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Does an Employee Handbook Create a Contractual Obligation?

Every business with at least one employee should have an employee handbook, sometimes also called an employee manual or code of conduct, setting out the company’s policies and rules and the laws applicable to the employment relationship. It establishes the expectations in the relationship and enables employers to deal with similar situations consistently. Typically, employers do not intend for the handbook to create any obligations that could be enforced by their employees. However, a poorly drafted employee handbook could open the door to contractual liability.

Inadvertent Alteration of At-Will Employment Relationship

The problem that arises most frequently from an imprudently written employee handbook is the unintentional creation of limitations on the at-will employment relationship. In the absence of an employment contract to the contrary, employees are generally employed “at will”. This means that they can be terminated for any reason (including no reason or even a bad reason—unless it’s illegal) at any time without any warning. The at-will employee may also quit at any time and for any reason.

The potential for litigation emerges when employee handbooks contain language that can change an at-will relationship into one in which the employee can only be terminated “for cause”.  This can happen when the handbook includes provisions that an employee could reasonably believe provide job security. For example, the following types of provisions could limit an employee’s at-will status:

  • Lists setting forth reasons justifying termination
  • Procedures requiring warnings or suspensions prior to firing
  • Appeals available to employees to challenge disciplinary action

Even if an employer only intended for these types of provisions to be flexible policies, not promises, they could end up creating a contractual obligation enforceable by their employees. Whether they do depends on whether the language used in the handbook could create an expectation in an employee that the policies must be followed before they can be fired. In that case, the employer’s failure to follow the policy may be considered a breach of contract.

Unintentional Creation of Promise to Adhere to Handbook Provisions During Employment

Employee handbooks typically contain provisions addressing a wide variety of issues, and they sometimes spell out policies providing employees protections and benefits beyond what is required by law. For example, a handbook may include a strict anti-harassment policy or generous wage or leave provisions. As with the “job security” provisions, if the employee reasonably expects that the employer has promised to abide by those policies, and the employer fails to do so, the employee could assert a claim for breach of contract against the employer.

How to Protect Your Business from Breach of Contract Claims

Employers can avoid potentially costly lawsuits for breach of contract by including a carefully worded disclaimer in their employee handbooks. Here are some tips to ensure your disclaimer is effective:

  • Place the disclaimer in a prominent place in your handbook. It should attract the attention of the employee—for example, place it on the first page and highlight, capitalize, or underscore it so that it will stand out.
  • The disclaimer should clearly state that the handbook contains no promise of any kind by the employer.
  • It should state that regardless of any language in the handbook, the employer is free to change any provision at any time without notice and without consulting anyone or obtaining anyone’s agreement to the change.
  • It should make clear that the employer retains the unfettered right to terminate any employee at any time with or without cause.
  • It should restrict the people at the business who are authorized to alter the at-will employment relationship to certain expressly named individuals and require any changes to be in writing and signed by those individuals.
  • The disclaimer should be written in plain language—no “legalese”.
  • Require employees to sign an acknowledgement that they have read, understood and agreed to the handbook’s provisions and the disclaimer.

Conclusion

A well-drafted employee handbook is essential not only to set out your company’s policies and establish expectations but also to protect your business from potentially costly litigation. We would be happy to review your existing employee handbook or draft a new one. Please give us a call to set up a meeting.

Disclaimer:
"This blog is for informational purposes only and is not intended to create an attorney-client relationship. It is recommended that you speak to an attorney licensed in your jurisdiction before relying on the information in this blog."

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