By Jeremy Pasternak
CAOC “Forum” – January 2005
By my estimation, the average member of Consumer Attorneys of California owns or works for a firm with fewer than five attorneys, and over twenty-five percent are sole practitioners. My “anectodotal polling” tells me that average staff size is between three and eight. We are, almost to a member, “small businesses.” So, when does a “small business,” particularly a law firm, need an employee handbook?
As an attorney who represents employees, I am occasionally called by our members – small business owners – to advise them on how to manage their employees. (To their credit, the questions generally amount to, “How do I ensure I’m complying with the law?”) Eventually, they ask the question posed above, that is, “Should I have an employee handbook?” There are pros and cons to having one, both in terms of business management and liability.
This article will examine those two broad issues to be considered with respect to adopting a company handbook: 1) The Reasons to Have a Handbook From a Business Perspective and, 2) The Pros and Cons from a Liability Perspective.
As lawyers, your first thought is probably liability, that is, what are the pros and cons of having a handbook in terms of avoiding liability. That’s natural. After all, as plaintiffs’ lawyers, when we think about doing business, we are thinking about someone’s liability.
Having sued hundreds of employers, deposed scores of human resource professionals, and even having represented a number of human resources employees as plaintiffs, I’ve found that having an employee handbook is not solely, or even primarily, about avoiding liability. For the “regular” business (that is, businesses which aren’t law firms), making profit and the management of employees are considerations preceding issues of liability, which are secondary (and, unfortunately, often much farther down the list). We, as lawyers, can learn from this. Therefore, this first section will address how having an employee handbook can serve your business interests, and how being too “lawyerly” about making one can actually interfere with business goals.
Setting forth ground rules is something every business has to do with every employee. From that point on, it’s just a fact of life that employees sometimes need reminding, or, to put it another way, may simply forget procedures such as how to ask for vacation time and the like. The handbook can teach them these ground rules at the beginning of their employment, and then serve as a reference tool later on.
These basic expectations, separate and apart from actual job duties, are the sorts of things that are bothersome when they aren’t followed. On the other hand, it’s a difficult trick not to sound petty when reminding an employee of them. The handbook can communicate for you in these instances, can prevent confusion, and can save you from looking like the bad guy.
Similarly, employees want to know what they are entitled to. It’s another simple fact of life that if employees aren’t told what they are entitled to, they can begin assuming quite a bit. Any plaintiffs’ employment lawyer can tell you that they have received countless calls from employees who assume they have all sorts of rights that they never had in the first place. I’m willing to bet that half the employees in the Bay Area believe that they are legally entitled to some kind of severance. The law is that unless they have some contractual right to severance, they aren’t in fact entitled to anything. But severance was for a time so common (particularly during the dot-com layoffs) that employees began assuming they had a right to it.
The handbook gives you an opportunity to get things straight from the beginning, and prevent ill will when an employee doesn’t get something that was expected.
These are the types of things that are not essential to the employees’ performance of their duties, are incidental to what we do, and that can be expressed in a handbook. One lawyer I used to work with called these “Stereo Instructions,” and the metaphor is a good one. What is so important about providing these “stereo instructions” is that by taking the time to put them in writing, in a neat, easy-to-follow format, you can save dozens of hours that might otherwise be spent explaining menial tasks.
Example: how eager are you to interrupt yourself in the middle of opposing summary judgment to show an employee, who is filling in for someone else, how to use the postage machine? You aren’t. But it only takes seconds to say, “I’m really busy, but if you check the handbook, it’s in there.”
This is particularly helpful in the smallest firms (whose owners might assume they’re “too small” for a handbook). After all, the smaller the firm, the more likely it is that 1) there is no supervisor or manager in between you and staff, and 2) staff is much more likely to feel comfortable “popping in” to ask you little questions. We all know that after a time, that can become annoying, particularly when we’re trying to focus on our work. This is especially helpful for those employees who are all too inclined to take the easy route of asking others (read, us) when they have a simple question, rather than trying to figure it out for themselves.
One of the largest problems I’ve seen, at least based on the calls I get, is when employees believe they aren’t being treated “fairly,” which they define as being treated “worse” than someone else in the workplace. Standing alone, this isn’t illegal (of course, if motivated by a protected classification it is, but other than that there’s no law stating that you have to treat your employees equally).
This can be a particular problem in small companies, where management is ad hoc. If you’re deciding moment-to-moment how to handle employee problems, there is no way you are going to be consistent.
The employee handbook can therefore become a reference guide for you, and help you ensure that you don’t destroy morale (and maybe encourage a lawsuit, discussed below) by treating your employees “unfairly.”
True example: I was deposing a human resources employee of a large retail clothing business, with stores throughout the West Coast. In asking about employee handbooks and their evolution, I learned that up until only a few years ago, the company’s “employee handbook” was a 3 x 5 card reading, “Use Your Best Judgment.” Though pathetic in terms of risk avoidance (nothing prohibiting discrimination, etc.), this 3 x 5 card precisely fit what the company wished to be its culture, which was built around salespeople working somewhat independently, developing their own “styles,” their own “book” of repeat customers, and being compensated largely through commissions. Even the updated versions of the handbook emphasized the use of judgment by each employee.
This company’s 3 x 5 card is an extreme example of corporate culture trumping all other concerns, and I’d wager it existed despite the better advice of their lawyers. However, though extreme, it illustrates the way a handbook can mirror company culture.
In making a handbook, consider the message you want to send. Many of our employees have come to work for small firms because they think it will be a more personable place to work. Perhaps they feel more a part of something, as opposed to a small cog in a big machine. This is part of their morale, and they probably are accepting less income in exchange for it. Any handbook, but especially one whose length and tone are contrary to a small “family” feeling, can interfere with that type of motivation. After all, if your handbook looks just like the one at the “big, bad, defense firm,” and if the employee starts to believe that there’s no difference between your firm and that one, why shouldn’t the employee just go to work there? Be consistent, and keep your handbook a reflection of the firm culture you are trying to maintain.
In a small enough firm, the handbook doesn’t just reflect firm culture; it reflects the personality of the owner.
What’s the basic difference to the employee, between working for a large company and working for a sole proprietorship? Answer: Companies have cultures, and people have personalities. Put another way, it’s the difference between working in this environment and working for this person. This is largely because as an owner or part-owner of a business, you dictate how that workplace will function.
This is sometimes difficult for lawyers to recognize. As lawyers, our work experience is largely external to our workplace. When we talk about our jobs, we talk about our cases, witnesses, opposing counsel, judges, and juries. These things are all external to the workplace environment. For our employees, although they may sometimes deal with these people, their workplace environment is largely about the people with whom they work and the conditions in which they work, which have been established by you. So if someone asks your staff about their jobs, they’ll talk about work hours, pay, benefits, vacation, etc., and also about their boss as a human being. They’ll weigh in on personality. Even if their primary beef is that they’re underpaid, it’s still going to be about you. If the pay at IBM stinks, it’s because “the job doesn’t pay well.” If the pay at the small plaintiff’s firm stinks, it’s because “the boss is cheap.”
What this tells us is that a company handbook has an effect on your employees’ idea of what their workplace is, who you are, and will affect how they feel about working for you.
As is discussed in more detail below, employees are presumed at law to be at-will, and they can live with that, in part because they still are convinced of the contrary (and incorrect) notion that they have to be treated “fairly.” They understand that a handbook may have a list of things for which they can be terminated. That’s “fair” to them. But if every explanation of every firm policy ends with “deviation from these policies is cause for termination,” the message is going to get through pretty quick that they aren’t valued, and that “fair” is whatever you say it is. Legally, that’s fine, but in terms of staff morale and motivation, it stinks. The same is true of all kinds of legalese that you – as a lawyer – might be tempted to drop into your handbook.
Remember that every time you drop into a handbook some type of legalese reminder to the employees that they can be fired, or don’t have particular rights, you are making a negative statement to them and about their employment. As lawyers, that sort of thing may roll off our backs. But staff members aren’t lawyers, and they expect to be treated like valued members of your team, not like opposing counsel. As is discussed below, liability concerns in this regard can be covered in a few well-placed caveats, without beating employees to death with all the ways they can get themselves fired.
This is but one way a handbook can negatively reflect upon you and interfere with morale and longevity. The point is to consider what message – in light of your personality and how you want to motivate your employees – is being sent. Remember that employees seek security and consistency. We live on contingent risk. They don’t. They expect security and consistency not just in their pay, but also in what they can expect from their employer. If you’re gruff and tough, that’s fine. If you’re a sweetheart, that’s fine, too. But don’t present one thing in your handbook and another day-to-day. That angers employees, interfering with morale (read, performance) and longevity (read, they’ll quit right when you need them most).
Many people, particularly laypeople, think that employees can only be fired for a good reason. You may therefore believe that you need a handbook to spell out what those reasons are.
California Labor Code C2 A7 2922 states:
An employment, having no specified term, may be terminated at the will of either party on notice to the other. Employment for a specified term means an employment for a period greater than one month.
In short, you can fire your employees at any time, for any reason, as long as it isn’t a specifically unlawful reason (such as age, gender, sex, whistleblowing, complaining of unlawful activity, etc.).
Under the law, you are presumed to have maximum flexibility to terminate employees. Therefore, there is no real upside in this regard to having a handbook. In fact, the handbook can just create problems. There is a theory under California law of “implied contract of employment.” It basically goes that even though employment is presumed at-will, if an employee has been with a company for a while, and if the policy of the company seems to be to only fire people for a good reason (such as a strictly-followed progressive discipline policy), and if there have been assurances made to the employee that as long as they do a good job, they’ll continue to have a job, the employee may have an at-will contract that they will only be fired for “just cause,” that is, a good reason. Obviously, you don’t want to create such a situation, as it limits your legal right to fire an employee.
I may catch some heat from my employment-law brethren on this, but I really don’t see this as a realistic problem. The breach-of-implied contract claim is on its last legs. The California Supreme Court has significantly restricted the cause of action for “breach of implied contract,” both in terms of damages (contractual only), and, more significantly for this discussion, in terms of what it takes to establish liability in the first place. If you want to catch up on the law in this area, read the seminal case on the subject, Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, and the last significant California Supreme Court case on the subject, Guz v. Bechtel Nat., Inc. (2000) 24 Cal.4th 317.
To be sure your handbook doesn’t create, or can’t be used to help argue the existence of, a contract of employment, you’ll need to include an “at-will clause,” that is, a paragraph or two reminding the employees that they are at will, that their employment can be terminated at any time, that there is no contract, that any such contract would have to be in writing, and that the handbook is only a set of guidelines, not an agreement, etc. The handbook can actually protect you from liability in this regard, in that it provides a clear affirmation in writing of the employees’ status.
There are some cases suggesting that such clauses aren’t necessarily dispositive if there have been verbal promises of continuing employment, but the answer here is simple: don’t make such promises unless you really mean them. If an employee is going to lie about that, you can’t stop them, and at least with an at-will clause, you’ve done what you can.
The cardinal rule of having a handbook is this: if you have one, follow it.
The reason is simple: if you’ve set forth a set of policies or guidelines, say, for progressive discipline, and you fail to follow them, you are treating an employee “unfairly.” From a legal standpoint, this means little on its face, as there is no law requiring employees be treated fairly. However, it leads to other problems.
The first is that having employees feel they are not being treated fairly is horrible for morale; not strictly a liability issue, but certainly something to be avoided. The second is a liability issue. In very large part, employment law revolves around what we call “pretext analysis.” It goes like this: an employee claims that their termination (or some other action against them) is because of their protected classification (such as their race, because they’ve protested sexual harassment, etc.) For the first step of the analysis, the employee need only prove that they are in the protected class, and suffered the adverse action. In step two, the employer posits a legitimate business reason for the action. In the third step of the analysis, the employee seeks to show direct evidence of unlawful intent, which is fairly rare, or, more commonly, establish “pretext,” that is, show that the employer’s basis for the action lacks credibility, and is therefore a “pretext,” or cover, for some other, presumably unlawful, motive. Put simply, this is all the employee must do to defeat summary judgment, and is in fact enough to sustain a plaintiff’s verdict.
So, what happens if the employer fails to follow its own procedures for a termination? What if the employer claims it fired the plaintiff-employee for a particular reason, but another employee was only warned for the same infraction? What if the employer is claiming that an employee is being fired “according to policy,” but the handbook indicates otherwise? In short, failing to follow your own handbook will give aid to the employee-now-plaintiff in a wrongful termination suit.
This is the “bigger” problem because of the damages in these cases. In a breach of contract case, the only damages are contractual, such as the value of lost wages and benefits, minus reasonable or actual mitigation. In a case of wrongful termination, say, for race discrimination, the damages include these plus emotional distress, punitive damages, and all attorneys’ fees and costs. This is the arena where “pretext analysis” is at play, and it’s not a place you want to be.
The rule here is again simple: if you’re going to have a handbook which addresses legal rights, make sure it’s complete.
Don’t have a handbook which addresses some rights and not others. I have seen dozens of handbooks which have page after page of instruction on how to prevent and deal with sexual harassment (which remains a “hot topic”), but say nothing about harassment based on race, much less the rights of disabled or pregnant employees (which are often thought of as inconveniences to the employer). The fact that an employer has paid a lot of attention to a particular right to the exclusion of other rights speaks for itself, and can be used to demonstrate a disregard for these other rights.
A big “not to do”: don’t try to use a handbook to contract around an employee’s rights. You can’t do it. Employees have their rights, and those rights can’t be abridged by agreement between the parties. If, for instance, you try to have an employee stipulate to an understanding that the workplace is a sexually-charged environment, contains graphic language and jokes, and therefore the employees cannot make a claim of hostile-environment sexual harassment, you’re just going to get yourself into trouble. On the one hand, the waiver will be ineffective, and on the other, it will just help establish that you were knowingly breaking the law when you deprived the employee of a harassment-free environment. (Of course, if you do sexual harassment cases, there is nothing wrong with language in the handbook warning employees that they may come across graphic materials and asking for notification if they’d like not to be assigned to these cases.)
Of course, the big exception to the general rule that you can’t make employees waive their rights is the arbitration clause, but I’m not going to give you any tips in that regard, and a pox on any CAOC member firm that makes its employees submit to mandatory arbitration as a condition of employment.
In sum, a handbook can help you run your business. If it’s written and used properly, the liability risks it may create can be minimized. You just need to determine if it “fits” the firm that you have or are trying to have, and if you can adhere to it in the same way you expect your employees to.
Jeremy D. Pasternak has law offices in San Francisco. He is a member of the Forum Editorial Board.