Management Rights
The rights of the employer, usually called management rights , can be summed up as the rights to run the business and to retain any profits that result. In the United States, management rights are supported by property laws; common law (a body of traditional legal principles, most of which originated in England); and the values of a capitalistic society that accepts the concepts of private enterprise and the profit motive.24 The stockholders and owners who control a firm through their property rights delegate the authority to run the business to managers.
Management rights include the right to manage the workforce and the rights to hire, promote, assign, discipline, and discharge employees. Management’s right to direct the workforce is moderated by the right of employees (at least those who have not signed an employment contract) to quit their jobs at any time. Thus, it is in management’s interest to treat employees fairly.
Management rights are influenced by the rights of groups who have an interest in decisions made in the workplace. For example, managers have the right to hire the employees they wish to hire, but this right is affected by EEOC laws that prevent the employer from discriminating on the basis of certain applicant characteristics (age, race, sex, and so on). Furthermore, managers have the right to set pay levels for their employees, but the presence of a union labor contract with a pay provision requires managers to pay employees according to the contract’s terms.
Management rights are often termed residual rights because they pertain to the remaining rights that are not affected by contracts or laws that represent the interests of employees or other parties (such as a union).25 According to the residual rights perspective, managers have the right to make decisions that affect the business and the workforce except where limited by laws or contract provisions.
One of the most important employer rights is employment at will.
Employment at Will
Employers have long used employment at will , a common-law rule, to assert their right to end their employment relationship with an employee at any time for any cause. U.S. courts adopted the rule in the nineteenth century to promote flexibility in the labor market by acknowledging the existence of a symmetrical relationship between employer and employee. Because workers were free to terminate their relationship with their employer for any reason, the courts deemed it fair for employers to be able to end their relationship with employees whenever they see fit to do so. Employment at will can be a particularly important management right in small business, where a low-performing employee can make the difference between a healthy profit and an unhealthy loss.
Although the courts originally assumed that employment at will would give both parties equal footing in the employment relationship, it is apparent that employment at will has stacked the deck in favor of employers. Because of the employment-at-will doctrine, many employees who are wrongfully discharged each year have no legal remedies.26 One labor relations expert has estimated that approximately 150,000 employees are wrongfully discharged by their employers each year.27 Virtually all these wrongful discharges occur in the 70 percent of the U.S. labor force that is not protected by either a union contract or civil service rules, which guarantee government employees the right of due process in termination procedures. Employment at will is not accepted in other parts of the world, including Japan and the nations of the European Union. These countries have enacted laws that make it difficult for employers to discharge a worker without good cause. In France, Belgium, and the United Kingdom, the only grounds for immediate dismissal are criminal behavior.28 In many other countries, employers who discharge employees for noncriminal reasons face costly mandatory severance pay requirements that provide many weeks of pay. For example, employment laws provide discharged workers 32 weeks of pay in France, 34 weeks of pay in the United Kingdom, 75 weeks of pay in Mexico, 78 weeks of pay in India, 90 weeks of pay in China, and 165 weeks of pay in Brazil. By comparison, in the United States employers are not legally required to provide severance pay to discharged employees, although some U.S. companies voluntarily offer modest amounts of severance pay.29
Legal Limitations to Employment at Will
For the past 35 years or so, state courts have been ruling that employment at will is limited in certain situations.30 Because these are state rather than federal cases, they have varied widely. In general, however, employment-at-will limitations can be grouped into three categories: public policy exceptions, implied contracts, and lack of good faith and fair dealing. In some states, plaintiffs have received sizable settlements for punitive damages as well as back pay. Although juries have given an average award of $500,000 to plaintiffs in wrongful discharge cases, in one case at a Wall Street investment bank a manager was awarded $1.9 million by his former employer to settle his claim.31
Public Policy Exceptions
The courts have ruled that an employee may not be discharged for engaging in activities that are protected by law. Examples are filing a legitimate workers’ compensation claim; exercising a legal duty, such as jury duty; refusing to violate a professional code of ethics; and refusing to lobby for a political candidate favored by the employer.32
Implied Contracts
As we saw earlier, the courts have determined that an implied contract may exist when an employer makes oral or written promises of job security. For instance, an implied contract may exist when an employee handbook promises job security for good performance, or when a manager who is unaware of this doctrine makes promises during the selection interview, such as “good performers will always have opportunities at our company.” To prevent implied contract lawsuits, employers should carefully rewrite employee handbooks to eliminate any language that could be interpreted as an implied contract. In addition, employers must train managers to refrain from implying promises of job security in conversations with new and current workers.
Lack of Good Faith and Fair Dealing
Courts in some jurisdictions expect each party in the employment relationship to treat the other in good faith. If one party acts with malice or bad faith, the courts may be willing to provide a remedy to the injured party. For example, the courts may reason that firing a worker shortly before he or she becomes eligible for a retirement plan indicates bad faith. In this situation, the burden of proof may be on the employer to show that the discharge was for just cause.
The following case makes it plain how costly it can be for an employer to act in bad faith in discharging employees:
In 1987 two employees of a New Jersey real estate management firm took maternity leave. One was dismissed after she returned to work; the other was fired seven weeks before her planned return. Both women sued, and in 1992 a jury awarded them $210,000 and $225,000, respectively, in compensatory damages. They were awarded another $250,000 each in punitive damages, and on top of that the judge added another $374,000 in interest and legal fees. Total cost to the employer: $1.3 million.33
To minimize the risk of wrongful discharge lawsuits based on an implied contract, many employers have drawn up employment-at-will statements that all new employees must sign, acknowledging their understanding that the employer can terminate their employment at any time for any reason.34