Maryland Court of Appeals Holds that Inclusion of Permissive "Termination For Cause" Provisions Negates Presumption of At-Will Employment and Creates "Continuous For Cause" Contract
In a recent decision, Spacesaver Systems, Inc. v. Adam, --- A.3d ----, No. 98, 2014 WL 4216024 (Md. Aug. 27, 2014) (“Adam”), the Maryland Court of Appeals was “asked to re-examine the contours of the firmly established doctrine of at-will employment.”Adam, 2014 WL 4216024, at *1. Specifically, petitioner Spacesaver Systems, Inc. (“SSI”) asked the Court “to determine if a written contract containing a for-cause provision but no definite term of employment exists as an at-will contract, a lifetime contract, or something else.” Id. The Court found such a contract to be something else, and affirmed the contract’s designation by the Court of Special Appeals as one for “continuous for-cause” employment, finding this was the “best moniker” for such an arrangement. Id. at *13. Given the creation of a new category of employment relationship, employers should review existing employment agreements and templates to determine whether the language therein creates the relationship the employer intends – at-will, for-cause, lifetime, or, now, continuous for-cause employment. Moreover, if an employer desires to provide for both termination with and without cause, and severance and related benefits only in the event of the latter, the burden is on the employer to make this distinction clear. Including what are intended to be optional (e.g., “employer may”) for-clause provisions will likely foreclose an employer’s right to terminate without cause unless the employment agreement explicitly states that the employer also has the right to do so.
The Adam Court explained that although the treasurer and shareholder Adam’s employment agreement was “silent as to its duration, which can signify at-will employment, it also contain[ed] a for-cause provision, which negates an at-will employment contract.” Id. at *8. Citing Towson University v. Conte1, 384 Md. 68, 80, 862 A.2d 941, 948 (2004) and noting similar rules in other jurisdictions, e.g., Nevada and Minnesota, the Court “embrac[ed]” Conte dicta that “either a for-cause provision or a ‘contractual delineation of the length of the employment period’ will independently establish that an employee was not at-will.” Adam, 2014 WL 4216024 at *8 (emphasis in original). It did not change the Court’s analysis that the “Termination by the Company For Cause” provisions in Adam’s employment agreement provided that SSI “may” terminate Adam for cause, not that it “can only” do so. Id. at *13. Thus, SSI, a closely held corporation, breached the employment agreement when it terminated Adam without one of the causes set forth in the termination for-cause provisions therein. The award of $255,868.20 in damages to Adam was affirmed. Id. If an employer intends to create an at-will employment relationship, listing examples or scenarios in which the employer “may” terminate in an employment agreement is superfluous and should be avoided to prevent the appearance of limiting the causes for termination.
Indeed, employers may find that they agree with SSI’s assertion that continuous for-cause agreements are the new “evil twin” of lifetime employment contracts. Id. at *4. Furthermore, the Adam Court “refrain[ed] from imposing the additional requirement of special consideration, which evolved from a line of lifetime employment cases, to contracts of a ‘continuous for-cause’ nature,” thereby potentially making continuous for-cause contracts the more evil of the pair. Id. at *12.
Despite its holding, the Court averred that the decision “signal[led] no retreat from [its] recognition and veneration of the employment at-will doctrine.” Id. Nor, according to the Court, should the decision erode that doctrine, as the presumption of at-will employment continues and may only be defeated “when the parties explicitly negotiate and provide for a definite term of employment or a clear for-cause provision.” Id. The Court “emphasize[d] that in this case, SSI’s corporate attorney could have easily kept Adam’s employment at-will by inserting an at-will provision in the [e]mployment [a]greement, or making sure that no for-cause provision made its way into the contract." Id.
This last statement by the Court leaves unanswered the question of whether an at-will clause will trump contrary for-cause provisions in an employment agreement. The use of “or” rather than “and” suggests that only one of the named measures SSI’s corporate attorney could have taken is necessary to maintain the presumption of at-will employment. But to provide for greater certainty, employers should ensure that if an at-will employment relationship is desired, both measures are employed.
Note that the Court honored the provisions in Adam’s employment agreement stating that the agreement’s terms trumped those in the employee handbook. Thus, employers should ensure that their employment agreements contain such a clause, assuming that construction is desired. In addition, employers should confirm that their employee handbooks do not contain provisions contradictory to those in their employment agreements. Whereas the Adam Court did not look to extrinsic evidence (including the testimony of two SSI officers indicating that they envisioned a lifetime tenure when they signed the employment agreement) when construing the terms of the employment agreement because it found its terms to be unambiguous, a court will look to such evidence if it finds the contract to be ambiguous. Id. at *14, n. 12. In such circumstances, handbook provisions which contradict those in an employment agreement would likely factor into a court’s analysis of the parties’ intent, particularly if the employment agreement does not provide that its term govern in the event of a conflict with the handbook.
According to the Court of Special Appeals’ decision, the SSI handbook repeatedly indicated that employment with SSI was at-will, but it also disclaimed that it was intended to create contractual obligations with respect to any matters. See Spacesaver Systems, Inc. v. Adam, 212 Md. App. 422, 437, 69 A.3d 494, 503 (2013). The Court of Special Appeals therefore refused to enforce the handbook’s at-will provisions in light of such a clear and unequivocal disclaimer. The Court of Appeals followed suit, explaining that even if for-cause language in an employee handbook could support a continuous for-cause employment agreement, the Court “would carefully examine the handbook to see if other language therein was inconsistent with such conclusion.” Adam, 2014 WL 4216024 at *14, n. 16. “For example, if the handbook also stated that employment was at-will or expressly provided that the handbook was not a contract, [the Court] would consider that language as negating any claim that the handbook created ‘continuous for-cause’ or lifetime employment.” Id. The Court, did not, however, explicitly state whether contradictory or inconsistent provisions in an employment agreement, e.g., stating that employment was at-will but also listing causes for termination, would negate the creation of continuous for-cause employment. In such situations, a court may determine that the contract is ambiguous, and thus look to extrinsic evidence to determine the parties’ intent. Adam’s agreement lacked any at-will clause, so the Court had no need to pursue the analysis.
Finally, the Court recognized that “concerns over corporate authority to execute a ‘continuous for-cause’ contract and shareholders’ ability to change the management of the corporation could potentially arise in another case,” but they were not raised in Adam because the employment agreement for Adam was identical to that signed by the other two shareholders. Id. at *14, n. 15. Thus, “all shareholders and directors, including the corporate counsel who was a non-shareholder director, consented to the terms thereof.” Id. It is advisable to review the relevant corporate documents to verify that the authority to change the corporate management is appropriately delegated.
1.The Conte Court provided the rule the Adam Court adopted, but the cases are distinguishable. In Conte, the employment agreement contained provisions (i) permitting termination only for cause and (ii) providing a time period for Dr. Conte's employment. In Adam, however, the contract's for cause provisions were permissive and no employment duration was provided.