C. The Revolution in Employment Contract Law

A Wrongful Discharge Cause of Action for Implied Contracts

The most spectacular Michigan example of the shift in favor of the individual's right to sue may be found in the field of employment contract law. Michigan is one of the nation's leading states in the development of common law wrongful discharge rights. The case which created a revolution in common law employee rights is Toussaint v. Blue Cross & Blue Shield of Michigan. [39] This case is justifiably credited with creating a tidal wave of litigation in the employment contract law field, encompassing discharges, compensation, benefits, demotions and promotions, and numerous other conditions of employment.

In order to fully understand the import of this case, one must briefly review general employment contract law prior to Toussaint. For over a century, the basic common law rule for employment was "employment-at-will." Under this doctrine, an employer could terminate any employee without good cause at any time, in the absence of a specific written contract providing employment for a specified period of time. The only exception to this rule was a somewhat esoteric theory practiced in some jurisdictions that prohibited terminations which were against "public policy", and of course specific statutory prohibitions against termination or other employment action on the basis of prohibited categories, such as race, religion, sex, being handicapped, refusing to work in an unsafe environment, etc. In short, the power to determine the employment relationship on such fundamental issues as length of employment, compensation, promotions, etc., rested almost entirely with the employer.

Toussaint changed all that. The facts in the case were relatively simple. Plaintiff Toussaint was hired as a financial analyst by the defendant in 1967. During the course of his preemployment interviews, Toussaint asked about job security and was assured that he would be with the company "as long as I did my job". Toussaint was also handed a personnel policy manual which stated in part, "it is the policy of the company to treat employees leaving Blue Cross in a fair and consistent manner and to release employees for just cause only." In addition, the policy provided for complaint procedures and disciplinary procedures. When Toussaint was terminated in 1972, he brought suit claiming that he had relied on these employment promises and that the company had violated a good cause termination employment contract.

In a decision as revolutionary as any in the history of Michigan jurisprudence, the Michigan Supreme Court concluded that Toussaint had made a valid contract claim. Said the court, "We see no reason why an employment contract which does not have a definite term – the term is "indefinite" – cannot legally provide job security." The court announced:

We hold that employer statements of policy ... can give rise to contractual rights in employees without evidence that the parties mutually agreed that the policy statements would create contractual rights in the employee, and, hence, although the statement of policy is signed by neither party, can be unilaterally amended by the employer without notice to the employee, arid contains no reference to a specific employee, his job description or compensation, and although no reference was made to the policy statement in preemployment interviews and the employee does not learn of its existence until after his hiring.

Where is the employee's consideration (the employee's end of the bargain) for this contractual right? The court finds that merely being in employment is sufficient consideration to support the contract. The court also makes clear that the contractual rights established by employer promise may cover any and all components of the employment relationship, including rights to bonuses, pensions, and other forms of compensation. And what standard will be applied to determine breach of contract? The employer's? Why, of course not. "If the jurors would not have fired the employee for doing what he . . . did, the employer may be held liable in damages although the employee was discharged in good faith and the employer's decision was not unreasonable".

This is really a quite remarkable decision. With one excruciatingly broad decision, the Michigan Supreme Court overturned decades of carefully developed common law balances. Suddenly, any employee could sue for any term or condition of employment so long as the employer had at some time, somewhere, somehow promised it, and the employee could reasonably have relied upon the promise. Any statement by a manager, any comment on a piece of paper, any pamphlet or employer handout could give rise to a contractual right.

The Michigan Bar responded to this decision with a vengeance. Within just a short span of years, Toussaint has given birth to a major, substantial field of trial law. Thousands of cases are filed every year claiming employment contract rights based on employer promises. Such suits find promises not just in overt statements, but also in patterns of discipline of other employees, in patterns of promotion for the complaining employee, in job evaluations, in broad policy documents – in a sense, anywhere a judge may decide to find it.

The impact of this revolutionary change in the common law has been dramatic. Employers are not just inundated with numerous suits (and the tremendous litigation and compensation costs this entails), but are also completely reshaping the way they deal with employees. The freedom they once knew to deal with particular individuals and particular situations in immediate, fact-specific ways has been significantly limited. Employee relations have become tentative and cautious. Disciplinary actions designed to produce the most effective business results are no longer being taken. Every employer must ask himself such questions as, "will this particular employee sue me if he is terminated?", "have I said or done anything in writing or verbally or in evaluating the employee that could possibly form the basis for a contract?", "what have my managers said or done that could be seen as contractual?", "is the risk of suit worth procuring a better employee?", "how sympathetic will the jury find the individual?". "how much am I willing to settle for in case of a law suit?", etc. In this atmosphere, managing the business becomes much more difficult.

A hint of the impact of Toussaint in Michigan may be gleaned from the results of a 1988-89 national survey of 225 U.S. firms in which 40% of the firms maintained that the threat of litigation hinders supervisors' ability to manage. The survey revealed that in just the previous two years, 27% and 20% of the firms respectively had wrongful-discharge claims filed against them. [40] If one then takes into account that Michigan is nationally recognized as the leader in providing wrongful-discharge protections to its employees, one can at least sense the dimensions of the management dilemma Michigan's employers face.

The question here as elsewhere is whether such as shift in favor of the employee's ability to sue the employer is not a good thing. Do we not want tile employer to be more "fair" to his employees? The answer of course is yes, but that does not necessarily mean that we should compel such "fairness" by taw. In a free market economy, employees confronted with unfair employers can after all seek out fairer employers elsewhere to work for. The real question is to what extent the law will intercede to compel "fairness" and punish employers who behave less than fairly (as seen in the eyes of the jury). The danger is that we have gone too far in the utilization of the legal hammer, creating an employment rights environment so constricted that society as a whole is no longer able to reap the benefits of free market decision making.

By permitting an employee to sue on virtually any statement or policy or practice, the ability of the employer to control his own granting of rights and benefits in the workplace is severely limited. By declaring any employee claim of contract to be a question of fact for trial resolution, you subject the employer to substantial legal costs, nuisance settlement costs and compensation risk in every single termination case, every single promotion dispute, every single disciplinary action, regardless of the merit of the employer's actions.

Take the following example: Under Toussaint, a terminated employee could sustain a lawsuit on a claim that a supervisor who is no longer with the company made a verbal employment promise ten years earlier, even though there was no written evidence available anywhere to support that claim. Such an easy ability to Sustain a claim all the way through a jury trial can easily be seen as having too severe an impact on the ability of the employer to manage his business. There is simply no way to escape cost in such a situation. If you keep the employee, you lose your desired improved managerial effectiveness in the workplace. If you settle the case, you lose the money you settle for. If you go to trial, you have to pay attorneys a lot of money and you incur the risk of a jury verdict against you. You as the employer are in effect optionless at that point.

It is at this point, when the employer has lost the ability to make fundamental decisions about the most productive and successful way to run his business, that the contemporary judicial fondness for the complaining individual access to the courtroom has gone too far. At that point, the benefit to the suing individual comes at the expense of society as a whole, because the market has lost the freedom to allocate resources efficiently and effectively.