When do Statements in an Employee Handbook Create an Employment Contract?

Though most employers do not intend for the statements in their employee handbooks to create an employment contract, the language they use may form the basis of an implied contract. Sometimes, a simple disclaimer will not be sufficient.

How is a contract established?

Just like any other contract, an employment contract must have certain elements to become enforceable. Those elements are as follows:

  • Offer
  • Acceptance
  • Consideration
  • Mutuality ("meeting of the minds")
  • The offer is a promise made by one party to do, or refrain from doing, some specific action in the future. Acceptance of that offer can be expressed in several ways, including words, actions, or performance of actions required in the contract itself. If acceptance does not exactly mirror the terms of the offer, it is considered either a rejection or a counteroffer of something different. Consideration is the giving of something of value in exchange for the promise. Finally, the parties must have a "meeting of the minds" in regard to the agreement. In other words, the parties must understand and agree to the basic terms of the contract.

Was a contract formed by language in the handbook?

A contract must contain a legally enforceable promise. The types of promises commonly found in handbooks are promises to terminate only for cause, or to follow the company's progressive discipline policy. Likewise, a promise to lay off employees and recall them in a particular order, would constitute a legally enforceable promise. However, a promise alone is not sufficient, if there is no mention of consideration on the employee's part.

Moral obligation is rarely a consideration in enforcing promises in the context of employment contracts. Instead, courts will look for detrimental reliance on the part of the employee when determining whether or not a promise should be enforced.

What are "implied contracts?"

A contract can, in some circumstances, be implied by policy statements, past practices and oral assurances made by employers to their employees. In other words, if looking at all of the circumstances, past practices, longevity of service, and reasonable expectations form a promise of job security, that promise would be implied. This theory of implied contract is used when an employment contract has not been bargained for and reduced to writing.

Have any courts found handbook promises to be employment contracts?

There are two prevailing theories used for finding the promises made in an employee handbook to constitute an employment contract. One theory, first recognized by a Minnesota court, is referred to as the "unilateral contract theory." In that case, the court applied the unilateral contract analysis where there was an offer which provided specific disciplinary actions, with no disclaimers contained in the manual. Another theory involves the "instinct with obligation," as set out by the Michigan Supreme Court. The idea there is that an employer receives a benefit from issuing the handbook, which is a loyal, productive workforce. This benefit, then justifies legally enforcing the handbook as a contract.

The idea is that the employer gains benefits from issuing the handbook in the form of a more loyal and productive workforce, thereby justifying legal enforcement of the handbook promises.

If you have questions regarding employment contracts, or your employment rights, please contact Wrady & Michel, LLC, either online or by calling us at (205) 265-1880.

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