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Right approach to avoiding wrongful discharge.

Right Approach to Avoiding Wrongful Discharge

Wrongful discharge is the generic name applied to a variety of claims that can be lodged against an employer by a former employee. Breach of contract, bad faith and discrimination on the basis of age, sex and race are often-heard allegations. It is under these accusations that plaintiffs claim emotional stress and economic loss, seek punitive damage awards and pursue associated workers' compensation claims.

Wrongful discharge is an area of increasing judicial and legislative activity. Statutes that address these considerations include the Civil Rights Act of 1964, the Occupational Health and Safety Act and the Foreign Corrupt Practices Act. However, the notion of employment "at will," which is central to wrongful discharge cases, can be traced to H.G. Wood, a legal commentator who wrote "The Law of Master and Servant" in 1877.

Briefly stated, Mr. Wood described an employment relationship without a specified length that may be terminated at any time by either employer or employee. The concept received little attention until 1980, when a Michigan court in Toussaint v. Blue Cross & Blue Shield pointed out that none of the four cases cited by Mr. Wood support the doctrine. Since that time, a great deal of legislation has been written and the courts have heard many cases on the issue.

Types of Litigation

A wrongful discharge action may first be detected when an employee makes veiled, or even specific, threats at the time of separation. Alternatively, a case may arise from a notice that a complaint has been filed with the state's Equal Opportunity Employment Commission or that a lawsuit has been served. No matter how a case originates, it will generally fall into one of three categories of litigation: the public policy exception to the doctrine of employment "at will," the implied-in-law covenant of good faith and fair dealing and the implied-in-fact terms of the individual employment relationship.

In Thompson v. St. Regis Paper Co., a Washington court upheld the "at will" doctrine, but created the public policy exception to avoid the harsh consequences imposed by law. The court recognized wrongful discharge as a cause of action in tort "if a discharge of the employee convenes a clear mandate of public policy." In this case the employee was discharged after instituting proper accounting procedures, and the court found the discharge to be tortious. In addition, a New Jersey court in Pierce v. Ortho Pharmaceutical Corp. gave notice to a professional code of ethics, and a California court in Tameny v. Atlantic Richfield Co. held in favor of an employee who refused to join a price-fixing scheme.

The implied-in-law covenant of good faith and fair dealing has been used to relieve the harshness of the "at will" doctrine. Rooted in contract law, this so-called bad faith exception asserts that in every employment contract there is an implied agreement by both parties to act in good faith and deal fairly. Courts have found that the covenant can limit employer discretion to terminate an "at will" employee.

In Foley v. Interactive Data Corp. the California Supreme Court found that the covenant of good faith and fair dealing implied in contracts of employment is a remedy in contract, but not in tort. Therefore, recovery is limited to back pay, loss of future pay and reinstatement. The decision effectively eliminates emotional distress and punitive damages. Intentional infliction of emotional distress and such actions as defamation remain in tort.

Implied-in-fact terms of employment differ from the other categories in that it relies heavily on the actions and words of the two parties to determine what terms and conditions were intended to govern the employment relationship. Thus, the original terms of "at will" employment can be modified by written materials such as employee manuals. Even verbal assurances can be held to alter the "at will" doctrine. In Towns v. Emery Air Freight the court found that an employee manual statement that employment was "at will" was invalid because of a subsequent disclaimer to the statement.

A discussion of wrongful discharge would not be complete without mentioning the disparate impact and disparate treatment theories, both of which are tied to notions of discrimination. To prove disparate impact, the plaintiff must show that an employer's policy or requirement had an adverse impact on a disproportionately large number of persons belonging to a protected minority group of which the employee is a member. The employer may rebut that the policy or requirement is necessary for operating the business. Moreover, in disparate impact it is not necessary to show that the employer acted intentionally, an important consideration when seeking insurance.

Disparate treatment, on the other hand, is based on intent. It describes purposeful discrimination against a particular minority group of which the employee is a member. One or both of these theories are often cited in wrongful discharge pleadings.

Investigating a Case

Investigations stemming from wrongful discharge allegations can be the most interesting and challenging aspects of risk management. In launching such an investigation, one of the primary considerations is to establish a close, cooperative relationship with the defendant firm's top management. Access to company personnel and records will determine the quality of the final report, an important element in the company's defense.

Establish confidence with company employees. These investigations often uncover areas that they would prefer not to discuss. They may think that disclosures of company practices and the behavior of certain personnel will hurt their own careers.

To overcome these anxieties, explain that disclosing all relevant facts to the investigator is in the best interests of the company because it ensures that the claim is properly handled. Also, explain that candor from the employee witness now may preclude the necessity of a cross-examination later. Most people will be anxious to avoid an investigation by a hostile lawyer in a deposition or trial.

Employees should also be counseled that their failure to fully disclose the facts of a wrongful discharge allegation early on may exacerbate the company's problems later. Be aware that personnel may attempt to sidestep or shift onto others their own culpability regarding questionable actions in the case. Employees with these fears should be handled with tact, reassurance and broadmindedness by the investigator and company management.

What Policies Apply?

All the basics of coverage analysis are involved in reviewing the insurance coverage of a wrongful discharge claim. Start with a careful examination of the insuring agreement, reviewing its exclusions, notice provisions, definitions and terms. One important matter is the definition of an occurrence, which is an accident that results in bodily injury or property damage, neither of which is expected or intended. Thus, intentional acts are not afforded coverage. A Washington court in E-Z Loader Boat Trailers Inc. v. Travelers Indemnity Co. differentiated between disparate treatment and impact in examining this issue and found that there had been disparate treatment which equated to an intentional act. Coverage, therefore, was precluded.

Occasionally, a wrongful discharge complaint will include specific inclusions of bodily injury. But a more troublesome problem concerns the question of coverage for emotional distress as opposed to bodily injury, illness or disease. Distress complaints are usually couched in terms of intent, malice and willfulness, but the claim examiner must address the question of intent with respect to the defendant's activities or acts. In other words, the defendant may have intended to exercise a specific policy or perform a specific act but did not intend harm to result. Therefore, the result was not an intended act and coverage may be invoked.

In the E-Z Loader case, the court pointed out that the complaint was so broad that it failed to define whether or not the action was intentional. Therefore, the carrier was charged with investigation of the claim and defense of the ensuing action. It is common for a complaint to delineate several liability theories, some of which may or may not be clearly covered. The carrier must then determine how to proceed with the lawsuit. In many cases the best course of action for the carrier is to protect itself under a reservation of rights filing and defend the lawsuit.

Normally, the general liability or comprehensive general liability policy does not cover wrongful discharge claims. The excess or umbrella policies providing coverage tend to follow the underlying policies in not providing coverage in these cases. Some recent general liability policies carry a broad form personal injury endorsement that invokes coverage for discrimination. However, the typical personal injury endorsement is specific in providing coverage. These endorsements are analogous to "specific perils," rather than a general offering of liability coverage. Traditionally, personal injury endorsements do not provide protection from discrimination.

Some carriers have defended wrongful discharge cases under their directors' and officers' policies. While this policy does not cover bodily injury, neither does it exclude coverage for emotional distress. Thus, while it is unlikely that D&O coverage was intended to provide protection in this body of law, it does by way of what it fails to exclude.

Wrongful discharge cases may involve employee benefit policies. The thrust of the claimant's case, and therefore the avenue to resolution, depends on the written employee benefit contract. These vary widely, and it would not be unlikely to find more than one benefit contract involved in the claim. Some of the common allegations in these claims are breach of contract, intentional attempts to avoid paying employment-related benefits and negligent administration of employee benefit programs.

It is incumbent on the claim investigator to fully understand the defendant's insurance program, regardless of carrier or type of coverage. Often the result is unsatisfactory to both the carrier and the insured. Court records are replete with declaratory judgment actions and bad faith awards against carriers that have erred in their determination, or lack of determination, of insurance coverage.

A carrier may also find itself charged with proceeding with a case until it becomes clear that the matter is not covered within the framework of its policy. Ironically, this fact may not emerge until the end of a trial. In such instances the carrier finds itself saddled with the duty to defend a situation in which there is ultimately no duty to indemnify the policyholder.

Selecting an Attorney

Employment law is a relatively narrow discipline, but one filled with unexpected and intended occurrences. The fact that a trial lawyer can cite in-depth experience in tort and workers' compensation cases does not mean that he or she is effective in this area. While in many instances the final selection of counsel will rest in the hands of others, such as the defendant's home office, the claims analyst still has the duty to acquaint the defendant's decision-makers with the relevant facts.

Before undertaking a counsel search, one should be at least casually aware of those defense attorneys currently practicing employment law in the jurisdiction. Referrals should be sought from the defendant's corporate counsel and perhaps the company's workers' compensation and liability defense attorneys. Employment law cases beg for immediate referral to counsel, so the defense counsel can begin work on the investigation.

In cases in which suit has not yet been brought, but is expected, the need for legal representation is immediate. Historically, few claims have been made without filing a lawsuit, and plaintiffs' attorneys are more inclined to push the matter to trial than in the case of traditional liability claims. The seeming inevitability of courtroom action, together with the sensitivity of the subject matter, cry out for protection of the investigatory work from the start.

Settling the Case

After a thorough investigation and an objective analysis of the facts, an approximate settlement value should emerge. This is important because, due to the sensitive nature of these cases, out-of-court settlements are not often disclosed. Even when settlements are disclosed, they should not be taken at face value because there are frequently post-trial adjustments.

Still, gathering information relating to arbitration and jury awards in similar cases can be helpful in guiding the case at hand. But because these cases are characterized by their volatility, be careful to compare the special circumstances of the case with patterns established in other settlements. The age and sex of the plaintiff, the position held by the plaintiff at the time of discharge, the venue and the cost of defending the case are all factors that come into play. There may also be special business considerations on the part of the employer that deserve mention in the final evaluation. Remember to look into all of these factors.

Finally, when faced with a wrongful discharge allegation, remember that the criteria for evaluating these cases are similar to those in other liability actions. A possible exception is the absence of bodily injury, which comprises a large part of liability cases. Still, by knowing the intricacies of wrongful discharge cases, the risk manager can head off serious losses.

David W. Meyer is corporate claims analyst with Seattle-based Scott Wetzel Services Inc.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Meyer, David W.
Publication:Risk Management
Date:Sep 1, 1990
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