Wednesday, February 3, 2010

GFFD in Employment Contracts Comes to Wisconsin?

Wisconsin For those unfamiliar with employment law, it might surprise you to learn that in the United States most states do not recognize an implied covenant of good faith and fair dealing (GFFD) in employment contracts, even though such covenants are deemed to exist in commercial contracts under the UCC.

By my last count, only nine state have adopted GFFD in employment contracts. Though the type of GFFD implied in employment contracts varies, the most common form involves a situation where an employee's justified expectations to pay or benefits are frustrated by an arbitrary employer action (like an out-of-the-blue firing).

Well, Wisconsin might be the tenth state to recognize such a GFFD in employment in the case of Phillips v. US Bank (Wisconsin Ct App 02/02/2010), though the Wisconsin Appellate Court was careful not to call it that.

From Ross Runkel's Employment Law Memo:

Phillips sued the employer, alleging that the employer discharged her in order to avoid paying promised benefits.  Although the benefits were described as having accrued, receipt of the benefits was contingent on continued employment.  The trial court granted summary judgment in favor of the employer.  The court reversed.

The court noted that an employer is not obligated to act in "good faith" when exercising its right to discharge an at-will employee.  The court concluded, however, that "an at-will employee does not forfeit benefits that have accrued during his or her employment even though the agreement governing those benefits conditions their receipt on the employee's continued employment [,] if the employer fires the employee solely to prevent the employee from getting the accrued benefits…."  The court observed that, although an employer need not comply with "good faith" in discharging an at-will employee, "an employer must comply in good faith with its 'contractual obligations.'"  The court applied agency principles in arriving at its decision.

I'm not sure I understand the distinction the court makes between exercising good faith in discharging an employee versus discharging a contractual obligation, but for me if it walks, talks, and acts like a duck, it's a duck. Welcome to the good faith in employment club, Wisconsin.


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It's a familiar enough distinction in other contracts where the termination itself is unchallengeable, because expressly the right of the party terminating, but the contractual performance leading up to the termination may be evaluated for good faith. In Sons of Thunder, Inc. v. Borden, Inc., 690 A2d 575 (NJ 1997), a sale of goods case, Borden induced some clam fishermen to fit their boats with all kinds of expensive equipment, then terminated the output contract. Borden's right to terminate was reserved in the contract and could be exercised whether in good faith or not, but its pre-termination performance was patently not in good faith: failing to communicate the decision to terminate; inducing reliance without intent to compensate; etc.

Posted by: Alan Hyde | Feb 7, 2010 10:34:50 AM

btw, in Summers, Dau-Schmidt and Hyde we found 22 states that recognized the covenant of good faith and fair dealing. And many would take Easterbrook's opinion in Jordan v Duff & Phelps as the equal of a couple of dozen lesser state courts :-)

Posted by: Alan Hyde | Feb 7, 2010 10:37:06 AM

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