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If you enter into a formal employment contract with an employee (or a union contract with a group of employees), you'll frequently specify in the contract the proposed length of the employment relationship and the reasons for which either party can end the relationship. In other words, the contract's terms will generally govern your ability to fire the employee, as well as the employee's ability to quit. If either party attempts to terminate the relationship in violation of those terms, a potential breach of contract claim arises.
Assuming that a formal contract does not govern your employment relationships, as is generally the case, what limitations restrict your ability to fire your employees?
Employment-at-will doctrine. In all states other than Montana, such relationships are governed by the "employment-at-will" doctrine. "Employment-at-will" means that there's a presumption that the employee is employed at the employer's will for an indefinite period rather than for a fixed term.
Montana law has abolished the "employment-at-will" status. In Montana, an employer can fire an employee who has completed a probationary period only for good cause. "Good cause" is defined as reasonable job-related grounds for dismissal based on a failure to satisfactorily perform job duties, disruption of operations, or other legitimate business reason.
Traditionally, both the employer and the employee have had the ability to end an at-will relationship at any time and for any reason. However, at least from the employer's perspective, the unlimited freedom to fire at-will employees at any time for good cause, bad cause, or no cause at all has been eroded in recent years by the federal and state governments and the courts. The exceptions that these institutions have carved into the employment-at-will doctrine form the foundation for most wrongful discharge claims, in which employees sue you for lost wages, punitive damages, and occasionally, reinstatement in their job.
- Limitations in written laws: Numerous federal and state laws potentially restrict an employer's ability to fire at-will employees. These laws fall into two general categories. The first category consists of those laws that make it illegal for employers to discriminate against certain individuals. The second category consists of laws that make it illegal for an employer to retaliate against employees who exercise rights conferred by the laws or who take steps to see that the laws are enforced.
Courts, too, have taken steps to limit an employer's ability to fire at-will employees. In doing so, they generally rely on one of the following theories:
- The implied contract limitation: A statement or document from the employer effectively created a formal employment contract where none previously existed. For example, stating that employees will be fired only for good cause in your handbook may form the basis for such an "implied" contract.
- The public policy limitation: The firing goes against "public policy" by infringing on some right granted employees by federal or state law or because it is otherwise morally or socially wrong. For example, firing an employee merely for filing a workers' compensation claim is illegal.
- The bad faith limitation: The few courts that have relied on this theory presume that employers are generally obligated to deal fairly and in good faith with all their employees. For example, firing an employee for the sole purpose of denying the employee a bonus that the employee has earned but not yet received may be unlawful in some states.