a wage in exchange for work performed; subsequent performance by the employee provides consideration to create the contract. Thus, before performance is rendered, the offer can be modified by the employer’s unilateral withdrawal of the old offer and the substitution of a new one: the employer makes a new offer with different terms and the employee again accepts the new offer by performance . . . .Thus a new unilateral contract is formed-a day’s work for a day’s wages.” Arizona courts thus recognize that at-will employment contracts are unilateral and can be changed or modified by the employer. Benefits of employment recited in these policies constitute an offer to the employee. The employee’s performance under the policy constitutes acceptance, and continued employment constitutes consideration. Under this approach, an employer’s unilateral modification of an existing employment policy is not a breach of the existing policy. Rather, it constitutes an offer for a new unilateral contract. The employee’s continued employment constitutes acceptance of that offer, thereby also constituting consideration. In some states, an employee has to work for a substantial period of time for there to be consideration. In Arizona, three months was held to be sufficient. However, other states, such as Texas, do not require employment for a particular period of time for it to be consideration. Texas and some other states have held that in an employment at-will situation, an employee handbook does not, by itself, constitute a binding contract. For the benefits and policies to be binding, the manual must clearly state an intent to do so. Conversely, a handbook that expressly gives the employer the right to amend or eliminate health benefits, for example, does not create a legally protected interest in those benefits. Even when an employment policy does clearly indicate an intent to constitute a bonding contract, an employer in states like Texas may unilaterally modify that contract so long as the employee gets sufficient notice of the proposed modification. The best evidence of this is a signed acknowledgement page. When the employer notifies an employee of changes in employment terms, the employee must accept the new terms or quit. An employee can’t stick his head in the sand and hope that it goes away: If the employee keeps working, even after getting notice of the changes, the employee accepts the modified terms as a matter of law and gives up any right to claim that he’s bound by the past terms. Some states, such as North Carolina, combine the approaches of states like Texas and Arizona. Courts in North Carolina have held that an employer may unilaterally alter employee handbooks that provide for employee benefits. North Carolina courts recognize-as do the courts of most other states-that, despite the fact that the policy could be canceled at will by an employer, the policy protects employees as long as they work or as long as the policy remains in effect. Unlike Arizona, there is no requirement that the employee continue his employment for a substantial period of time. And, unlike Texas, the employer does not have the burden of showing unequivocal notification. On the other end of the spectrum, Missouri is among those states holding that employee handbooks are not generally contracts because they lack the traditional prerequisites of a contract. In Missouri’s view, an employer’s unilateral act of publishing a handbook cannot be said to be a contractual offer. States such as Connecticut focus on the employee’s expectations. Though these states apply unilateral contract principles to modification of handbook situations, an employee’s continued employment is not consideration for the modified terms if that modification substantially interferes with an employee’s legitimate expectations about the employment terms. Whether the modification has substantially interfered with an employee’s legitimate expectations about the terms is a question of fact. In Illinois, if an employer tells an at-will employee it plans to modify the benefits terms, but the employee rejects it, the employee must either be let go or retained under the original terms. In Florida, continuing to work cannot be considered as the employee’s agreement to the modification. How states would rule on the hypothetical situation Turning back to the lawsuit between ABC and the salesman over ABC’s modification of its commission rate, if the salesman worked in ABC’s Arizona office, a court would have to decide whether those two months he continued working constituted consideration sufficient to make the handbook modification effective. If he worked in Texas, ABC would have to show that it unequivocally notified him of the change in employment terms. Without a signed acknowledgment, that would be difficult to prove. In Connecticut, there would be a fact issue as to whether the decrease in the commission rate substantially interfered with the salesman’s legitimate expectations about the terms of his employment. In Illinois, the parties would argue over whether the salesman actually accepted the modified terms when he kept working. If he is a Florida employee, ABC would not be entitled to a presumption that he accepted the modified policy by his continued employment. But in North Carolina and Missouri, ABC would probably be entitled to summary judgment. Perhaps complicating matters further, an employer’s modification of a handbook may also implicate state statutes. If ABC’s attempted modification was not effective, but it goes ahead and withholds benefits as if it were, then ABC may run afoul of statutes that make it unlawful for an employer to withhold wages. See Adam P. Forman, Christopher W. Sanzone and Christine B. Watts, “State wage payment laws pose unique challenges,” NLJ, Jan. 12, 2004, at 19. While most states recognize an employer’s right unilaterally to modify an employee handbook, employers must do so only after a thorough analysis of the common and statutory laws of each potentially implicated jurisdiction. In conducting this analysis, the employer must be careful to distinguish those cases that deal with modification of the at-will employment relationship itself-such as cases dealing with modification of seniority and disciplinary policies-from those cases that deal with modification of benefits of at-will employment relationships. Courts in many states have recently confused the legal standards. Again, if an employer has employees in only one state, then only that state’s laws respecting at-will employment and modification of employee handbooks need be consulted. Multistate employers, on the other hand, must conduct a thorough analysis of those states’ laws. In the example above, perhaps the change in commission structure may save ABC some money, but if the modification is made contrary to the laws of one or another state, the benefit may be outweighed by the cost of potential litigation. Rob Nicks is an associate in the labor and employment section of Dallas’ Gardere Wynne Sewell.