Is your employee handbook a binding contract? A recent case from the Alabama Supreme Court, Davis v. City of Montevallo, says sometimes it is. Many employers issue handbooks to set forth guidelines for what employers expect of employees, and also what employees can expect from their jobs. In at-will employment states, companies think of handbooks as simple guidelines for employment terms but not contracts. But instead of serving as a resource for consistent application of policies, those guidelines can sometimes be treated as binding contracts.
In Davis, the handbook had a disclaimer that the employees were all at-will and the handbook was not a contract for any specific term. When the city terminated employee Ed Davis, it did not follow the termination procedures in the handbook. Davis said the city had to follow those procedures.
When Is a Handbook a Contract (at least in Alabama)?
The court opined that the handbook’s discharge procedures created a binding obligation, and the city had to follow them. In concluding that the discharge procedures were “specific enough to constitute an offer,” the court emphasized the detailed, step-by-step procedures and repeated use of mandatory language (i.e., “shall”). The court also rejected the argument that interpreting the discharge procedures in the employee handbook as a binding contract was at odds with the concept of at-will employment because, according to the court, the reason for terminating employment is distinct from the means used to terminate employment. So, the city could terminate Davis for any or no reason (as long as it wasn’t an illegal reason), but it had to follow the handbook’s termination procedures.
Next, the court rejected the sufficiency of the handbook’s disclaimer, which provided:
“nothing in this handbook can be interpreted to be a contract for employment for any specified period of time.”
The court found the disclaimer too specific because it disclaimed only any particular duration of employment and did not disclaim all potential contracts that might be formed under the employee handbook. The court also rejected the argument that there was no contract because language stating that the handbook could not be interpreted to “place a limitation on [the employee’s] freedom or the [employer’s] freedom to terminate the employment relationship at any time.” Again, the court found that the city following the discharge procedures did not place a limitation on its freedom to terminate Davis. Finally, the court found that the city’s right to modify the terms of the employee handbook at any time did not preclude a finding of a contract.
What if You Are Not in Alabama?
While the Davis case is a good recent reminder to review our handbooks, this principle is not brand new. Older opinions from other courts also emphasize the importance of clear disclaimers. For example, Florida appellate courts have consistently held that specific language expressing parties’ mutual agreement in an employee handbook can give rise to a contract. Additionally, at least one federal district court applying Florida law has allowed a claim for breach of an employee handbook to proceed where the party seeking dismissal did not point to any disclaimer language. Likewise, in Tennessee, where the courts have recognized a high bar for an employee handbook to give rise to a contract, the Tennessee Supreme Court has noted that there is “no clearer way for an employer to express its intent not to be bound by an employee handbook’s provisions than the employer’s specific statement that the handbook is not a contract or that the handbook should not be construed as a contract.”
Given the new Davis ruling in Alabama and these earlier opinions from other states, what should employers do?
- Be cautious about using mandatory language like “must” or “shall” in policies or handbooks, particularly with respect to actions that the employer may take. Unless you are always going to follow that policy, think about using “may” instead of “must” or “shall.”
- Ensure that your handbook contains clear and unequivocal disclaimers. In discussing sufficient disclaimers in Davis, the Supreme Court of Alabama reaffirmed an earlier decision, McCluskey v. Unicare Health Facility, Inc., pointing to the disclaimer analyzed in that case as the gold standard for contract disclaimers in employee handbooks. Think about that language:
“This Handbook and the policies contained herein do not in any way constitute and should not be construed as a contract of employment between the employer and the employee, or a promise of employment.”
This kind of disclaimer language is a good starting point for employers who need to revamp their handbooks. As long as a disclaimer is clear and unequivocal, it should be sufficient to prevent the creation of a contract by virtue of language contained in an employee handbook. And while you are looking at your disclaimer language, think about reviewing all of your handbook policies and see what needs tweaking (or deleting).