What Does It Mean to Be Employed “At Will”?
In most developed countries, employers are required by law to give employees some notice or severance pay before terminating their employment. There are exceptions if the termination is based on some type of serious misbehavior, but the default standard is that employers owe their employees a “soft landing.”
This isn’t the case in the United States. In the U.S., most business owners employ their personnel “at-will,” which means an employer (or the employee) can terminate the employment relationship at any time, with or without notice, and with or without cause.
You can generally terminate an employee for performance reasons, business reasons, or simply because you don’t like the color of the shirt the employee wore last Friday (although, if you do this, you may not be cut out to be an employer in today’s economy!). Still, it is clear that, as an employer in most U.S. states, you can terminate an employee for any reason or no reason at all, unless it’s one of a handful of reasons that are prohibited for “public policy” reasons. See below in Common Law Exceptions to Employment “At-Will.”
Different Employment Standards
At-will employment doesn’t apply to employees with employment agreements that spell out a different standard, e.g., that notice or severance is required prior to termination. Employment agreements are fairly rare in corporate America. They tend to be reserved for high-paying executives, athletes, movie stars – in other words, not regular people like you and me.
Additionally, government employees, particularly Federal employees, enjoy greater job protection than most employees in the private sector. There are rules about laying off Federal employees and procedures that need to be followed in order to terminate an employee even for performance.
Another context in which you won’t generally see employment at will is with unionized workers because the unions negotiate agreements regarding what employers can and cannot do and what duties they owe to unionized employees prior to termination.
In 1987 Montana passed the Wrongful Discharge from Employment Act of 1987 (WDEA), which requires that employees not be terminated without good cause. This Act is unique in the United States and extends rights to employees far greater than any other state. This Act gives employees the right to challenge a termination for other than good cause after a designated probationary period. This Act is unique in the United States and extends rights to employees far greater than any other state (including Texas where my business law practice is based).
Common Law Exceptions to Employment “At-Will”
There are also a few common law exceptions to the presumption of at-will employment. Generally speaking, these exceptions could apply (depending on the state in which you operate your business) to any employee in any industry or location.
The first is that an employer cannot terminate an employee for a reason that violates public interest. For example, an employer cannot terminate an employee based on discrimination, retaliation for whistle-blowing (i.e., reporting company misbehavior to authorities), or exercise by the employee of a right the employee was entitled to by statute (e.g., making a claim under worker’s compensation).
Another common law exception to at-will employment is based on the concept of an implied contract, which is recognized by a minority of states. Click here for the list of those states. An implied contract may be created where an employee gains an expectation of continued employment as a result of something written in an employee handbook or policy or a something that is said by an employer representative. To preserve an employment at-will relationship, you should place clear and obvious disclaimers on your employment handbooks and policies stating those documents do not create contractual rights and that you, as the employer, have the right to change policies at any time.
The last common law exception is only recognized by a handful of states and it’s based on the concept that an implied covenant of good faith and fair dealing exists in every employment relationship. An example of a violation of the implied covenant of good faith and fair dealing is a company firing an employee right before the company owes the employee a large bonus.
Employee Classification: W2 Employees vs. 1099 Independent Contractors
You may be tempted to try to avoid questions about terminating employees altogether by hiring personnel as 1099 independent contractors. If you are able to classify new hires this way, it provides additional flexibility and will save you a few dollars on payroll-type (FICA) taxes. Be very careful, though. Employee misclassification is a big issue these days. The consequences of misclassifying your employees can be significant and potentially include criminal penalties and even jail time.
Whether an employee works for your business as a W2 employee or 1099 worker isn’t simply a matter of choice for you and the employee. The employment relationship determines how an employee must be classified. A large consideration is the degree of control you, as the employer, exercise over the employee. For more information about classifying your employees, visit Understanding Employee vs Contractor Designation at the IRS site.
This issue comes up often when I represent clients with mergers and acquisitions (“M&A”) (as a business attorney, most my work is for clients doing business transactions rather than advising on employment law matters). A buyer acquiring a business will usually require the seller to represent that there are no misclassification issues. Keeping your internal house in order is key to a successful M&A transaction.
Should I Use Employment Contracts in My Business?
If you’re a business owner who employs people “at-will,” no. This is always my advice to my business clients. Most U.S. employees don’t have an expectation for a written employment contract. Using employment agreements costs time and money (possibly lawyer review time/cost, internal administrative time managing the documents).
And, while it’s possible to have an employment contract that is clearly for an “at-will” employment relationship, it’s not typical. So, when a court or plaintiff’s attorney sees an employment agreement, their initial inclination will be to think the relationship was something other than “at-will” (for a set employment term). If the agreement is clear about the “at-will” nature of the relationship, this shouldn’t be an issue, although why take any risk? A written offer letter (that clearly states the employment relationship is “at will”) is all most employees expect – it’s simpler, cheaper, and safer to use only offer letters.
Ideally, you should also have an employee handbook (be careful not to make implied promises of continued employment in a handbook!) that lays out company policies. Have new hires acknowledge in writing that they received, read, understand, and will abide by, your company policies (this can also be helpful for regulatory compliance – to evidence your training and compliance programs). Best practice is to have existing employees re-review the handbook and sign an acknowledgment once per year. And, you definitely want to require existing employees to resign an acknowledgement form if you update/change your employee handbook (or any policies in it).
Pros and Cons of Employment At-Will
So, why is employment at will the standard in the U.S. while most other developed countries give greater rights to employees? The primary argument you’ll hear is that employment at-will gives U.S. companies great flexibility to adjust to market conditions. If the market is going down, companies can let employees go to save expenses on payroll and ride out the tough times. When the market is going great, companies are quicker to add employees since they know they’re not necessarily taking on any long-term obligations by hiring. And, the data I’ve read proves this out – indeed, the U.S. is quicker to respond to upswings and downswings and, when it’s an upswing, we hire more quickly.
Critics of employment at-will point to the imbalance of power between employers and employees, claiming that private sector, regular-level employees need some legal protection because they lack the bargaining power of high-level or unionized employees. They also note that employment at-will merely shifts the burden of lost employment from the private sector to the public one since employees who are laid off without notice or severance are inclined to immediately seek state unemployment benefits.
Conclusion
In the end, I’m not sure whether I believe employment at-will is the best approach or not. I’ve run companies before and can attest that sometimes you need the flexibility to be able to hire and let go of employees freely based on market conditions. Business is competitive and a whole lot of small businesses straddle the profit/loss line. In an increasingly fast and global economy, this flexibility helps American businesses compete. And, when it comes to grossly underperforming employees, it’s helpful to be able to let them go without an argument that they’re entitled to notice or some sort of procedure.
However, like most employers, if I can afford it without having to turn the lights off, I’d prefer to give employees some notice period or actual severance money. If an employee worked hard for me, it strikes me as only fair to treat that person kindly when it comes to termination. And, with information about people and companies being as readily available as it is now in the digital age, I believe most employers are concerned with protecting their reputations by treating employees fairly. Building trust within your company has far reaching effects even outside the office.
For now, though, my advice to business clients is to be very cautious to not take any action to modify the employment “at-will” nature of your relationship with employees unless you intentionally wish to do so. You never know when you may need the flexibility to let someone go, especially someone that is significantly harming your business’ performance (and it happens that formerly-solid employees lose interest or disengage for one reason or another).
For More Information About My Business Law Services
I’m a corporate transactional lawyer. Most of what I do for clients revolves around partner and founder relationship structuring (formations of LLCs and corporations, drafting founder and partnership agreements), capital raising, mergers and acquisitions (M&A), and other outside general counsel services (e.g., drafting, reviewing, and negotiating contracts).
Sometimes I assist existing business clients with questions about employment law, non-compete agreements, and things of that nature. Whether or not I’m the right attorney to advise on those issues or if you’d be better served to hire an employment law expert is your decision and mine. It depends on the exact issue, our relationship, and your ongoing needs. There’s no question that most (all?) Board-certificated labor attorneys have deeper employment law knowledge than I do. Whether you need that deeper knowledge or whether my 10 years in business roles is likely to provide better, more practical advice for your particular situation, is something I’m happy to discuss with you.
To read more about me to help decide if I’m the right attorney for you, visit About Brett Cenkus. Or, get in touch. I’m located in Texas (Austin, Houston/Dallas) and have clients all over.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.