Saturday, November 20, 2004

Knee Jerk Under-Reaction

One of the problems with blogging is the pressure to react swiftly to new developments. Often, this leads to comments which may a little too heated than would be the case if some time had passed to allow measured reflection.

However, after further consideration of the Court of Appeals' opinion in the Conte case, I think that the opposite might have occured. Upon reflection, I think that my comments were not critical enough of the Court's action.

The Court's opinion squarely presents what might be called a "theoretical defect." That is, the majority opinion undercuts the principle of the objective interpretation of contracts. Instead of determining what the parties meant by certain terms in a contract (i.e., what constitutes cause), factfinders in employment contract disputes are limited to:
determin[ing] the objective reasonableness of the employer’s decision to discharge, which means that the employer act[ed] in objective good faith and base[d] its decision on a reasoned conclusion and facts reasonably believed to be true by the employer.
However, the Court's reasoning is also faulty with respect to the perceived need of businesses to be able to act with certainty when discharging employees.

First, except for top actors and professional athletes, employers almost always have the upper hand when negotiating an employment agreement. Even a little knowledge of game theory will tell you that if the employee holds out for better terms, he or she is risking 100% of a limited and irreplacable resource, his or her time. The employer, on the other hand, more often than not has the luxury of walking away from the negotiating table and simply seeking another employment candidate. Thus, the employer is in a position to demand a contract with more and larger escape hatches. Where, as in Conte, the employer agrees to a contract with a limited set of escape hatches (i.e., the employer could only terminate the employee for cause), the courts should presume that the employer knew what it was doing and enforce the contract according to its objective terms.

Second, and perhaps more importantly, is what I will term the "HR Problem." It is simply this: Most employers with even a modest number of employees have, at the least, a "human relations" staffer if not a "human relations" staff or department. As a consequence, there is an institutional dossier regularly kept on the employee's job performance. Every failure to perform can be reflected in this dossier--every instance of tardiness, every instance where the employee lost his or her temper, every act of performance with any job task that someone acting for management thought was less than par. Of course, this dossier will have a management spin on it, with each story told from the perspective of the employer. Few employees keep a analogous record of their successes.

In the event that the employer decides to terminate the employee, the employer is well armed for any lawsuit alleging that it breached the employment contact. Each failure of the employee recorded in his or her personnel file (and even the best employee will have some failures) will be the subject of close scrutiny and thus magnified. After the fact, given a detailed, but employer-biased, employment history, duly recorded in the ordinary course of business, most factfinders will likely conclude that the employer acted reasonably.

I am not moved by the argument that a rule allowing the factfinder to examine whether there truly was cause for termination would cause the courts to act "as a super personnel officer, or of second-guessing a company’s decisions." Most cases, after all, result in a compromise settlement. I suspect that this is as true of employment contract disputes as it is with other sorts of litigation. The Court's opinion seriously weakens the employee's ability to negotiate a honorable termination of the contract. After all, in most cases, it will be the employer who has shuffled and then cut the cards. And, given the disparity in negotiating power, it will be the employer who gets to deal the cards as well. At the least, the employee should be entitled to have an impartial arbiter determine whether the shuffle was clean.

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