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When Is A Personnel Manual A Contract?

April 1993

Employers often rightly fear that when an employee is being terminated, a lawsuit is in the offing. The number of cases brought each year by former employees against employers, alleging some form or variant of wrongful termination, seems to go in only one direction: up. Nothing an employer can do will completely prevent an employee from filing suit. However, an employer can do much both to minimize the risk and to put itself in a stronger position in the event it is faced with litigation.

One of the tools an employee often will use in litigation against his or her former employer is the employer’s personnel manual. This is because, under certain circumstances, the personnel manual may be considered to be a contract between the employer and employee, regardless of whether the employer ever intended it to have this effect. If the employer has deviated from the procedures or rights described in the manual, the employee may have a claim for breach of contract.

A recent case decided by the First U.S. Circuit Court of Appeals in Boston sets forth practical guidelines for employers that want to reduce their vulnerability to such a claim. In this case, Pearson v. John Hancock Mutual Life, Pearson had been an at-will employee of Hancock. He claimed that Hancock was required to hire him back following a six month leave of absence, because Hancock’s personnel manual stated that Hancock would try to place an employee seeking to return from a leave of absence in the job most comparable to his or her last job. When Hancock did not rehire Pearson following the leave, he brought suit. The only claim (of several) that made it to the jury was the claim that Hancock had breached its contract embodied in the personnel manual. The jury awarded Pearson $345,000 on this claim.

The Court of Appeals reversed, holding that the personnel manual did not constitute a contract between Hancock and Pearson. Applying Massachusetts law, the federal court held that six factors must be evaluated in considering whether a personnel manual is a contract. Using these six factors as guidelines, the following rules should be followed by an employer who does not wish for its personnel manual to be considered a contract.

1. Employer’s Right to Modify. The manual should expressly state that the employer retains the right to modify the manual at any time. This is simply a matter of making the necessary disclaimers in the manual, preferably up front and in prominent type. For example, the manual might state that the employer “retains the right to revise, suspend, or cancel in whole or in part any of the policies appearing in this manual without advance notice.” It helps even further if the employer has, in fact, made occasional changes to the manual.

2. Firm Commitment. The manual should not make a “firm commitment,” but merely provide “guidance” regarding company “policies.” Again, this is primarily a matter of controlling the language in the manual, to avoid making it overly committal.

3. Employer/Employee Negotiations. The employer should not negotiate with employees over the contents of the manual. For example, the employer should not bargain with a committee of employees designated to represent the employees against management in the creation of a personnel manual.

4. Special Attention. The employer should not call “special attention” to the manual. This may be hard to do, without eliminating the reason for the manual altogether. However, failing on this factor alone should not result in a contract.

5. Employee Assent. The employee should not be asked to manifest assent to the terms of the manual by, for example, signing a page in the manual or a document that references the manual.

6. Period of Employment. The manual should not state that employees are entitled to a specific term of employment. Every employee manual should contain a prominent statement that unless an employee has an individual employment contract with the employer, he or she is an employee-at-will, and either the employer or the employee may give notice of termination at any time.

The Court of Appeals found that Pearson’s case had failed on four out of six of these factors, and therefore the jury’s verdict was reversed.

TLB Comment : Employers will go a long way toward defending against a claim that a personnel manual is a contract simply by following points 1, 3 and 6 — asserting the right to modify, not negotiating the manual with employees and stating in the manual that all employees without a contract are at-will employees. In addition, although not mentioned by the court in the Hancock case, employers should avoid making unqualified promises in their personnel manual – every employer obligation not required by law should be described as being at the discretion of the employer.