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The ABCS of employee handbooks for entrepreneurs.


Every organization must have an employee handbook. Depending on the contents, an employee handbook could protect the organization or could become a damaging liability. The primary purpose of this article is to inform entrepreneurs about the significance of employee handbooks. To accomplish this purpose, we discuss a number of key elements including the benefits of handbooks, contents of a typical handbook, the effective use of clauses and disclaimers, concerns with on-line handbooks, and issues that pertain to revisions or additions to handbooks. Knowledge of these key elements and the practical advice we offer will help entrepreneurs develop employee handbooks that contain legally defensible and effective mechanisms for managing employees as well as for protecting their organizations against legal challenges.


Managing human resources is just as important to a small business as it is to a large organization. The threat of allegations of discrimination poses a significant challenge particularly for smaller organizations that do not have the resources to employ specialists, such as human resources or risk management professionals. Instead, the small business owner or entrepreneur has to deal with human resource-related activities, in addition to managing business-related activities. For instance, a small business owner must engage in several human resources activities, such as hiring employees, administering compensation and benefits, promoting employees, resolving conflict among co-workers, disciplining employees, and terminating employees.

Mistakes made in performing any of these activities will expose the small business to potential lawsuits. For instance, disciplining employees in an inappropriate manner or terminating employees in an insensitive manner could result in a discrimination lawsuit or charges of wrongful termination against the small business owner. These types of lawsuits could ruin a small business. For instance, the median compensatory award for a wrongful termination case is more than $200,000. And, since 1992, the number of civil rights employment cases filed in federal courts has more than doubled (Levin, 1998). According to the Equal Employment Opportunity Commission, in 2001 alone, businesses paid over 725 million dollars to plaintiffs who were successful in alleging discrimination.

Given the substantial awards and the litigious business environment, small and big businesses should do everything possible to avoid lawsuits. Avoiding lawsuits is particularly critical for small businesses because a single lawsuit could easily bankrupt a small business. In this regard, employee handbooks are invaluable to small businesses. Employee handbooks not only serve as a deterrent to lawsuits but a well-designed employee handbook could be used to successfully defend a lawsuit.

This article is organized into six sections. In the first section, the benefits of employee handbooks to small businesses are described. In the second section, the contents of a typical employee handbook are noted. Third, the different types of clauses are described and their effective application is discussed. Fourth, suggestions for the effective use of disclaimers in handbooks are provided. Fifth, issues relevant to on-line handbooks are discussed. Finally, the major issues to consider when revising and/or updating employee handbooks are discussed.


Employee handbooks are invaluable to small businesses. Unfortunately, many small business owners/entrepreneurs do not believe that employee handbooks are valuable, or even necessary. We conducted informal telephone interviews with 30 entrepreneurs. The size of their organization varied from 7 employees to 61 employees. Eighteen entrepreneurs (60%) indicated that they did not have an employee handbook in their organizations. To our surprise, sixteen entrepreneurs (53%) indicated that they do not see the need for a handbook. Eight entrepreneurs mentioned that they would like to have a handbook but noted that they have not had time to create one yet. If our sample were to be representative of the "small business owner/entrepreneur" population, then the results are very troubling. They are troubling because results indicate that most small businesses do not have a handbook, and worse yet, about 53% of small business owners/entrepreneurs do not see a need for, or benefit of an employee handbook.

It is apparent that small business owners/entrepreneurs do not realize that a well-designed employee handbook can help accomplish several objectives and goals that are crucial for any small business to succeed. These goals and how employee handbooks help accomplish those goals are briefly discussed next.

Share Core Values

It is important to all organizations, large and small, to share their core values with employees. An employee handbook is an important vehicle for small business owners to share their core values, philosophy, and organization's mission with employees.

Improve Morale

Employee handbooks that clearly communicate expectations, and convey that policies and procedures will be applied consistently are likely to improve employee morale. In many small businesses, a few employees are likely to develop close ties with the small business owner or entrepreneur giving other employees the perception that their employer favors some employees over others. Handbooks that indicate that all employees will be treated consistently will allay the fears of employees who are not in the "inner circle" of the entrepreneur. Of course, actions of entrepreneurs should be consistent with stated policies and procedures. When employees believe that they will be treated in a fair and consistent manner, employee morale is likely to be very high. When morale is high, employees are likely to act in ways that would benefit the company, which is exactly what small business owners and entrepreneurs desire from every employee.

Free up Business Owner's Time

Most, if not all small business owners and entrepreneurs work very long hours. Time, therefore, is a precious commodity. Most entrepreneurs cannot work any harder but they can work smarter. They need to find ways to free up time to focus on key business activities and engage in planning to ensure continued success of the organization. Thus, they should look for ways to reduce time spent on activities that do not directly contribute to the growth of business. An employee handbook can help in this regard. When policies, procedures, and expectations are in writing, employees can look up the number of sick days, or vacation days and other such benefits available to them in the employee handbook. Business owners can then spend more time focusing on business issues rather than having to respond to questions, answers to which can be easily found in the employee handbook.

Avoid Lawsuits

Lawsuits are a nightmare for every organization, particularly for a small business. A lawsuit can quickly drain the resources of a small business. In addition to financial resources, lawsuits will force the entrepreneur to direct attention away from managing the business to fighting the lawsuit. Obviously, every entrepreneur would like to avoid lawsuits. Can a handbook help in this regard? The answer is a resounding yes! Research shows that handbooks reduce the risk of being sued by an employee. An attorney of a disgruntled employee will request the employee handbook during discovery phase of building a case against the employer (Milligan, 1999). The attorney will be reluctant to file a lawsuit if rules, policies and procedures are clearly articulated in the organization's employee handbook (Farr, 1999).

Defend Against Lawsuits

Obviously a goal of a small business should be to avoid any lawsuits. But, if an employee files a lawsuit, can a handbook help? Again, the answer is yes. Consider this: if an employee who was fired for violating company policy alleges discrimination, the burden of proof shifts to the employer, and the employer has to show that the employee was terminated for a legitimate business/job-related reason (Gatewood & Feild, 2001). Employee handbooks that clearly state the policies and procedures are the best place to start for building a successful defense against such legal challenges (Milligan, 1999). Thus, an employee handbook becomes an important document that could be effectively used by a small business owner to defend against many types of discrimination charges. Small businesses that do not have a handbook with written policies and procedures will most likely not be able to put forth a strong defense. The fact that a single lawsuit could severely debilitate a small business underscores the importance of a well-designed employee handbook.

Obtain Insurance

Because of the pervasive threat of lawsuits, it makes good business sense for small businesses to purchase employment practices liability insurance (EPLI) and limit liability. According to Noreen Graham, Assistant Vice President for Becher & Carlson Risk Management Inc., most insurers are unlikely to even give a price quote for such coverage to businesses that do not have an employee handbook. In fact, EPLI applications of all insurers who offer such coverage request details about, and a copy of, the employee handbook (Howard & Jawahar, 2002). In addition, one of the factors influencing the premium for such coverage is the quality of the contents of the employee handbook (Howard & Jawahar, 2002; Levin, 1998).


In the previous section, we discussed the significance of employee handbooks to small businesses. Every small business must have an employee handbook. Typically, handbooks contain three broad sections: Information about the company, policies and procedures, and employee benefits. Contents of each section are described next. Small business owners should consider including information about their company, policies and procedures, and employee benefits in their handbooks but must customize the information to fit the needs of their organizations.

Company Information

Information about the company is usually included at the beginning of the employee handbook. Typically, a welcome letter from the owner/entrepreneur should be included. The letter is usually followed by a brief description of the history of the company. Next, a discussion of the company's mission, goals, and expectations should be included.

The company information section should be attractive and should be written to create a positive impression about the company. It should contain sufficient information to socialize a new employee to the company and its environment. Like other sections, this section should be updated as necessary.

Policies and Procedures

Policies outline the rules and expectations of the company. Many states legally require companies to include drug/alcohol, harassment, and equal employment opportunity policies in their handbooks. Some states also require nondiscrimination policies. It is important that small business owners include what is legally required as a starting point. Otherwise there is an opening for any employee, union representative, or even government regulator to press charges against the company. Small businesses could also include policies that address smoking, prohibited conduct, right to intellectual material, right to privacy, arbitration, solicitation, and dress code in the employee handbook.

Procedures outline steps or actions that could be taken if any of the policies or rules is not followed. Procedures could deal with a number of issues including safety, employee discipline, harassment, and discrimination. For instance, procedures could delineate the steps to follow if harassment or discrimination is alleged, describe the process to file a grievance, or describe actions to be taken in case of emergencies.

Mistakes to Avoid When Writing Policies and Procedures

It is important for small business owners/entrepreneurs to avoid including unrealistic or insincere policies. According to Dean Reynolds, Director of Risk Management and Human Resources at Nissan North America Inc., "failure to follow your own policy can be worse than not having a policy" (Milligan, 1999). If a small business owner does not follow a policy as stated in the employee handbook, it will not only discredit the business to employees but will also open the business to lawsuits. In addition, if owner/company suddenly decides to enforce a policy contained in the handbook, employees may have good grounds to sue the company because they had no reason to believe any of the policies would actually be enforced.

In the employee handbook, small business owners/entrepreneurs must include a clear and specific procedure that will be followed in cases of harassment. Why? The reason is simple. Courts including the United States Supreme Court have consistently favored companies in cases where a strong policy is in place and strictly followed (London, 1999). The policy should include a broad definition of harassment, lines of authority where complaints may be taken, and a clear indication of what will follow after a complaint has been lodged. Consistently following through with every complaint is the most important defense with a harassment policy. Just saying it exists is not enough; it must be followed precisely. In a national survey conducted in 1997, the median award in harassment and discrimination cases had risen nearly 300 percent to $250,000 (McAndrew, 1999). By having a good non-harassment policy, educating employees about the policy, treating each complaint seriously and taking appropriate action, small business can substantially limit liability.

Policies and procedures are critical for directing behavior of employees toward organizational goals. Companies, both big and small, rely heavily on policies and procedures to manage employees. In addition, most lawsuits either allege that the company violated its own policies or procedures or challenge the legality of the company's policies and procedures. Therefore, small business owners/entrepreneurs should consult an attorney, preferably one who has experience in either corporate law or in human resource management and compliance, review policies and procedures before publishing them in the handbook.


Some benefits, such as social security, unemployment insurance, and workers compensation, are legally required and must be included in employee handbooks. Other benefits, such as life insurance, health insurance, time off from work, and designated parking spaces may be offered to all employees, or they may be available only to select workers. Each benefit offered should be described to highlight the advantages for the employees. Employers who contribute toward retirement benefits should also include the proportion of the contribution made to the retirement accounts of employees. In general, a benefit will have more value to employees if they are able to see how much the employer actually spends to provide that benefit. An awareness of how expensive benefits are to employers is likely to build commitment and loyalty. Commitment and loyalty of employees are key ingredients for the success of any small business.

Mistakes to Avoid When Describing Benefits

Although employers should communicate the costs of providing benefits to employees, we advice small business owners and entrepreneurs to not include specific numbers or amounts in the employee handbook. Each employee's cost and benefit amount, especially for different types of insurance, will vary. This is especially true when employees are allowed to choose among different options or coverage, and when they are able to enroll their families. Only state that the benefit may be available and who to contact with questions about cost or coverage.

Some benefits, such as social security, unemployment insurance, and workers compensation apply to all employees but other benefits, such as unpaid leave under Family Medical Leave Act (FMLA) do not. For instance, FMLA allows an employee up to 12 weeks of unpaid leave for the birth of a child, adoption of a child, or to care for a family member who is ill. However, only employers who have 50 or more employees employed within a 75-mile radius are required to comply with FMLA. So, if at one location (e.g., branch office), there are fewer than 50 employees, the company is not legally required to offer FMLA benefits to employees at that location. However, if the same employee handbook is given to employees at all locations and it lists FMLA as a benefit, then even if there are fewer than 50 people employed at a particular location, the company will have to provide FMLA benefits to employees at that location (Flynn, 2000).

In a recent case (Thomas v. Pearle Vision, Inc., 2001), the 7th Circuit court of Appeals ruled Pearle Vision to provide FMLA benefits to the plaintiff even though the plaintiff was employed at a location where Pearle Vision had fewer than 50 employees. Pearle Vision had listed FMLA as a benefit in their employee handbook but had not specified the criteria for eligibility. Therefore, it is very important for small businesses to clearly state in the handbook to whom each benefit applies and what criteria will be used to determine eligibility.


Clauses are statements in the employee handbook or contract that either allow or prohibit specific behaviors. Small business owners should seriously consider the use of clauses in their company handbook. Some of the most important clauses include the at-will employment clause, non-compete clause, confidentiality clause, no-solicitation clause, and arbitration clause. If used effectively, these clauses will protect the interests of the small business owner/entrepreneur. In some states, an agreement must be signed to document that the employee has read and understood the clause. Effective use of the aforementioned clauses is described next.

At-will Employment Clause

At-will employment is an employment relationship that allows either the employer or an employee to discontinue the employment relationship at any time, with or without reason. In this relationship, no contract exists. At-will clauses must be included in the employee handbook.

In small businesses, many employees are likely to develop close ties with the owner/entrepreneur and come to take the employment relationship for granted. During tough times, if they are asked to leave the organization, they could protest or threaten a lawsuit alleging violation of an "implied" employment relationship. Therefore, including the at-will employment clause in the handbook will be a tremendous asset for a small business owner/entrepreneur.

How to Phrase an At-Will Clause

The most effective way to phrase an at-will clause is to simply state "this employment relationship is at-will." The straightforward wording will clearly convey a desire for an at-will relationship, but it will still need to be backed up by the rest of the handbook and the actions of the small business owner. Simple and straightforward wording of the at-will employment clause will minimize confusion and help avoid complications in the future. For example, some employers add that nothing verbal will alter the at-will employment relationship in any way. However, such additions enable employers to imply contracts they do not intend to complete. Because adding statements such as, "nothing verbal will alter the at-will employment relationship in any way," could be misinterpreted, such additions are unlikely to protect the employer. On the other hand, it may harm the employer by creating a warning flag to courts that the employer may have had the intention to use it to mislead employees. This is particularly applicable to small businesses because of the close ties employees have with owners and the prevalence of family atmosphere in small businesses. So, do not include such additions or modifications.

Instead, to reinforce the at-will employment relationship, owners and entrepreneurs should add the following statements to the statement that "this employment relationship is at-will."
 Nothing in this employee handbook represents a guarantee of
 employment for any length of time.

 The employer reserves the right to change, add, or delete information
 included in the employee handbook, and those changes will apply to
 all current and future employees.

 All changes will be in writing.

To make the handbook more consistent with an employment at-will clause, do not refer to full-time employees as "permanent employees" because it could be assumed that all full-time employees are permanent and, therefore, are not employed under the at-will clause. Such misuse has been known to smudge the intent of at-will employment. In contradictory cases where interpretation of the handbook conflicts with interpretation of the at-will clause, the courts will decide if the employee was hired at-will or not, and the courts are not known to be business-friendly. So do not include fuzzy language that could void the at-will clause.

The at-will clause should be included in the handbook. Employees should be asked to sign and date a form to acknowledge the at-will employment relationship. This form should become a part of the employee's personnel record. Traditionally, employers have asked that new employees sign an agreement that states they have received the manual and accept the terms within it. The signed at-will acceptance form does not replace this form. Both forms must be signed and dated and placed into the employee's file.

According to Levin (1998), in 1996, cases of wrongful termination brought a median award of $200,000 per person. The $200,000 award amount does not include the cost of rehiring and retraining the person(s) or the costs of the time and effort involved in litigation. Thus, having a clearly written at-will clause that makes employees aware that their employment is strictly at-will can save the small business owner hundreds of thousands of dollars, even if it only discourages one case from going to court.

Non-compete Clause

The purpose of the non-compete clause is to keep employees from competing directly with the company by starting their own business or working for a direct competitor, for a specific duration. The non-compete clause is usually included in an employee contract, but if it is relevant to all employees and/or there is no written contract, it could be included in the handbook. The clause acknowledges that the employee may leave the company at some point in time and prohibits the employee from going to work for the company's competition. Whenever possible, the specific companies that the employee cannot work for after leaving an employer should be identified. The intent of the non-compete clause is to prevent an employee from learning trade secrets, then selling them to the competition or using them to secure a better job with the competition. In addition, it prevents the employee from taking the knowledge and using it to create a new business that directly competes with the former employer.

When using a non-compete clause, state exactly who it includes and for what period of time. According to Retkwa (2001), these clauses are not favored in courts, and anything deemed unreasonable tends to be discarded. In 2001, PaineWebber lost two cases against employees who violated PaineWebber's non-compete clause. The court ruled the clause to be "void and unenforceable" because it required the employees not to work in an entire industry for one year after leaving PaineWebber. It is always better to identify companies for whom the employees should not work than to state that employees should not work for any company in an industry. If an employee is knowledgeable about just one industry, the clause will drastically impair his/her ability to find work, creating a significant disadvantage for the employee and his/her family. If this happens, like in the PaineWebber case, the clause will likely be thrown out. Because PaineWebber's non-complete clause was very restrictive (and void), the court also ruled that PaineWebber would not be allowed to collect back pay from the plaintiffs, which added up to over $800,000 for only one of the plaintiffs. Thus, a poorly written clause will not only be ineffective at protecting the company but will actually protect the employees.

A well-written clause will specify: (1) the companies for which employees should not work, (2) the geographical areas in which employees should not compete with the company, and (3) the time period for which an employee is not allowed to compete directly with the company for business. As a general rule, a non-compete clause should not prevent competition for extended periods of time. A reasonable time period will vary depending on the business and the nature and depth of the competition being included, but six months to one year is typical. If many companies are included as competitors to avoid, then the time period must be relatively short to compensate for the employee giving up more employment opportunities. On the other hand, if the non-compete clause only lists the two top-most competitors in an industry with many companies, the time period may be longer because the employee will still be able to find a suitable job in the industry.

Why is the non-compete clause important for a small business? Consider the following scenario. You are an entrepreneur operating a specialty store in a small town. You have a half-a-dozen employees who have been with you for many years. One of them is very familiar with your business: knows the vendors, suppliers, your cost structure, and profit margin. Would you like for this person to quit your company and start his/her own company across the street? A non-compete clause that specifies the geographical area within which the former employee cannot compete with the company could prevent this from happening. If this were a larger town with another competitor, you could specify that a former employee cannot work for the competitor upon leaving the organization for a specified period of time. Thus, the non-compete clause, when effectively incorporated in an employee handbook, will provide peace of mind for the small business owner.

Confidentiality Clause

A confidentiality clause specifies the topics an employee may discuss with certain people or, conversely, topics that should not be discussed. In jobs that involve knowledge of trade secrets and recent developments, confidentiality clauses can be used to prevent word from leaking out of the department or, worse yet, the company. It is best to let employees know that there will be negative consequences if they ask for or attempt to share confidential information.

When including confidentiality clauses, be specific about the types of information that can or cannot be discussed. If a clause could be interpreted as prohibiting the freedom of employees to talk about wages, benefits or work conditions, it is unconstitutional and, therefore, invalid. For instance, Sodexho Marriott Services' handbook implied that no confidential information could be discussed among workers. The Hotel Employees and Restaurant Employees International Union was upset because the clause did not specify what the company considered "confidential." The union was concerned that some employees could interpret the clause to mean that they could not discuss wages, benefits or working conditions. In response to the union's concern, Sodexho chose to modify the clause rather than risk their day in court. They chose to include exceptions that were not prohibited (King, 2000). Alternatively, a company could list subjects that are confidential and prohibit employees from discussing those subjects.

The confidentiality clause is particularly relevant to small businesses involved in research and development activities, such as developing new software, biotechnology, or prototypes for clients. If a key employee shares confidential information with competitors, the results can be devastating for a small business. Thus, if the nature of the business activity involves research and development activities, small business owners should seriously consider incorporating a confidentiality clause in the employee handbook.

No-solicitation Clause

A solicitation (or no-solicitation) clause defines who can and cannot solicit coworkers to support a cause, buy something, or join an organization. Generally this clause is only included when solicitation is prohibited. Legally, the clause must be all or nothing because solicitation is a method of free speech. Companies have the right to prohibit solicitation because they are paying their employees to work, not socialize or solicit their coworkers' support for a cause. On the other hand, if solicitation is prohibited, it includes selling Girls Scout cookies or collecting donations for the Red Cross. These causes are dear to the hearts of employees, and the company's support for these types of causes can help enhance employees' satisfaction with the company. Employers, who are forced to take action against employees for doing a good deed or helping a good cause, will obviously look bad.

The reason why employers use a no-solicitation clause in spite of the negative consequences is to prevent union representatives or company employees from handing out or collecting petitions to organize a union in the workplace. While the employer can express antiunion sentiments and give support for those feelings, they cannot exclusively prevent the solicitation of unions. All solicitation must be prohibited.

Therefore, only include a no-solicitation clause if you intend to eliminate all forms of solicitation. Entrepreneurs who operate businesses that are engaged in manufacturing products, fabrication, or otherwise employ individuals in "trade" jobs (e.g., carpenter, plumber, electrician) should seriously consider incorporating a no-solicitation clause in their handbooks for two reasons. First, these jobs/industries are heavily unionized, thus increasing the chance of unionization at the small business. Second, wages of unionized employees are at least 15 to 30% higher than wages of non-union employees. The increase in labor costs will significantly reduce the profit margin, and, if the small business tries to pass on the increased cost to the customer, it will place the small business at a competitive disadvantage. For these reasons, entrepreneurs should use the no-solicitation clause if there is a chance that employees might unionize.

Arbitration Clause

The purpose of the arbitration clause is to clearly communicate that any disagreements between employees and the management of the organization will be subject to arbitration by an in-house or a third-party arbitrator. The employer should obtain a signed acceptance of this clause upon hiring a new employee. Courtroom litigation costs are exorbitant. In contrast, arbitration costs are relatively modest. Companies that use arbitration could save a significant amount of money relative to companies that settle disputes in a court of law. If arbitration is used, companies are able to pay more in whatever settlement is reached and still realize cost savings. Realizing the potential to limit costs, companies even offer incentives to employees who agree to settle disputes through arbitration. It is not uncommon for companies to add a set amount, for example 10%, to the settlement if the employee agrees to use the arbitrator. Use of both in-house and outside arbitrators have advantages, so companies must research to find the best solution for them. Then they need to implement it and make it known that arbitration is their chosen method for finding common ground and resolving problems.

The arbitration clause should be displayed conspicuously in the handbook. In other words, bring special attention to the arbitration clause. That special attention can be achieved by having a signed form to indicate acceptance of the arbitration agreement (Perkins & Terman, 1999). Given the exorbitant costs associated with litigation (entrepreneur's time and money), we suggest small business owners and entrepreneurs seriously consider including an arbitration clause in their employee handbook.


Disclaimers are a special category of clauses. Traditionally, they were placed at the beginning of the handbook and contained "nothing in this handbook is contractual" or an equivalent phrase. This is a generic disclaimer, and it could mean bad news for a company because its purpose is unclear. It is a disclaimer of everything included in the handbook and makes everything eligible for change, from insurance benefits to the mission statement to the disciplinary procedures. The problem is that some things, such as the legally mandated benefits, are undoubtedly contractual--that is, not subject to negotiations.

How to Use Disclaimers in an Effective Manner

Only place disclaimers where needed

In Secretary of State for Employment vs. Aslef, the court of appeals stated that some parts of the handbook would always be enforced, making them contractual, such as benefits required by law (Aikin, 1998). So a generic disclaimer that says nothing in the handbook is contractual would be inaccurate and, therefore, void. Procedures must be clearly labeled as contractual or not, or their meaning will be decided by the court that decides the case. So the disclaimer must be placed in the section to which it pertains and must clearly state that its validity is for that specific section only.

Use disclaimers consistently

In the case of Leahy vs. Starflo Corp. (see Martucci & Smith, 1997), the disclaimer included in Starflo's handbook was deemed inappropriate because it was not published in the "disciplinary procedure" section of the handbook and because the company privately stated that the disciplinary steps should be followed by all supervisors. If supervisors are told to follow every step of the procedure every time, then the procedure, not the disclaimer, is relied upon and followed, making the disclaimer false. The disclaimer must be followed and supported by all actions to be credible and upheld in a court of law.

Almost every employer is confronted with situations that require invoking disciplinary procedures. Because of their widespread use and the significance of using disclaimers in an effective manner, we discuss how to describe disciplinary procedures in the handbook and at the same time avoid any liability by incorporating disclaimers in an effective manner.

Disciplinary Procedures

Disciplinary procedures should be outlined in the handbook, but not in great detail and never as progressive steps that will be followed every time. If the disciplinary procedure is described as a series of progressive steps, then the employment will not be at-will, and termination of an employee for a first but serious offense will become extremely difficult. The employee could argue that the company failed to afford him/her due process--that is, did not use the step-by-step disciplinary procedure before terminating him/her.

Every handbook should contain a section on disciplinary procedures. To preserve the at-will employment relationship and at the same time have an effective and legally sound disciplinary procedure, organizations should follow the suggestions offered below.

Never list disciplinary procedures as a series of progressive steps (e.g., verbal warning, written warning, suspension, termination). Doing so implies that every step will be followed. Not every violation is going to get a simple verbal warning. For example, assault of a coworker is going to receive a harsher punishment than arriving five minutes late on one morning. The discipline section needs to make this point clear so people know what to expect. Make it clear that the consequences for infractions will depend on the nature of the infractions and are completely and entirely at the discretion of management. If on the other hand, the steps are described as progressive, employees will expect every step to be followed before they are terminated. If the employer does not follow the steps in the sequence listed in the handbook but terminates an employee for gross misconduct, then the employee could have a strong case against the employer for breach of contract.

The best alternative to listing disciplinary procedures as a series of progressive steps is to describe and depict the process as a cycle of possible actions. According to Falcone (1999), California courts have ruled that if the handbook implies there are specific steps in due process, the employment is no longer at-will, meaning a terminated employee can sue because a step in the list was skipped. If the procedure is created as a cycle, it may start at any point and progress to any other point. This representation helps when explaining that every step may not be followed and the inclusion of a step is only to show that it exists and is available for the management's use. To accomplish this, place all the options for discipline around the edge of a circle. Do not include a start or end point. They should not be placed in any specific order, as that would imply a steady progression. Then use the circle to decide which option would best fit each individual's misbehavior.

When describing and depicting the disciplinary process as a cycle of possible actions, be sure to include an "other" category as a possible action. Including such a category will be particularly important if the organization believes in adjusting the penalty to fit the crime. For example, if an employee walks out of the office with a company pen every day, the penalty could be to require the employee to bring in a new box of pens once a week. Although it may seem childish, adapting penalties to fit the misconduct can actually be an effective deterrent. This method works well with minor infractions that create an annoyance but are not yet problematic. It also is useful because it affords the small business owner the flexibility necessary to handle situations on an individual basis. Since it is impossible to foresee all possible infractions, providing the small business owner some discretion by leaving an "other" category of discipline makes sense.

Employers often list actions that would prompt disciplinary proceedings. If you list actions that will result in disciplinary proceedings, state very clearly that the list is illustrative and not exhaustive. That is, the list only contains a few of the possible actions that will be punished and the company reserves the right to punish any and all indecent and inappropriate behavior. This disclaimer is necessary to protect the company in cases where an employee engages in an inappropriate behavior that is not contained in the list. Using such a disclaimer is important because it is impossible to include every possible inappropriate behavior/action, and it protects a company's right to take action against employees who engage in inappropriate behaviors not included in the list of punishable behaviors and actions.

Why is use of disclaimers in the handbook important for small businesses? Consider the following scenario. As the owner of a small business you fire an employee because you suspect the employee is stealing money from the cash register. If you don't have an employee handbook and cannot document the theft, you are likely to have difficulty mounting a strong defense if the former employee alleges wrongful termination. If you had an employee handbook but had listed the disciplinary procedure in a step-by-step fashion (e.g., verbal warning, written warning), you could lose the case, especially if this were the former employee's first offense. On the other hand, if you had described the disciplinary procedure as a cycle of possible actions including termination, you are likely to have a much stronger case against the former employee. Thus, it makes sense for small businesses to use disclaimers. We urge small businesses to follow the recommendations we have offered on how to describe the disciplinary process and also list possible actions against infractions of company's policies and procedures.


The increase in the availability and ease-of-use of new technology has resulted in many employers posting their handbook on the company's intranet or in a storage area on the internet. Organizations, particularly small businesses, must consider a number of issues before resorting to posting employee handbooks on-line. A few of the more important issues are discussed next.

First, employers, especially small business owners, have to realize that on-line handbooks may not be accessible to employees who do not have access to computers and/or the internet. Many employees do not use computers often enough to warrant purchasing one, so they would still need a written handbook to be provided. In addition, if the handbook is on the intranet, employees will not be able to access it from outside the company, so everyone will also need a written handbook. Employees who travel frequently may not have access so they would need a physical handbook. Basically, a physical handbook would have to be provided in addition to the net link. So, in most cases, it will not be possible for employers to only have an on-line version. Since hard copies may also be required, posting handbooks on-line does very little to eliminate the publishing and printing costs associated with the traditional (paper) employee handbook.

Second, changes employers make to a virtual handbook can be very hard to document. All employees need to somehow be notified that a change has been made and must somehow give their consent to the change. Documentation is important because a physical signed consent is easier to uphold in court than a reply to a mass email. In addition, if employees also have a printed version, updated sections must still be sent out to replace the old sections in the printed handbook because every employee cannot be expected to manually change the handbook. And if the change is not made and employees continue to use the printed handbook, they could be looking at outdated and invalid information. In the end, they could blame the employer for not providing the change in the handbook. Also, whenever changes are made, employers have to print the changes, affix a date to the changed material and store it. Because adjusting a virtual handbook is so easy, there is a chance the change would not be printed out, dated, and kept. That chance is risky because without the physical proof that a change had been implemented on a specific day, the employer could be required to follow the unchanged version.

Third, employers should be concerned with the security and integrity of the virtual handbook. Anyone can browse and read material on the internet. A password could be issued to access the handbook, but if someone wants to access it, they could figure out the password. If employees are allowed to print the on-line handbook, then the employer has no way of controlling who has that information about the company and cannot prevent an employee from taking that information with him/her after the employment relationship has ended. Also there is a chance of someone breaking through the security restrictions and making unauthorized changes to the handbook. If those changes are not caught right away, employees could follow them, possibly with disastrous results. Thus, the disadvantages far outweigh the advantages of using virtual handbooks, especially for small businesses. For these reasons, we strongly urge small business owners and entrepreneurs to not use online handbooks.


Employers should periodically review the contents of the employee handbook. At a minimum, handbooks should be reviewed at least once a year. From time to time, it may become necessary to revise, update or add new policies, procedures and benefits. When making changes to the employee handbook, employers should engage in two very important actions.

First, they should print the section or sections that were revised, record the date the changes will go into effect, and make sure that every employee receives a hardcopy of the changes in a timely manner. It is always a good idea to require employees to read the revised sections and endorse their signature to acknowledge receipt and awareness of the changes made to the handbook.

Second, employers should provide "consideration" when substantive changes are made to existing policies or when a new policy is added to the handbook. Consideration must be given to employees in return for their signature of acceptance of a new handbook. Historically, courts have treated "continuing to work" as "acceptance" of the policy, but in a recent case, Doyle vs. Holy Cross Hospital, this precedent was reversed. The hospital had added a unilateral at-will doctrine to the handbook. When the plaintiffs were dismissed without a reasonable cause, they claimed they had never agreed to the at-will statement in the updated handbook. The court found for the plaintiffs, stating that they did not receive anything in return for giving up something. Therefore, a contractual agreement had not been made, and the plaintiffs were still employed under the old handbook (Jenero & Schreiber, 2000).

Thus, it is important for every business to periodically review the handbook, consider if updates or revisions are necessary, and evaluate if the changes merit use of "consideration." These issues are relevant to small businesses also because just like larger businesses, small businesses also grow in terms of number of employees and diversity of their operations. Such changes may require changes or revisions to the employee handbook.


Every organization must have an employee handbook. Employee handbooks are particularly valuable to small business owners. Small business owners can use the handbook to share core values with employees, improve morale, and negotiate affordable premiums for EPLI coverage. In addition, a well-designed handbook will most likely deter frivolous lawsuits; at the very least, it will serve as the first line of defense against lawsuits. Alternatively, not having a handbook or having a poorly designed handbook will become a damaging liability for a small business. In 1995, $35 billion was spent on litigation costs and rulings (Slate, 1995). A national survey conducted in 1997 found the median award in wrongful termination and discharge cases to be $162,500. The mean, which may be skewed by unusually high awards, was $461,745. These figures do not include attorney fees, which could be as high as $200,000. Punitive damages are awarded to over a third of discrimination and harassment claimants, and the amount of awards has been steadily increasing (McAndrew, 1999). By following the suggestions offered in this article, small business owners can develop an effective and legally sound employee handbook.

No handbook will be completely foolproof. However, the goal should be to foresee and eliminate as many potential problems as possible before they arise. In addition to following our suggestions, small business owners are advised to have an attorney check the handbook before it is published to catch legal errors and disputable areas. Such mistakes could present openings to employees to sue the company for creating false expectations, breach of contract, or wrongful termination. Legal advice will help avoid any problems that may have occurred unknowingly in the handbook making process. The farther a problem goes, the more costly it gets. In litigation, a company is lucky to get off with a warning and court costs. Most often, in addition to court costs, companies end up providing back pay and benefits, rehiring wrongful terminations, and paying punitive damages or corporate fines.

One simple error could mean hundreds of thousands of dollars in legal fees and litigation or arbitration. If a complaint makes it to court, the employee has more than a fifty-percent chance of winning. A single lawsuit could threaten survival of a small business. Remember: an ounce of prevention is worth a pound of cure. Prevent employee complaints by using suggestions offered in this article and by obtaining legal advice before publishing an employee handbook because, as stated above, the cure can be very expensive.


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I.M. Jawahar, Illinois State University

Stacy Gavin, Illinois State University
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Author:Jawahar, I.M.; Gavin, Stacy
Publication:Entrepreneurial Executive
Geographic Code:1USA
Date:Jan 1, 2003
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