The Journal of The DuPage County Bar Association

Back Issues > Vol. 10 (1997-98)

Employment Contracts Quiz
By Christine Godsil Cooper

The following is a quiz that promises (without consideration) to challenge your understanding of your clients’s employment contracts and handbooks.

But, before you begin your quiz, the following is a brief review.

Prior to 1970, an Illinois employer could issue an employee handbook or other policy manual and be pretty sure that no contract rights had been established. The handbook could say anything, promise the moon, without legal liability.

Beginning in the mid-1970’s, a few Illinois courts flirted with the concept of handbooks as contracts. Then in 1987 the Illinois Supreme Court decided Duldulao v. St. Mary of Nazareth Hospital, 115 Ill. 2d 482, 505 N.E.2d 314 (1987).

Duldulao held that handbooks or policy statements could be contracts under the following circumstances:

(1) The language of the policy statement must contain a promise clear enough that an employee would reasonably believe that an offer has been made. (2) The statement must be disseminated to the employee in such a manner that the employee is aware of its contents and reasonably believes it to be an offer. (3) The employee must accept the offer by commencing or continuing to work after learning of the policy statement.

In Duldulao, the Illinois Supreme Court adopted the unilateral contract analysis for the formation of a binding contract based on a handbook or other policy statement: the employer makes a promise of some job security, such as just cause only termination, progressive discipline, or specified pre-termination rights; the employee accepts by performing the work. As in unilateral contracts, the acceptance is the consideration by the offeree. Continued employment by an employee under no obligation to remain working constitutes the consideration that makes the employer’s promises binding.

Contracts based on handbooks or other policy statements are usually called "implied" contracts. Why this is so is a curiosity. Perhaps it is a recent historical accident that these contracts are called "implied." They aren’t really implied, since the employer’s promises are expressed in the written handbook or other policy statement. Perhaps the term is used to distinguish these contracts from the individually negotiated, written contract of a definite duration. In handbook contracts, in contrast to individually negotiated contracts, the acceptance is implied from the employee’s continued work. In an individually negotiated contract, the employee typically promises to work for a definite duration.

The Duldulao decision emphasized the importance of a reliable promise made by an employer. There is no reliable promise if the handbook or other policy statement contains a clear and conspicuous disclaimer that is disseminated to affected employees. See, e.g., Hanna v. Marshall Field and Co., 279 Ill.App.3d 784, 665 N.E.2d 343, 216 Ill.Dec. 283, 11 IER Cases (BNA) 1045 (Ill.App. 1996).

Consequently, well-advised employers who have handbooks, have company handbooks which set forth clear and conspicuous disclaimers.

Much judicial ink has been spent on what makes a disclaimer effective. Good disclaimers are conspicuous (in large, bold type, prominently placed in the document) and clear (easily understood by the reasonable employee as denying contractual rights). Good disclaimers are not undermined by mandatory terms or conflicting language in the document, nor are the disclaimers vitiated by subsequent assurances from the employers.

Effective disclaimers are in each policy pronouncement of the employer. The effective disclaimer says all of the following:

THIS IS NOT A CONTRACT.

YOU ARE EMPLOYED AT-WILL, WHICH MEANS THAT YOU MAY TERMINATE YOUR EMPLOYMENT, OR YOU MAY BE TERMINATED, AT ANY TIME, WITH OR WITHOUT NOTICE, WITH OR WITHOUT CAUSE.

NO PERSON OTHER THAN [NAMED OFFICIAL, SUCH AS PRESIDENT OF THE COMPANY] HAS THE AUTHORITY TO ENTER INTO ANY AGREEMENT FOR EMPLOYMENT FOR ANY SPECIFIC PERIOD OF TIME, OR TO MAKE ANY AGREEMENT CONTRARY TO THE ABOVE. ANY SUCH AGREEMENT MUST BE IN WRITING.

This recommended disclaimer is based on the Sears disclaimer, which has been repeatedly upheld as preventing employment contract formation. See Sanchez v. Life Care Centers of America, 855 P.2d 1256, 8 IER Cases (BNA) 1101, 1106 (Wyo. 1993), quoting Reid v. Sears, Roebuck & Co., 790 F.2d 453, 456, 1 IER Cases (BNA) 451 (6th Cir. 1986). It must be emphasized, however, that such a disclaimer should not be undermined by subsequent, contrary assurances, or by contrary language in the document. Moreover, many jurisdictions demand that the disclaimer be in bold type.

The initially issued handbook that contains effective disclaimers presents no problem. There is no contract. But what of the handbook that, by the magic of Duldulao, became a contract that the employer does not wish to keep?

Once a handbook has achieved contractual status—usually by surprise owing to the Duldulao decision—can the employer try to take back its handbook promises by means of a subsequently-issued handbook that contains a clear and conspicuous disclaimer? The disclaimer would say, in effect, "What used to be a contract isn’t one anymore. We are disclaiming all contractual liability and we can fire you anytime by mere whim."

Ever since Duldulao, this is exactly what employers have been doing, although in more measured language.

You are now ready for the first question on the quiz. But first, one ground rule. If a statement is not reliably true, it is to be considered false. Note: this field of law is in a considerable state of flux, and the decisions are not coherent. The Supreme Court of Illinois has not yet spoken. So remember, if the statement is not reliably true, you should consider it to be false.

1. May an employer escape its contractual obligations under an employment policy by unilaterally modifying its employee handbook to include a clear and conspicuous disclaimer?

False: Fresh consideration is required. Continued employment is not consideration sufficient to relinquish contract rights. Doyle v. Holy Cross Hospital, 682 N.E.2d 68, 12 IER Cases (BNA) 1280 (1st Dist., 3d Div. Mar. 26, 1997).

In Doyle, the handbook with layoff protection and rehire rights was issued in 1971 (long before Duldulao, and even before Illinois cases hinted that these documents might be contracts). The handbook was modified with a disclaimer in 1983 (probably anticipating Duldulao by means of some lower court decisions and decisions from other jurisdictions). The plaintiffs, nurses who had received both the 1971 and 1983 handbooks, were terminated in 1991. When the nurses claimed their 1971 handbook rights, the hospital pointed to the subsequently-issued disclaimers. The hospital relied on its amendments to the handbook: the old handbook no longer constituted an enforceable contractual right because it had been amended. But the court ruled for the nurses: the hospital was bound to them by the promises in the 1971 handbook; the subsequently-issued disclaimer was ineffective without fresh consideration.

Said the court:

"Traditional contract principles allow parties to modify their contract, if there is consideration to support the modification....If parties to a contract agree to a modification, consideration is usually found to exist where the obligations of both parties are varied. A modification solely for the benefit of one of the parties is unenforceable.

If, as Holy Cross argues, plaintiffs’ continued work amounts to acceptance and consideration for the "loss" of their right under the Economic Separation policy, then the only way plaintiffs could preserve and enforce their contractual rights would have been to quit working after Holy Cross unilaterally issued the disclaimer. This would make the promise by Holy Cross not to terminate, except under the terms of the Economic Separation policy, itself illusory. The illusion (and the irony) is apparent: to preserve their right under the Economic Separation policy the plaintiffs would be forced to quit.

We believe this analysis avoids an illogical result: by continuing to work, plaintiffs continued to perform their duties and assert their right under the existing contract, which promised that Holy Cross would follow specific procedures for job termination. Plaintiffs received no benefit and Holy Cross suffered no detriment when Holy Cross modified the employee contract to attempt to make plaintiffs terminable at will. There was no bargained for exchange to support plaintiffs’ purported relinquishment of the protections they were entitled to under the existing contract. The modification by Holy Cross was solely for the benefit of Holy Cross and is unenforceable as to plaintiffs."

In other words, continued employment constitutes consideration from the at-will employee to make an initial handbook a contract, as in Duldulao. But once the employees have contract rights from handbooks or other policy statements, they are no longer at-will and continued employment is not consideration for their (forced) relinquishment of contract rights. Continued employment can make a contract, but it can’t break one. Accord, Robinson v. Ada S. McKinley Community Services, Inc., 19 F.3d 359, 9 IER Cases 461 (1994) (employer may not unilaterally withdraw tenure granted by original written employment contract, since valid modification requires fresh consideration, and continuing to work is not sufficient; employer suffered no detriment and employee received no benefit).

Courts in other jurisdictions are coming to the same conclusion. See, e.g., Torosyan v. Boehringer Ingelheim Pharmaceuticals, Inc., 234 Conn. 1, 662 A.2d 89, 10 IER Cases (BNA) 1313 (1995); Brodie v. General Chemical Corp., 12 IER Cases (BNA) 1276 (Wyo. 1997).

But there are numerous cases in disagreement with this proposition. See, e.g., Condon v. American Telephone & Telegraph Co., 210 Ill. App.3d 701, 569 N.E.2d 518 (1991) (continued employment constitutes consideration); In re Certified Question (Bankey v. Storer Broadcasting Co.), 432 Mich. 438, 443 N.W.2d 112, 4 IER Cases (BNA) 673 (1989) (because contract did not arise by mutual assent, mutual assent unnecessary for modification, since reasonable employee cannot expect handbook to remain unchanged forever; all that is necessary is that the modification be made in good faith with reasonable notice to all affected employees).

The safe thing for an employer to do is to provide consideration (money usually works) to the employee in exchange for the relinquishment of handbook rights. This exchange should be written.

What, then, is the status of a sexual harassment policy? Is it a contract? If the sexual harassment policy is a contract, can the Doyle rule apply? Will an employer who wishes to avoid contractual liability have to disclaim the sexual harassment policy? If the disclaimer is not in the original policy, will the disclaimer be ineffective if the employer does not provide employees with fresh consideration? Try the next question.

2. Is a sexual harassment policy a contract, and is any contract claim that an employee might have by virtue of a sexual harassment policy preempted by the Illinois Human Rights Act?

False: Corluka v. Bridgford Foods of Ill., 284 Ill. App.3d 190, 671 N.E.2d 814, 12 IER Cases (BNA) 379 (Ill. App., 1st Dist., 3d Div., 1996).

In Corluka, the employer distributed an undisclaimed sexual harassment policy, which promised, in mandatory language, non-retaliation: "rest assured that you will not be penalized in any way for reporting harassment concerning yourself or any other person. [Bridgford] will take immediate action to punish anyone who seeks reprisal as a consequence of harassment being reported."

After reporting being sexually harassed, Corluka was demoted and then discharged. The court held that the policy constituted a contract under the Illinois rules of contract formation; Duldulao’s unilateral contract analysis. The court also noted that the employee who reported sexual harassment was fulfilling his obligation under the stated sexual harassment policy. The court further held that the contract claim was not pre-empted by the exclusivity provisions of the Illinois Human Rights Act: "nothing in the Act or caselaw...suggest it was meant to preempt contract law." The case was remanded for trial to determine whether Corluka was discharged in retaliation for reporting sexual harassment.

Corluka’s refusal to find the contract claim pre-empted is no doubt a more durable decision in light of the Illinois Supreme Court’s recent decision in Maksimovic v. Tsogalis, 1997 Ill. LEXIS 447, 13 IER Cases (BNA) 653 (Oct. 17, 1997). In this case, the Court held that the Illinois Human Rights Act does not pre-empt "common law tort claims of assault, battery and false imprisonment[; such claims] are not inextricably linked with claims of sexual harassment, because the plaintiff has established the necessary elements of each tort independent of any legal duties created by the Act."

In finding that a sexual harassment policy is a contract, the Corluka case presents a rather new, although not unique, development.

A South Carolina appellate court has found a contract to exist not to discharge for reporting sexual harassment. Bookman v. Shakespeare Co., 314 S.C. 146, 442 S.E.2d 183, 10 IER Cases (BNA) 1695 (S.C. App. 1994). Few other cases hold sexual harassment or other EEO policies to be contracts. See the cases cited in 1997 Supplement to Lindemann & Kadue’s Sexual Harassment in Employment Law 139-140 (Christine G. Cooper ed. 1997). The usual reason that an EEO policy is not considered a contract is that the policy typically contains guidelines rather than rules, language of aspiration rather than promise. Yet the sexual harassment policy, unlike the general EEO policy, is frequently written in mandatory language.

It is tricky to disclaim a sexual harassment policy, since the disclaimer tends to undermine one of the objectives of the policy: to encourage meritorious claims. The employer wishes to encourage meritorious claims for at least two reasons. The first reason is to avoid liability for hostile working environment harassment. When a harassee could have utilized an internal reporting mechanism to challenge sexual harassment, but did not do so, the employer is less likely to be held liable for the creation of a hostile working environment, because the employer is usually held liable only under the "knew or should have known" standard—no report, no liability, unless the harassment is notorious. The second reason is that an employee who did not report is simply seen as less credible to jurors (even though the literature clearly demonstrates that harassees seldom report).

Will a disclaimer discourage claims so that an employer is then held to have constructive notice of harassment because the employer did not have an effective harassment policy? One way to finesse this problem would be to state company employee rights as creatures of law, not contract: state, federal, and local law provide that employees have the right to be free of harassment and to be free of retaliation for reporting harassment. The disclaimer could then follow.

And now the most important part—you can identify the contract, now what’s the remedy for breach of this contract?

3. May a prevailing employee in a breach of contract case recover front pay or reinstatement?

False: Maier v. Lucent Technologies, 120 F.3d 730, 13 IER Cases (BNA) 161 (1997) (in an action to recover for a breach of contract action, a plaintiff-employee cannot recover damages that might arise after trial); Chady v. Solomon Schechter Day Schools, 269 Ill. App. 3d 31, 645 N.E.2d 983, 10 IER 357 (1995) (because the common law prohibits specific performance as a remedy for breach of an employment contract, an employee is not entitled to reinstatement as a remedy in the absence of a statute providing this remedy).

Illinois remains very stingy toward the employee harmed by breach of contract. Future damages are considered speculative and will not be awarded. The plaintiff cannot recover damages that might arise after trial. Several cases deny reinstatement to the employee fired by a private employer in breach of contract. See, e.g., Kurle v. Evangelical Hospital Assoc., 89 Ill. App.3d 45, 411 N.E.2d 326 (1980); Zannis v. Lake Shore Radiologists, Ltd., 73 Ill. App. 3d 901, 904, 392 N.E.2d 126 (1979); Munoz v. Expedited Freight Systems, Inc., 775 F. Supp. 1181 (N.D. Ill. 1991).

The only time the Illinois Supreme Court spoke on this issue was in 1891 in Mount Hope Cemetery Assoc. v. Weidenmann, 139 Ill. 67, 28 N.E. 834 (1891). The Court refused to allow future damages for a five-year, written contract. The Court said that the employee could have recovered future damages if he had waited until further installments were due on the employment contract, but a 1911 decision rejected this possibility. In 1911, the Illinois Supreme Court ruled that recovery on a suit for wages due barred all future actions. Doherty v. Schipper & Block, 250 Ill. 128, 95 N.E. 74 (1911). In other words, "the plaintiff in a suit for breach of an employment contract cannot sue more than once and therefore must wait until the term of the contract expires before he can sue if before then his full damages would be speculative." Munoz, supra, summarizing Doherty.

In Munoz, Judge Lefkow criticized the rule and noted that "[m]odern evidentiary tools such as actuarial tables and labor statistics suggest that assessing damages beyond the date of trial is not unduly uncertain." The judge also noted that a fair degree of probability, not certainty, is required for assessment of damages. Courts call such damages speculative because it is not known whether the plaintiff will live or die, get raises or a diminished salary, be promoted or demoted, quit or continue employment, be fired for cause or flourish. As Judge Lefkow noted, "the current validity of the rule is open to question...."

Only a few cases have discussed this issue of damages, and they are all bad for employees and for the law of contract. Harden v. Playboy Enterprises, Inc., 261 Ill. App.3d 443, 633 N.E.2d 764, 9 IER Cases (BNA) 88 (1993); Lewis v. Loyola Univ. Of Chicago, 149 Ill. App. 3d 88, 500 N.E.2d 47 (1st Dist. 1986); Kolar v. National Ass’n of Dealers, 1993 U.S. Dist. LEXIS 12831 (N.D. Ill. Sept. 16, 1993); Corby v. Seventy-One Hundred Jeffery Ave. Building Corp., 325 Ill. App. 442, 60 N.E.2d 236 (1st Dist. 1945). Much work needs to be done on this point.

And now for the essay questions:

4. What should management attorneys do?

Management attorneys need to consider whether their clients’ handbooks and other policy statements constitute contracts. If these handbooks and other policy statements are contracts under existing law, management attorneys may consider issuing new handbooks with disclaimers, but this will not be easy.

If Doyle sticks, the later handbooks with their clear and conspicuous disclaimers will need consideration to be effective. The consideration could be money, a raise, a promotion, or a favorable change in terms and conditions of employment, provided that this consideration is in exchange for the employees’ relinquishment of the contractual rights that had been created by the earlier handbooks or policy statements.

If both Doyle and Corluka stick, many sexual harassment policies, stated in mandatory language and containing no disclaimers, may constitute contracts that cannot be subsequently disclaimed without fresh consideration.

Management attorneys should be especially cautious about disclaiming sexual harassment policies, for you want your policies to be effective in order to minimize claims for failure to remedy and prevent known hostile working environment harassment. While you can’t have too many disclaimers (and you can have too few), you don’t want to chill sexual harassment reports and saddle yourself with constructive knowledge of sexual harassment.

Having said all this, management attorneys may nonetheless find that doing nothing is the best strategy, depending upon how many current employees may assert rights under the old documents. Consider that if you reissue a new handbook with the disclaimer and attempt to give fresh consideration in exchange for the employees’ relinquishment of contract rights, some employees may refuse the fresh consideration and know, for the first time, that they have contract rights. Some employees may ask for more. Some may pay more attention to the handbook than they otherwise would have; these employees will now know they have contract rights that they had previously overlooked.

You will have to make a difficult decision if employees refuse the bonus or other consideration and cling to their rights. If you are going to terminate them (and that might be a very bad idea from the point of view of employee morale and fundamental fairness), be sure to follow the handbook rules and procedures, because the employees may have rights to these rules and procedures.

If you follow the rules and procedures for termination under the old handbook, and if the old handbook does not provide for cause-only termination, then you probably have the right to terminate employees who refuse to accept the new handbook. In O’Regan v. Arbitration Forums, 1997 U.S. App. LEXIS 20511 (7th Cir. July 31, 1997), the Seventh Circuit found that a termination for refusal to sign a broad covenant-not-to-compete did not raise a claim for retaliatory discharge under Illinois law.

If only a few of your employees were employed under a previous undisclaimed handbook that has been subsequently and effectively disclaimed to new employees, you may wish to keep your head in the sand. It may be cheaper to let a few employees keep their old contract rights than to raise the issue of revoking rights that might not be asserted in any event. The employee may no longer have the old (contractual) handbook. The employee’s lawyer may not think of this line of inquiry.

The limited remedies afforded prevailing plaintiffs under current law may make change of handbooks unnecessary. (But remember that the remedies can add up for the highly-paid employee whose case takes years to get to trial).

When faced with a breach of contract suit, management representatives should expedite all pre-trial steps and get to trial quickly in order to take advantage of the rule limiting damages. The long statute of limitations for breach of contract actions, combined with crowded court dockets, may mean that trial is many years after the discharge in breach of contract. In Harden v. Playboy Enterprises, Inc., 261 Ill. App. 3d 443, 633 N.E.2d 764, 9 IER Cases (BNA) 88 (1st Dist., 1st Div., 1993), for example, the prevailing plaintiff was discharged in 1983 but her case was not tried until 1992. The damages for a modest-income plaintiff, such as the secretary in Harden, can amount to a good deal over a nine year period, particularly where mitigation is not practicable.

5. What should plaintiffs’ attorneys do?

Plaintiffs’ attorneys should insist that their clients provide them with all prior handbooks and harassment policies, for these documents may have contractual status, even if subsequently disclaimed. Plaintiffs’ lawyers will need to make novel, effective legal arguments to provide their clients with worthwhile remedies. They might argue for emotional distress damages when the contract claim is harassment (see Doe v. Roe, 681 N.E.2d 640 (1st Dist. 4th Div. 1997) (claim for breach of fiduciary duty stated against attorney who, for fear of embarrassment, failed to seek fees from ex-husband of divorce client with whom attorney was having a sexual relationship; client can pursue damages for mental distress, even though the fiduciary duty is a contract claim, for the mental harm was foreseeable).

They may look to the Attorney’s Fees in Wage Actions Act, 705 ILCS 225/1 et seq., for attorney’s fees when wages have been wrongfully withheld (strictly comply with the specific rules and demands for payment).

The statute provides: "Whenever a mechanic, artisan, miner, laborer, servant or employee brings an action for wages earned and due and owing according to the terms of the employment, and established by the decision of the court or jury that the amount for which he or she has brought the action is justly due and owing, and that a demand was made in writing at least 3 days before the action was brought, for a sum not exceeding the amount so found due and owing, then the court shall allow to the plaintiff a reasonable attorney fee of not less than $10, in addition to the amount found due and owing for wages, to be taxed as costs of the action."

Plaintiffs’ lawyers should file their breach of contract claims as late as practicable, just within the limitations period, in order to extend the time for which Illinois courts will award damages. It does plaintiffs no good to hurry up the proceedings.

Most important, plaintiffs’ attorneys should argue that the current Illinois damages rule is abusive and aberrant. The rule limiting damages to the trial date is contrary to 32 years of statutory discrimination law detailed in seventy-five volumes of Fair Employment Practices Cases: the discrimination statutes, in providing for make-whole relief, have consistently allowed front pay upon proper proof of damages, while maintaining the obligation of discriminatees to mitigate damages. Make-whole relief is even more appropriate for breach of contract claims, for expectancy is the rule in breach of contract cases. See, e.g., Feldstein v. Guinan, 148 Ill. App.3d 610, 499 N.E.2d 535 (1986):

"In Illinois, the purpose of damages is to place the nonbreaching party in the position he would have been in had the contract been performed, but not to place him in a better position or provide him with a windfall recovery....Speculative damages or damages not the proximate result of the breach will not be allowed....The proper measure of damages when an employee has been wrongfully discharged is the agreed wages during the contract term, reduced by wages earned during the same period and which could not have been earned in the same employment." [Emphasis supplied by author].

It is common for contract law to borrow from statutory discrimination law. See, e.g., Harden v. Playboy Enterprises, Inc., 261 Ill. App.3d 443, 633 N.E.2d 764, 9 IER Cases (BNA) 88 (1st Dist., 1st Div., 1993). Harden relied on civil rights decisions to conclude that damages awarded in an action for breach of an employment contract were not to be reduced by the amount of unemployment benefits received by the plaintiff.

A plaintiff should argue that:

(1) The existing rule against reinstatement is misguided.

(2) The limitation of damages to the date of trial, together with the ban on reinstatement, are horrible restrictions which undermine the protection that contract is supposed to provide.

(3) The rule against specific performance of an employment contract is directed against the employee’s involuntary servitude and is not designed to protect an employer from keeping a disfavored, wrongfully discharged employee.

(4) Over sixty years of experience with the reinstatement remedy under labor laws shows that reinstatement does not impose an insurmountable burden of court supervision.


Christine Godsil Cooper
is a Professor of Law at Loyola University-Chicago. She teaches Employment Law, Employment Discrimination, Labor Law, Labor Arbitration, and Comparative Labor Law. She also teaches Alternative Dispute Resolution and Feminist Jurisprudence. She received her Undergraduate Degree in 1972 from Rosary College and her Law Degree in 1976 from Harvard Law School (LL.M) and in 1975 from DePaul University.


 
 
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