The general rule in New York is that an employee who does not work under an agreement for a definite term of employment is an “at-will” employee: She or he may be terminated at any time, with or without cause, for any reason whatsoever.
Earlier this year, New York State’s highest court reaffirmed this general rule, and made a clear showing that it will guard closely against efforts to encroach on it. In Smalley v. Dreyfus Corp., 10 N.Y.3d 55, 853 N.Y.S.2d 270 (2008), the plaintiffs were a group of employees at the Taxable Fixed Income Group at Dreyfus. Each employee was hired at different times over a three year period. Both prior to and during their employment, rumors had been circulating that this group might be merged with another fund management company. Allegedly, the employees asked repeatedly about these rumors, and allegedly, these rumors were repeatedly and flatly denied. Based upon these alleged denials, the employees claim they turned down other employment and remained with Dreyfus. Four years after the first plaintiff was hired, Dreyfus merged the fixed income group with the fund management company, and shortly thereafter, all of the plaintiff-employees were terminated.
The plaintiff employees sued, asserting several claims, of which only one is relevant. Plaintiffs claimed that Dreyfus fraudulently induced them to accept and remain in the employment of Dreyfus. The plaintiffs alleged that they were misled into believing that Dreyfus’s Taxable Fixed Income Group would not merge with another company, and on that basis, they accepted and continued employment, and in some cases, turned down other employment.
The trial court dismissed all of the Smalley employees’ claims on the basis that their employment was at-will. The intermediate appellate court (the Appellate Division), by a 4-1 majority, reversed the dismissal with respect to the fraudulent misrepresentation claim, relying in large part upon a 1992 federal Court of Appeals case, Stewart v. Jackson & Nash, in which the federal court sustained a plaintiff’s claim of fraudulent inducement on a motion to dismiss.
A little background on the Stewart case — it involved an environmental lawyer employee who interviewed with the defendant law firm. The plaintiff alleged that the law firm told her that it had secured a large environmental law client, was setting up an environmental law department in the firm, and wanted her to head up that environmental law department, including handling the environmental matters for the newly-obtained client. She took the position, and began to receive general litigation work — not environmental matters. She allegedly inquired and was assured repeatedly that she would be handling environmental work. Stewart alleged that she eventually learned that the firm had not in fact secured any environmental law client and was not in the process of setting up an environmental law department. She was later terminated, and following the termination, she sued for damages. The federal appeals court, interpreting New York law, ruled that Stewart had stated a proper claim and denied the defendant’s motion to dismiss.
There were two key rationales for the federal court’s ruling in Stewart. First, Stewart had alleged a misstatement of present facts, rather than future plans (that they had in fact secured an environmental law client and were in the process of setting up an environmental law department). Second, the injury claimed by Stewart was separate and distinct from the termination of her at-will employment. The court noted that, “Stewart’s alleged injuries…commenced well before her termination and were, in several important respects, unrelated to it. According to the complaint, [the employer’s] misrepresentations allegedly caused Stewart, a budding environmental lawyer, to leave a firm with an environmental practice and spend two years at one in which she was largely unable to work in her chosen specialty. The resulting damage to her career development was independent of her later termination … and began while she was still at the firm.”
Coming back to the Smalley case, the New York Court of Appeals dismissed the employees’ misrepresentations claims. It concluded that the situation in Stewart was fundamentally different from Smalley in that the Smalley plaintiffs had alleged no injury separate and distinct from the termination of their at-will employment. The plaintiffs’ core claim was that they relied upon no-merger promises in accepting and continuing employment with Dreyfus, and eschewing other job opportunities — the misrepresentation did not thwart their career objectives, or cause them stray from their chosen specialties — it simply resulted in the termination of their at will employment earlier than they had wanted. The court therefore ruled that, “[a]bsent injury independent of termination, the plaintiffs cannot recover damages for what is at bottom an alleged breach of contract in the guise of a tort.”
The 4-1 majority in the lower appellate court is indicative that the facts were not as clear as the Court of Appeals suggests, but the Court of Appeals wanted to make a clear and unequivocal statement in this case. The ramifications of allowing the employees to proceed with their claim would have been far-reaching. The Smalley case looked, smelled and sounded very much like ex at-will employees suing their employers for being terminated after assurances that they would not be. To rule that the case could proceed would permit at-will employees to maintain lawsuits upon termination, armed with little more than allegations of oral misrepresentations inducing them to take the job or stay on. These cases necessarily would survive a motion to dismiss, and because they would be largely fact-driven, many, if not most, would probably continue through to trial. The Court of Appeals simply was not willing to permit the lower courts to crack open these floodgates.
Aside from reaffirming the general rule in New York on at-will employment relationships, the decision underscores the importance of setting forth the terms of employment clearly and in writing. The Court of Appeals quoted the at-will language of the plaintiffs’ employment contracts, noting that the plaintiffs had signed and agreed to that term. Accordingly, if an employer does not wish to commit to hire an employee for a definite period of time, it is of paramount importance that the employer state in writing the at-will nature of the employment and that the writing be agreed to and signed by the employee. That written agreement will go a long way to avoiding costly disputes later, so long as the employer has not modified or contradicted those terms in writing.
The employer also should not say or do, and certainly not put in writing, anything that could be construed to modify or contradict the “at-will” term of employment. Some common provisions, such as schedules for bonuses or raises, end of trial periods, renewals, or any benefits at future dates — end of year, each year for the next five years, etc. — can be included in an at-will agreement, but they must be in writing and phrased carefully, so they do not muddle the agreement, and create an impression that a fixed term has been agreed to.
Finally, the employer should include a basic “merger clause” — stating that the written agreement is the whole agreement, that there are no other understandings other than what is in writing — as well as a clause stating that no modifications to the agreement are effective unless in writing and signed by the employer.
The prospective employee must understand that reliance on an oral assurance is almost always at his or her peril — enforcement is the rare exception, not the rule — and if that assurance is so fundamental that the prospective employee would not proceed without it, then the employee should ask for the assurance in writing as part of his or her employment agreement.
The prospect of hammering home the “at-will” nature of the employment, or insisting on putting important representations into the employment agreement, does not sit well with anyone — neither employers, nor employees. There is a strong impetus at the outset of an employment relationship to keep the honeymoon going — to avoid discussion of sensitive matters that might disrupt the good feelings. After all, the intent is to motivate the new employee, not remind him that he can be cut loose on a moment’s notice. Without a doubt, that is a difficult impetus to resist, but both employers and employees must bear in mind that if they do not reduce their important terms to writing, there may well be problems later. To paraphrase the saying — the terms will not be worth the paper they were not printed on.
There are limited exceptions to the general rule where the termination would violate express prohibitions, i.e., termination on the basis of race, gender, ethnicity, religion, etc.
832 N.Y.S.2d 157 (1st Dept. 2007).
976 F2d 86 (2d Cir. 1992).
Id. at 88.
The New York Court of Appeals refused to adopt or reject the Stewart court’s rationale for allowing the environmentallawyer’s claim to proceed. Smalley, 853 N.Y.S.2d at 270.
It is also important to bear in mind the general rule that any oral agreement that is not capable of performance within one year, with certain exceptions, will be unenforceable due to the statue of frauds — a legal basis that is independent of the at-will nature of the employment.