Over the past couple of months I have been dealing with a case against a major national bank on behalf of one of its former employees.  The case involves his "discretionary" annual bonus, which most employers would say is just that-discretionary.  However, the term discretionary is misleading because except in some very limited circumstances a party to a contract does not have absolute discretion.

This is because all contracts in California have an "implied covenant of good faith and fair dealing".  This is one of the least sexy concepts in contract or employment law, so I will summarize it quickly.  This doctrine acts as a check on parties in contracts where one side has the right to exercise broad discretion that effects the other party's rights.  The law says that in such a case when the party exercises their discretion it generally must be done "fairly".

This is especially important in our case because on Wall Street investment bankers and other professionals are usually paid a (relatively) small salary and then an extremely large annual bonus at the end of the year.  In our case, the employee was used to making over $750,000 and suddenly his employer decided at the end of last year to give him a bonus of less than $50,000 for 2007 with no warning whatsoever and despite the fact that he was performing better than his peers.

It turns out that the employer was planning to lay him off in a few weeks, so they decided to give his usual bonus to his co-workers.  This is the classic case where the implied covenant comes up in California employment law cases.  If an employee performs acceptable work during the year with the expectation that he would receive a bonus similar to his peers and what he received in prior years, the employer does not exercise discretion in "good faith" by paying him hundreds of thousands of dollars less than they do to similar employees.

This might be an extreme case for most employees, but the same concepts can be applied to any bonus and even Christmas bonuses in certain circumstances.

Well, my post about the Los Angeles Times article on their new employee handbook seems to have set off (or at least contributed to) a firestorm throughout the web. Some of the reaction seems off-the-mark, though.

Comments: The Good, The Bad and the Ugly

The overwhelming majority of mail I received is in agreement with my comments on the handbook, but I also received the most hate mail for any post I have made in the past year. For example:

I’d like to see the legal system so jammed with lawsuits and uncollectible (sic) judgments that it fails altogether. Maybe then we could get out from under the thumb of the scum sucking lawyer filth who rule our lives. I support the kind of tort reform that would bankrupt 95% or more of attorneys.

However, I did actually receive some civil and thoughtful disagreement, most of which can be summed up by an anonymous comment that reads:

[T]hat "gobbledygook" that can be read and understood by 99% of the population is better than "gobbledygook" that is incomprehensible to 80% of the population. A legal system that is incomprehensible to the vast majority of those to whom it is supposed to apply is an incredibly bad system.

I agree with the second sentence of this comment, but to me the first sentence refers to a non-existent problem with employee handbooks. Generally these handbooks contain little (if any) legalese at all, because that would simply defeat their purpose.¹

Good Handbooks Have NO Gobbledygook

A post by Andrew Mitton at his new blog Legal Frontier that discusses the following provision as an example:

5.1 You may want to think twice before you enter into an intimate relationship with a co-worker. When you start, it might seem like a good idea. It's when you stop, or the wrong people find out (and they will) that you could discover that perhaps it wasn't.

While I did not originally comment on this provision, Daniel Schwartz at the Connecticut Employment Law Blog (an employment law defense attorney) has expressed concern over this provision. Mr. Mitton, on the other hand, praises the Tribune's provision for not having "wherefores, the herebys, and the all-encompassing list" of rules against behavior.

However, under the Tribune's provision, the company is refusing to take the position on the issue and the policy has no "teeth". If they want to terminate an employee for violating it, all the company can say is "we told him he should 'think twice'", when they should have made it a rule.

You might wonder to yourself "Ok, fancy lawyer guy, how would YOU have written it?" Alright, I will give it a shot:

5.1 The company discourages intimate relationships between co-workers and prohibits such relationships between supervisors and subordinates.

This is a clear statement of policy that the company can point to when an employee refuses to follow the rules and must be terminated. It contains no legalese and, in my opinion, CAN be understood by 99% of the population.

The Tribune's provision also does not prohibit relationships between supervisors and their subordinates, which are NEVER a good idea to allow. When the relationship sours, it can lead to sexual harassment suits and even if it does not go bad, employee morale can plummet when they think the subordinate is getting favorable treatment from the supervisor.

Of course, it is possible that the Tribune does not wish to prohibit relationships between supervisors and subordinates. It is also possible that instead of discouraging co-workers from having intimate relationships with each other, they simply want to make a public service announcement suggesting they "think twice". If so, then I suppose this provision accomplishes its goals.

The Reality of Typical Employee Handbooks

The public might be surprised to know that even most lawyers are opposed to legalese and overly complicated language (myself included). In fact, most law students today are taught not to write in legalese and to use plain English. Many jurisdictions (including the federal courts) are completely rewriting their rules to remove legalese and make them more clear for laypeople.

I have probably read close to 1,000 employee handbooks in my career and I do not recall ever seeing one written in legalese using "wherefore's" or "hereby's". In fact, using legalese in an employee handbook may even be as bad an idea as the Tribune's approach.

The main purpose of handbooks is to put employees on notice of what is expected of them. In litigation, the employer would have a tough time justifying termination of an employee for violation of a handbook provision so complicated the employee could not have been expected to understand it.

While I have seen many handbooks that are poorly written and difficult to understand, this is almost always because the employer did not consult a lawyer about it not because they did.

An article in Thursday's Los Angeles Times discusses their own parent company, Tribune Co.'s new employee handbook that was introduced by their CEO, Sam Zell, via a recent e-mail to employees.

This caught my eye because it is not every day that a company publicly releases or discusses their employee handbook. In fact, many handbooks actually state that its pages are the employer's property and must be returned at the end of employment.

The (Bad) Idea

According to Zell, the handbook outlines "our company's new core values" and "reminds us not to take ourselves too seriously, and to have fun." Unfortunately for the Los Angeles Times, legal documents (which are almost always referred to in employment law cases by one or both sides) do serve a legal function.

Although the handbook has the requisite disclaimer stating that it is not a contract, its provisions may be modified at any time, etc. and contains a footnote stating "Of course, Tribune follows...state laws," this will not let them off the hook in future litigation.

In provision 18.1.4 of the new handbook, the Tribune points out that:

It's good judgment not to put in writing what you don't want printed on the front page of a newspaper. Or posted on a website...

The company probably should have taken its own advice and left some of these provisions out of their official employee handbook, but it appears they did not consult an attorney before releasing it, so now they are stuck with it.

Use of Employee Handbooks in Litigation

Employee handbooks are used in litigation to demonstrate an employer's mindset, attitudes or as foreshadowing conduct at issue in a lawsuit.

For example, a handbook might say "you will be terminated immediately if you cannot satisfactorily perform your job due to a medical condition" (from an actual handbook I have seen in a case).

This is extremely good evidence in a disability discrimination or family medical leave case because it can be used as proof that the employer has already stated its intention not to comply with the law.

Examples from the Tribune Handbook

Here are some examples from the recently implemented handbook that point out that likely will cause its outside employment counsel to drive their head repeatedly into the nearest brick wall.

Harassment is not "Harassment"

From section 4, "Harassment Policy (Sexual & Otherwise), of part 3, "Employee Manual" of the handbook:

4.1 Working at Tribune means accepting a creative, quirky,...odd, humorous,...opinionated and sometimes annoying atmosphere.

4.2 Working at Tribune means accepting that sometimes you might hear a word that you...might not use...experience an attitude you don't share...[or] hear a joke that you might not consider funny.

4.3 This should be understood, should not be a surprise and is not considered harassment.

4.4 Harassment means being told that a raise, promotion or other benefit is dependent on you going on a date with your boss or some other similar activity. (emphasis added)

Provision 4.4 actually refers to the relatively uncommon "quid pro quo" sexual harassment, which includes "sleep with me or you are fired"-type conduct.

The vastly more prevalent form of sexual harassment is "hostile work environment" harassment, which occurs when a sexually-charged atmosphere is created, such as frequent, unwelcome sexual propositions towards an employee.

In fact, hostile work environment claims include situations where the conduct is not even directed at the plaintiff, such as other employees' constant viewing of pornography in close proximity to her or constant sexual comments about other employees to or within hearing distance of her.

Provisions 4.1-4.2 could easily be read to encompass a hostile work environment and 4.3's bold statement that in the company's view it is simply "not considered harassment". It does not take much work for a plaintiff's attorney to argue that this provision basically says that the company does not consider hostile work environments to be a form of harassment.

If an employee complains about such conduct and is ignored or retaliated against, provision 4.3 will be very damaging to the employer's case because its state position is that there is nothing wrong with the conduct in the first place.

Managers Love it When You Question Their Authority

8. QUESTION AUTHORITY. ...Question authority and push back if you do not like the answer. You will earn respect, and not get into trouble for asking tough questions.

In theory, this might seem to be a "breath of fresh air" and a great company-wide "open door policy". However, in practice this policy is likely bad for both employees and the company itself.

For the company, it is basically a promise that they will not take any action against an employee for complaining, no matter what it is about or how much they complaint. Every workplace has an employee who just loves to complain about anything and everything constantly. This provision both encourages such behavior and bars management from doing anything about it.

On the other side of the issue, I advise employees every day to be careful with taking such open-door policies too literally. It is commendable for a company to have a well-intentioned policy like this in place, but it has to be (and rarely is) followed by lower-level managers who usually do not like their orders or policies being questioned. In only a rare case will the employee earn any "respect" for complaining.

If an employee takes advantage of a policy like this, they should do so in writing and document both their complaints and their supervisor's reactions. That way, if retaliation does occur then there is a paper trail to prove it.

Alcoholism: Only Disease You Can Get in Trouble for Having¹

7.1 If you use or abuse alcohol or drugs and fail to perform the duties required by your job acceptably, you are likely to be terminated...

Alcoholics and drug addicts are considered to be disabled under California law and an employer terminates them for it at their own risk. In many circumstances, the Americans with Disabilities Act also applies to these situations.

In fact, under California Labor Code § 1025-1028, employers are required to reasonably accommodate these employees by allowing them to attend an alcohol or drug rehabilitation program if they have a substance abuse problem.

These types of disability discrimination claims are often difficult to prove and an uphill battle to establish that the disability (and not its side effects along, e.g. tardiness, poor performance) is the reason for termination.

However, a handbook provision like this could be the piece of evidence that wins the case, since this is singled out as a specific reason for terminating a poor performer. In other words, it does not say "If you have a mental breakdown and fail to perform...," so an argument that the difference is the specific disability itself is the reason gains a great deal of credibility.

"The company intends to actively discriminate..."

2.4 The company intends to actively discriminate based on job performance, ability and attitude.

2.5 Discrimination based on gender, age, race, religion, national origin, marital status, sexual orientation, disability, or any other characteristic not related to performance, ability or attitude, protected by federal or state law, or not protected (such as inability to tell a joke, the occasional poor wardrobe choice or bad hair day), is strictly prohibited.

There are a couple of issues with this provision that merit discussion, both of which can turn out bad for the company.

First, these paragraphs essentially promise that they will not terminate or otherwise discriminate based on any reason not related to performance, ability or attitude. Therefore, budget cuts, general "personality conflicts" with co-workers or management, or simply their manager's not liking them are not valid reasons to terminate or take any other action against an employee.

Second, while singling out someone with the "inability to tell a joke, the occasional poor wardrobe choice or bad hair day" as "unprotected" is clearly intended as a light-hearted joke, it could also be applied to that "weird" janitor/mailroom person/manual laborer who works for the company. I have represented some of these employees who are terminated for their social awkwardness which is sometimes a symptom of a disability such as mild autism.

While this may seem far-fetched, Tribune Co. has tens of thousands of employees and such an issue is bound to arise at some point in the next several years.

That's What Employment Law Attorneys Are For

Apparently the handbook was actually written by Randy Michaels, Tribune's CEO for Interactive Broadcasting. He has said he believe that "The more policies you have, the more opportunities there are for someone who is very unhappy to sue." However, with the right disclaimers in place, breaking a promise in an employee handbook itself provides no basis to sue.

Although our firm only practices employee rights law and does not advise employers or draft employee handbooks, this is most certainly the kind of thing that makes management-side employment law attorneys crucial in preventing lawsuits and other problems before they occur.

Mr. Michaels seems all too eager to say he is "amazed and amused at what lawyers get businesspeople to do," suggesting that other companies who pay lawyers to write (as the LA Time piece puts it) "the mind-numbing, lawyer gobbledygook in most corporate manuals" are being swindled or misled. In fact, that "gobbledygook" is often instrumental in successfully defeating many lawsuits by employees.

Once the Tribune faces its first lawsuit where this handbook is used as evidence against them, they will hopefully realize that Mr. Michaels has actually created more legal liabilities than he has prevented.

At that point, I will feel sorry for the attorney who has to defend a company that believes they will "have fewer legal problems with plain English and common sense than with pages and pages of rules". Essentially, that their own gobbledygook is better than any gobbledygook a lawyer could have written for them.

Good luck with that.

Jay Shepherd over at the Gruntled Employees blawg has an interesting post from the employer's attorney perspective about why he believes mandatory arbitration clauses are a "stupid employer trick" and actually "not good for employers".

I never understood why many employers force their employees to sign mandatory arbitration clauses, so this is refreshing to hear from a management-side employment law attorney. I have been saying this for years with little agreement from the other side of the aisle.

The points Jay makes are especially true in California, where employers have to pay for any costs of the arbitration that exceed what an employee would have to pay in a regular court (essentially just a minimal filing fee). This ends up being much more expensive for employers than going to court, because arbitrators are paid hefty rates by the hour.

In fact, forcing an employer into arbitration under their own agreement is a good way for an employee to leverage a settlement, because suddenly the employer is expending huge amounts of money just to pay for the process they forced the employee to agree to in the first place.

Q: My employer terminated me today (December 31, 2006). I was supposed to receive a $10,000 performance bonus for 2006, but one of the terms of my bonus agreement says that I have to be employed on January 1, 2007 to get my bonus. The company is not doing very well and I think I was actually terminated so that they did not have to pay me the bonus. Can they get away with this?

--Unhappy New Year (CA)

A: I am sorry that this happened to you. Unfortunately, this is more common than most people think, but usually it is not so blatant. Often when managers start looking at their budgets at the end of the year and want to "trim the fat", they do this sort of thing to quickly save some cash at the expense of their employees.

You promised your employer you (1) would perform at a certain level during 2006 and (2) be employed on January 1, 2007. They in turn promised to give you a year-end bonus if you kept your promises to them.

In your situation, the only reason that you did not satisfy all of the conditions your employer placed on your bonus is because they essentially canceled the deal before you could finish.

This situation is similar to a common law school hypothetical. Say one person promises another person to give them $10,000 if they walk across a bridge. At the very last second before the person crossing the bridge reaches the other side, the other person yells out that he is canceling the offer.

California courts often look at situations like yours and determine what is "fair". It is likely that a court would decide that you complied with your bonus contract and it was only your employer's act of canceling your contract that kept you from finishing performance.

If so, you would be awarded your bonus as well as attorney's fees, costs, interest and possible penalties.