Category Archives: Employment At Will

Beyond At-Will: Fiduciary Rights of Shareholder-Employees

At-will employment is a bedrock concept – an employee can be discharged without proof of cause.  The principle exists at all employment levels, from rookie to veteran, from entry-level clerical to senior executive.  The common exception is when at-will employment is altered by a contract with just cause employment provisions, such as a collective bargaining agreement or an executive compensation agreement.  But employers also need to be aware of the limitations that result from the fiduciary obligations between partners or shareholder-employees.

Under the common law of many states, including Minnesota, partners or shareholders of a closely-held corporation owe each other a duty of good faith and fair dealing.  Minnesota courts have held that partners or shareholders of a closely-held corporation may not contract to change their relationship to each another in a manner that will “destroy its fiduciary character.”  Appletree Square I Limited Partnership v. Investmark, Inc., 494 N.W.2d 889, 893 (Minn. Ct. App. 1993).  In a closely-held corporation, shareholder-employees may have a reasonable expectation of continued employment and termination only for cause.  This legal concept is different from basic employment law wrongful termination – it is the more arcane concept of employment-based shareholder oppression.  It captures the idea of protecting a shareholder’s investment and reasonable expectation in ongoing employment in a closely-held corporation.  It is a complex doctrine with its own exceptions, but one clearly recognized by the courts.  See, e.g., Gunderson v. Alliance Computer Professionals, 628 N.W.2d 173, 192 (Minn. Ct. App. 2001).

Takeaway:  When dealing with a shareholder-employee, the concept of at-will employment and its basic contractual exceptions may not be sufficient to fully appreciate all legal rights involved in a termination.  Employment-based shareholder oppression is a living legal principle that, while found deep in the pages of the common law, can control the outcomes and resolutions of important employment termination matters.  Good legal counsel will be an important guide to this employment concept that goes beyond the at-will doctrine.

Beware “Napkin Agreement” Modifications to At-Will Employment

How many significant developments are claimed to have been written on the back of a napkin or envelope? Certainly, such brevity can hold great meaning.

Such was the claim of an employee in a recent case decided by the Minnesota Court of Appeals. In Shelander v. Johnstech International Corporation, No. A13-1544 (Minn. Ct. App., April 14, 2014), the employee, Shelander, asserted that a commitment he made to an annual sales goal on a napkin which he signed and gave to his employer altered his at-will employment status. Shelander alleged that this napkin writing entitled him to employment through the remainder of the year to see if he could accomplish the annual sales goal to which he had committed. Before the end of the year, Shelander was discharged. He sued claiming that the terms of the napkin agreement had been breached.

The Court of Appeals affirmed summary judgment dismissing Shelander’s claim, noting that a contract can be formed only if a specific, definite offer has been accepted. Here, there was no objective manifestation of the company’s intent to modify Shelander’s at-will status.

Takeaway: Despite the result in this case, employers should be wary of accepting any writing – particularly an informal one – which might be intended to modify existing employment terms. Any annual performance compensation programs should be reviewed and, if appropriate, contain express language regarding the employee’s ongoing at-will employment status.

Can You Fire an Employee For Applying For Unemployment Benefits?

Yes – the Minnesota Supreme Court recently held that an employer does not violate public policy by terminating an employee for applying for unemployment benefits, but employers should still be cautious about doing so.

In Dukowitz v. Hannon Security Services, A11-1481 (Minn., Jan. 2, 2014), the plaintiff applied for unemployment benefits after her work hours were reduced due to the elimination of her daytime shift.  When the plaintiff initially suggested to her supervisor that she might apply for unemployment benefits, her supervisor openly questioned whether he should terminate her employment.  When the plaintiff’s employment was terminated several months later, the plaintiff sued and alleged that her termination was wrongful because it violated the public policy of the State of Minnesota.

Under Minnesota law, there is a narrow public policy exception to the employment-at-will rule under which an employer may be subject to liability for terminating an employee because of the employee’s good faith refusal to violate the law.  See Phipps v. Clark Oil & Refining Corp., 408 N.W.2d 569 (Minn. 1987).  In Dukowitz, the court held that the plaintiff failed to state a claim under this narrow exception because she did not allege that her termination resulted from a refusal to commit an act that she, in good faith, believed to be illegal.

The Dukowitz court also rejected the plaintiff’s argument that the court should recognize a new cause of action under which an employer can be liable whenever the discharge of an employee violates a public policy of the State of Minnesota.  The court held that this broad new cause of action would be more appropriate for legislative consideration, particularly because it would interfere with the employment-at-will rule.  The court also expressed concern about the lack of any clear definition of what constitutes a “public policy,” remarking that the advocates of the rule could not “delineate the contours of the tort that they urge us to adopt.”

The irony of the Dukowitz decision, however, is that by terminating the employee for applying for unemployment benefits, the employer is essentially assuring that the employee will apply for unemployment benefits again.  At that point, it would likely be difficult to convince an unemployment law judge that the employee’s initial application for benefits constituted employment misconduct sufficient to disqualify the employee from receiving unemployment benefits post-termination.

In addition, employers should also be aware that it is a misdemeanor under Minnesota law for an employer to “directly or indirectly . . . obstruct or impede an application or continued request for unemployment benefits.”  Minn. Stat. § 268.192, subd. 1.

Takeaway:  The Dukowitz decision is good for employers because it reinforces the doctrine of at will employment.  The decision is also a victory for employers because it rejected an effort to recognize a broad new cause of action against employers.  At the same time, it is largely a self-defeating task for an employer to terminate an employee for applying for unemployment benefits.  Employers must also be cautious not to “obstruct or impede” an employee’s application for benefits.

Magic At-Will Employment Disclaimer Language

When employers make written offers of employment or provide written employment policies to employees, such as Employee Handbooks, it is generally advisable for the employer to include a disclaimer stating that the employment is at-will.  The purpose of an at-will disclaimer is to prevent an employee from mistakenly believing that he or she is entitled to employment for a specified period of time or is entitled to other protections with respect to the employment.

In most cases, the following language will be sufficient to disclaim any intent to alter the at-will employment relationship:

Employment with the Company is at will unless otherwise stated in a written agreement signed by the President of the Company.  This means that either the Company or the employee can terminate the employment at any time and for any reason, with or without notice.

Employers should be careful, however, with respect to language that suggests “that the at-will employment relationship cannot be amended, modified, or altered in any way.”  An administrative law judge recently held that language interfered with employees’ rights under Section 7 of the National Labor Relations Act.

Takeaway:  The presumption that employment is at-will is an important protection for most employers.  By including at-will employment disclaimers on key documents, employers can increase the odds that they will be able to benefit from the protections of the employment-at-will doctrine.

Drafting an Offer Letter Without Undoing At-Will Employment Rights

To preserve “at-will” employment status, employers will carefully avoid entering formal contracts and insert “at-will” disclaimer provisions in their Handbooks and Policies.  But these efforts can be countered, thwarted, or complicated by poorly drafted offer letters that promise continued employment to a “hot” candidate.  Often the problem comes from a manager recruiting and trying to attract a candidate, not Human Resources or senior management.

Such promises can create contract or reliance claims if the “hot” candidate turns out to be not so hot as an employee and has to go.  An offer letter can constitute a contract as to termination or other terms and conditions of employment which can lead to damages for breach – particularly suspect are letters that have no clear at-will disclaimer language.  A reliance claim arises when there is a promise of employment that is specific and relied upon and compensates an employee for losses incurred in taking a job that doesn’t work out. Reliance claims usually arise in the context of job offers that are withdrawn.

Courts have often rejected attempted contract or reliance claims on the strength of the at-will doctrine, but a specific-enough promise with clear detrimental reliance or an offer letter that makes promises of employment for a definite period of time can support a reliance or contract claim and make a termination an expensive mess.

Takeaway:  Once you write an offer letter, review it backwards.   If the employment is at-will, include language expressly stating that.  Think about a termination meeting and ask yourself if you are making specific promises or saying things about the position that may compromise at-will employment rights.  If you think you are, then consult legal counsel about rephrasing the letter to take out the potential contract or reliance language without entirely losing the intended tone and points meant to attract the candidate.  Or, if such promises are really necessary to attract the candidate, have counsel draw up a reasonable contract that maximizes the employer’s rights while giving whatever binding assurances are necessary for the hire.

Employment Contracts: A Range of Possible Options

While most states are at-will employment states, employers commonly enter a range of individual employment contracts that can either alter or preserve the at-will relationship.  Typical reasons for such contracts in an “at-will” legal environment include recruiting the best candidate, protecting employer rights, or securing releases in exchange for severance.

Employment lawyers commonly see the following range of individual employment agreements:

  • The Comprehensive “Just Cause” Agreement:  These are sophisticated binding contracts often limited to the most senior management.  They have provisions for “just case” termination, severance, protection of company information, post-employment restraints, and, as applicable, stock options, change of control, and the like.  If such a contract is breached by the employer (for example, terminated without “just cause”), the employee usually can seek the remaining compensation due under the contract.  Drafting such important agreements takes an investment of time and effort and truly needs careful legal counsel and review.  The adage “a small mistake in the beginning can be a big mistake in the end” is rarely more applicable than in these type of contracts.
  • The “Term” Contract:  These contracts can be as sophisticated as the comprehensive “just cause” contracts, but they include a term provision ending the contract at a certain date with renewal or non-renewal at the discretion of the parties.  This provides the employer with the opportunity to end the employment relationship at non-renewal time without the risk of breach.  Term contracts are often first or “trial” contracts and can interest employees who believe that they will be able to negotiate better terms once they have proven themselves.  Legal review for consistency in term contracts is very important if the non-renewal option is to work.
  • The “At-Will” Agreement: These individual contracts contain many terms and conditions of employment (e.g., salary, bonus, confidential information, post-employment constraints), but there is no just cause provision by which the employee can only be terminated for specific reasons following specific procedures.  The objective of these “at-will” agreements is to commit the employer and employee to certain aspects of employment, but to keep employment itself at-will – usually with only a modest notice provision, if any.  Preserving “at-will” status in a contract prohibits the terminated employee from seeking damages for breach of a contract.  Because these contracts are so limited, they can be tricky to draft.
  • Post-Employment Contract Constraints:  Many employers, especially those with sales forces, have contracts that are explicitly limited to securing non-compete and non-solicitation obligations as a condition precedent to employment.  The contents of the contract, legal  “consideration”, professional drafting, and timing of these agreements will be of critical importance if they are to be enforceable.  Contracts with post-employment constraints may either preserve or alter at-will status.

Takeaway:  Think about the range of possible individual employment agreements (there are more types than just listed above) when determining whether you want to enter an individual employment contract.  What are your objectives?  What does the candidate really require in order to be successfully recruited?  Are you setting precedent in the organization?  And stay away from the “off the shelf” contracts – each needs to be drafted with care and professional precision.

When Do Minority Shareholders Have a Reasonable Expectation of Continued Employment?

In some circumstances, a minority shareholder in a closely-held corporation may have a reasonable expectation of continued employment.  As a result, if termination of employment is “unfairly prejudicial” to the shareholder in his or her capacity as a shareholder-employee, the termination may be grounds for a court to provide equitable relief for shareholder oppression under Minn. Stat. § 302A.751.  The threshold question in this type of claim is whether the minority shareholder’s expectation of continuing employment was reasonable.

In Gunderson v. Alliance Computer Professionals, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001), the Minnesota Court of Appeals identified several factors that influence whether a minority shareholder’s expectation of continued employment is reasonable or not.  Here are some of the key points from that decision:

  • Shareholders who sign buyout agreements permitting termination of employment for any reason and obligating shareholders to sell their shares to the corporation upon termination of employment likely do not have a reasonable expectation of continuing employment.
  • An employee who has no capital investment in the corporation but either buys a small percentage of stock through periodic company offerings or receives a small percentage of stock as part of a compensation package likely does not have a reasonable expectation of continuing employment.
  • To be reasonable, an expectation of continuing employment must be known and accepted by other shareholders, as opposed to based only on the shareholder’s “subjective hopes and desires.”
  • An expectation of continuing employment is likely reasonable if “continuing employment can fairly be characterized as part of the shareholder’s investment.”  Factors to be considered in making this determination include, among others, whether a shareholder’s salary and benefits constitute de facto dividends and whether procuring employment with the corporation was a significant reason for investing in the business.
  • Expectations of continuing employment must be balanced against the controlling shareholder’s need for flexibility to run the business in a productive manner.  Accordingly, an expectation of continuing employment is not reasonable when the shareholder-employee’s own misconduct or incompetence causes the termination of employment.

Union Employees

If a group of employees votes to be represented by a union, it usually has a significant effect on the workplace and the employer-employee relationship.  For example:

  • The employment relationship ceases to be “at will,” and employees may only be terminated for “just cause.”
  • The employer is prohibited by law from dealing directly with union employees about wages, hours, and working conditions and must deal directly with the union instead.
  • Employees tend to go to their union rather than their employer when they have a problem.
  • The relationship between the employer and the employees tends to become more adversarial rather than cooperative or collaborative.
  • The employer is required to expend additional time, money, and resources to deal with the union, particularly in the area of collective bargaining and grievance processing.
  • Supervisory employees are required to become familiar with the collective bargaining agreement and administer it on a consistent basis. Flexibility is reduced and the rules become more rigid regarding employee conduct.

Employment At-Will

Under Minnesota law, employment is presumptively “at will.”  This means that the employment relationship may be terminated at any time and for any reason, except on the basis of prohibited discrimination or retaliation (e.g., race, sex, age, disability, whistleblowing, etc.).

The traditional rule of at-will employment may be altered and a contract for employment may be formed by:

  • Employment contracts or collective bargaining agreements;
  • Statements made in employee handbooks or policy manuals without an appropriate disclaimer;
  • Specific oral statements made to applicants or employees; and
  • Other written representations, for example, those contained in an offer or warning letter to an employee.