At-Will Employment Contract Limits Ability to Sue for Fraudulent Inducement
At-Will employment is still the rule in New York, as its highest court, the Court of Appeals, reminded us ina decision handed down earlier this year. The decision, in Smalley v. Dreyfus Corp., 10 N.Y.3d 555, 853 N.Y.S.2d 270 (2008), is discussed in the New York State Bar Association’s New York Law Digest, No. 580 (April 2008), edited by David E. Siegel.
At-Will employment means an employee may be fired for any reason or no reason, at any time. The At-Will concept may be trumped by violation of a statute, such as an anti discrimination statute. It may be trumped by a contract but not if the contract itself explicitly establishes the At-Will nature of the employment relationship. That was the situation in Smalley.
Because the online version of the Digest is available only in a private area of the Bar’s website, we quote extensively from it here:
An attempt by the plaintiffs (after later being fired) to cast their claim in tort fails. The contract’s at-will employment is plain and rules the day, holds the Court in an opinion by Chief Judge Kaye, dismissing the plaintiffs’ complaint “in its entirety”.
The tort the plaintiffs sought to allege was “fraudulent inducement to enter into and remain in the employment of” D. More specifically the claim was that they were misled to believe that D would not merge with a certain other company, T. They said they took their jobs relying on that assurance, but a few years later such a merger did take place, and about half a year after that all the plaintiffs were fired.
The Court distinguished a federal case applying New York law that was decided differently by the Second Circuit, Stewart v. Jackson & Nash, 976 F.2d 86 (1992). But, in Stewart the promise or representation alleged to be fraudulent concerned something that had occurred, not something that would or would not occur. Plaintiff, an environmental lawyer, took a job when told the employer had an environmental client. Again, the Digest:
She took the job only to learn that while D was still seeking the client, the client was not yet there. P got only “general litigation work”. When she was later terminated, she sued for damages and her claim – albeit at only the pleading stage - was sustained.
D’s promises in Stewart were “misstatements of present fact”, the Court explains, and her alleged injuries -
thwarting her professional objective to specialize in environmental law, and damaging her career potential – occurred well before plaintiff’s termination and were unrelated to it.
Stressing that the Court is neither adopting nor rejecting the Second Circuit’s reasoning, it observes that here in Smalley the plaintiffs have claimed no injury distinct from termination of their employment and that absent injury independent of termination, plaintiffs cannot recover damages for what is at bottom an alleged breach of contract in the guise of tort.
The Smalley case and the specific issue of whether a fired employee may sue in tort have relevance to two broad categories of our clients though, perhaps, on opposite sides of the issue: (1) business owners and managers; and (2) senior and mid-level corporate employees. For both, we offer the following points:
- A contract can either negate or establish and reinforce the At-Will nature of the employment relationship;
- A contract is not necessarily found in a single piece of paper labeled in capital letters: “CONTRACT;” rather, a contract can be found in employment manuals, offer letters, compensation plans, e-mails, course of dealing and in other ways consistent with basic principles of contract law;
- The Smalley case reaffirms the At-will rule in New York;
- However, the distinction that the Court made from the Stewart case serves as a caution that misrepresentations of present fact may leave the door open to a tort claim.
A tort claim, such as fraudulent inducement, depending on the specific facts, is more likely to put punitive damages and attorneys fees in play than a contract claim in New York. In Connecticut, another At-Will state where we practice, punitive damages are limited to attorneys’ fees but, similarly as in New York, more of a factor in a tort claim than a contract claim.
