H. Implied Covenants Of Good Faith And Fair Dealing

Courts in California, Montana, New Hampshire, Massachusetts and Wisconsin, among other states, have further eroded the "at-will"by imposing a duty of good faith and fair dealing on long-term employment relationships. This applies especially in situations where longtime workers are fired before receiving anticipated benefits such as accrued pension, profit-sharing or commissions. Workers with seniority sometimes receive large monetary damages after proving this covenant was violated. For example, one man with 40 years of service claimed he was fired so his company could avoid paying commissions otherwise due on a $5 million sale. A Massachusetts court agreed and awarded him substantial money (lost compensation for predictable policy renewals), even though he had been hired at will. Another employee was fired after working 13 years without a written contract or job security guarantee. However, the court ruled that the company had fired him merely to deprive him of the vesting of valuable pension and other benefits (e.g., stock options) in his fifteenth year of service. The employee was awarded $75,000 in damages.

Typically, the employer's duty to act in good faith and fair dealing applies only to cases where an employee has been working for the company for many years or where the person is fired just before he or she is due to receive anticipated financial benefits. In one recent case, however, the Montana Supreme Court reasoned that the covenant of good faith and fair dealing is imposed by law. The court upheld a $50,000 jury award of punitive damages (more than 25 times the compensatory damage award) because the employer had promised to write a favorable letter of recommendation in exchange for the employee's resignation. Despite this promise, the employer delivered a letter of recommendation merely stating the complainant's dates of employment. In addition, the employer only returned a copy of the letter of resignation despite the employee's request for the original. These actions, the court found, justified the jury's finding of "fraud, oppression, and malice."

TIP: Actual cases support the right of employees to re- ceive the fruits of their labors. Recognize, therefore, that if you fire someone just before he/she is due to receive anticipated benefits, and the firing is not justified (for cause), the person may be entitled to damages.

However, not all longtime workers are entitled to such protection; each case varies depending upon the facts. If a company fires someone for a valid reason, the fact that he/she has been with the company for a substantial period of time or is eligible for a substantial benefit may not make the firing illegal under a covenant of good faith and fair dealing theory.

Sales Rep Protection Statutes

Even if the firing is legal, it is important always to pay earned compensation (wages, accrued vacation, commissions, etc.) to avoid wrongdoing. For example, most companies are unaware of the growing trend in many states to require prompt payment of commissions to independent sales representatives (also called agents or brokers) who are fired. Failure to pay promptly may leave companies liable for penalties typically up to three times the commission amount, plus reasonable attorney fees and court costs if the case is eventually litigated.

Some statutes even require that a formal written contract be issued and executed with each person selling products or services on an independent-commission basis. These agreements must specify the method by which commissions are computed and paid, and a signed copy must be given to each salesperson upon hiring.

Since exemplary damages and counsel fees are now being awarded regularly to successful sales reps who do not receive earned commissions within days after the commissions are due or they resign or are terminated, companies must be careful to pay commissions on a timely basis to avoid such penalties. Furthermore, it is essential to maintain proper books and records and give reps a proper accounting of commissions owed. Now companies must be aware of these laws (which govern in the state where the rep, not the company, is located) to avoid litigation in this area.

Counsel Comment 131: Companies can employ several strategies to reduce the harsh effects of such laws by:

1. Being mindful of demands received for commissions owed. All claims for commissions (particularly demands received in writing), should be investigated and responded to immediately by the company to avoid additional liability. This must always be done, especially if no money or a lesser sum is owed. Send the response via certified mail, return receipt requested, to prove delivery. This will help demonstrate your company's good faith and can minimize the imposition of additional damages and penalties by proving there was no willful intent to deny earned commissions to the salesperson.
2. Executing written contracts with all of your reps, even if the law in your state does not require them. Written agreements reduce confusion and clauses can be drafted to favor the company in many areas.
3. Considering including an arbitration clause in all of your rep agreements. Specify that all controversies will be settled in the city where the company is located, rather than where the rep resides or does business. This may force out-of-state reps who wish to sue in a distant locale to come to your state to proceed with their claims.

Other Exceptions To The Employment-At-Will Rule

Each state has its own laws regulating firings due to absences from work caused by disability, maternity leave, jury duty, voting, bereavement and other factors beyond an employee's control. You must know the particular law in your state to be sure that you are not in violation when firing someone. Further, be careful to apply firing policies consistently throughout the company.