By Elizabeth Zuckerman, Esq.

I. CONTRACTS

Different types of contracts protect employees to varying degrees.

A. At-Will:

Beginning with the least protective, we have the at-will employment relationship. Everyone knows that, in New Jersey, an employer may fire an employee for good reason, bad reason, or no reason at all under the employment-at-will doctrine. However, even an at-will relationship cannot be terminated for reasons contrary to public policy (Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58 (1980), or for illegal reasons such as race or gender. An at-will employment relationship is a contract. The fact that the employee and employer are free to terminate the contract for any or no reason, even without notice, does not deprive the relationship of contract status. It just means that the length of an “at-will” employee’s engagement is not controlled by the contract.

A Pierce claim is one which protects an at-will employee from a termination that is contrary to a clear mandate of public policy. Id. at 72. The requirements of a Pierce claim was recently reviewed by the New Jersey Supreme Court in Tartaglia v. UBS PaineWebber Inc., __ N.J. ____ (Dec. 16., 2008). In Tartaglia, the Court made clear that a claim under Pierce does not require that the employee voice her complaint to an outside agency. The employee must express disagreement with a corporate policy, directive or decision based on a clear mandate of public policy derived from one of the sources identified in Pierce(legislation, administrative rules, regulations or decision, judicial decision, professional code of ethics). It also requires “a sufficient expression of that disagreement to support the conclusion that the resulting discharge violates the mandate of public policy and is wrongful.” Thus, a complaint to an outside agency will usually suffice; a passing remark to a co-worker will not; a complaint to a senior corporate manager will probably suffice; a complaint to an immediate supervisor generally will not.

B. Implied Contract:

An employment manual may alter an at-will relationship by creating an implied contract between the employer and employee (Woolley v. Hoffmann-La Roche, Inc., 99 N.J. 284 (1985). Absent a clear and prominent disclaimer, an implied promise contained in an employment manual that an employee will be fired only for cause may be enforceable against an employer even when the employment is for an indefinite term and would otherwise be terminable at will.

C. Satisfaction Clause:

A more protective type of contract for the employee is one containing a satisfaction clause. Silvestri v. Optus Software, Inc., 175 N.J. 113 (2003). These types of contracts are divided into two categories for purposes of review: (1) contracts that involve matters of personal taste, sensibility, judgment; and (2) contracts that contain a requirement of satisfaction as to mechanical fitness, utility, or marketability. Satisfaction contracts of the first type are interpreted on a subjective basis (i.e. the party to be satisfied is the sole judge of his or her satisfaction). Contracts of the second type are subject to objective test of reasonableness.

A subjective standard is usually applied to satisfaction clauses in an employment contract. But the subjective standard requires that the employer act honestly in accordance with his duty of good faith and fair dealing. However, genuine dissatisfaction, honestly held, is sufficient for discharge. And, an employer cannot claim dissatisfaction for the reason for termination when another reason is the actual motivation, even if the true reason is neither discriminatory or contrary to public policy. Thus, the only way to prevail in an employment setting under a satisfaction contract is for the employee to prove that the employer was not really dissatisfied, or that the employer’s true motivation for termination was something other than his dissatisfaction.

D. Termination for Cause:

What is meant by termination “for cause”? “The phrase creates an objective, rather than a personal, subjective test.” Fried v. Aftec, Inc., 246 N.J. Super. 245, 255 (App. Div. 1991). It should focus on the ability and fitness of the employee to discharge the duties of his or her position. “Cause” encompasses concepts such as honesty, punctuality and sobriety. Substantial objective proof of an employee’s failure to perform his duties subjects that employee to termination for cause. Id. at 296.

A contract allowing termination only for good cause protects an employee from unreasonable or arbitrary termination. Examples of situations found to constitute good cause include: discharge prompted by a legitimate business concern; termination compelled by poor economic conditions; employee does not perform the job safely or effectively; employee intoxicated during working hours; employee absent without explanation. However, termination is not for cause if the grounds are irrelevant to the employee’s job performance. Examples of this would be: termination based on religious beliefs; employee with excellent work record terminated for conduct condoned on the part of another employee; off-duty use of drugs.

In New Jersey, termination based on a physical limitation that does not affect an employee’s ability to perform the job safely and effectively cannot constitute good cause. Greenwood v. State Police Training Center, 127 N.J. 500 (1992).

E. Termination for “Good Reason”

F. Implied Covenant of Good Faith and Fair Dealing:

Every contract in New Jersey contains an implied covenant of good faith and fair dealing. Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420 (1997). This is true for a “Wooley” contract (i.e. an implied contract by virtue of a handbook), and is even true in an at-will relationship. The obligation to perform in good faith exists in every contract, including those contracts that contain express and unambiguous provisions permitting either party to terminate the contract without cause.” Id. at 421. Although the implied covenant of good faith and fair dealing cannot override an express term in a contract, a party’s performance under a contract may breach the implied covenant even though that performance does not violate an express term. The breach of the implied covenant arises when the other party has acted consistently with the contract’s literal terms, but has done so in such a manner as to have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.

The implied covenant of good faith and fair dealing means that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract”.Id. at 420. The obligation of good faith performance of a contract, even where it may be terminated without cause, exists “up until its right of termination was actually effective”. United Roasters, Inc. V. Colgate Palmolive Co., 649 F.wd 985, 990 (4^th Cir.), cert. den. 454 U.S. 1054 (1981).

It is difficult to come up with a definition of “good faith and fair dealing”. “Good faith, as judges generally use the term in matters contractual, is best understood as an ‘excluder’ – a phrase with no general meaning or meanings of its own. Instead, it functions to rule out many different forms of bad faith. . . . In most cases the party acting in bad faith frustrates the justified expectations of another . . . .” Wade v. Kessler Institute, 343 N.J. Super. 338, 346 (App. Div. 2001), aff’d 172 N.J. 327 (2002). “Concepts such as good faith and fair dealing are chameleon-like in character, necessarily assuming the colorings of the surroundings in which they find themselves.” Noye v. Hoffmann-La Roche, Inc., 238 N.J. Super. 430, 442 (App. Div.), certif. den. 122 N.J. 146 (1990). The employer breaches the covenant of good faith and fair dealing “where the employer, without an honest belief that good cause for discharge in fact exists, attempts to deprive the employee of the benefits of the employment agreement.” Ibid.

The covenant “requires at a minimum that an employer not impair the right of an employee to receive the benefits of the employment agreement. . . . [It] includes an objective standard, under which the employer must act in a manner which a reasonable person would regard as fair. The covenant also includes a subjective element. An employer engages in subjective bad faith when it discharges an employee for the purpose of depriving him or her of one of the benefits of the contract.” Wade v. Kessler Institute, supra at 347, quoting Holland v. Union Oil Co., 993 P.2d 1026 (Alaska 2000).

In Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, (1997), the court held that “a party to a contract may breach the implied covenant of good faith and fair dealing in performing its obligations even when it exercises an express and unconditional right to terminate.” Id. at 423.

The implied covenant of good faith and fair dealing has been applied in three general ways. Seidenberg v. Summit Bank, 348 N.J. Super. 243, 257 (App. Div. 2002). First, the covenant permits the inclusion of terms and conditions which have not been expressly set forth in a written contract. It allows for inclusion of terms the parties must have intended. An example of such a case is Bak-A-Lum, 69 N.J. at 129-130. Second, the covenant has been used to allow redress for the bad faith performance of an agreement even when the defendants has not breached any express term. Ibid; see Sons of Thunder, supra. Finally, the covenant permits inquiry into a party’s exercise of discretion expressly granted by a contract’s terms. SeeWilson v. Amerada Hess Corp., 168 N.J. 236, 250 (2001).

The implied covenant of good faith and fair dealing cannot override an express term in a contract. Instead, it requires “that a contracting party act in good faith when exercising either discretion in performing its contractual obligations [citations omitted] or its right to terminate.” Seidenberg, supra at 258. “To determine what is considered a good faith performance, the court must consider the expectations of the parties and the purpose for which the contract was made.” Id. at 259. To make this determination, a court must allow for parol evidence (i.e. evidence outside the written agreement). Ibid.

In Nolan v. Control Data Corporation, 243 N.J. Super. 420 (App. Div. 1990), the court applied the covenant of good faith and fair dealing to an at-will employment relationship where the amount of compensation the employee was entitled to was governed by a sales plan, which the court considered to be a compensation contract. Although the plan gave the employer discretion to adjust the employee’s compensation, the court held that this discretion must be exercised in good faith. “Within its sole discretion” is not necessarily equivalent to “any reason whatsoever, no matter how arbitrary or unreasonable.” The discretion must be exercised reasonably, not for the sole purpose of depriving the employee of the fairly agreed benefits of his labors. Id. at 434.

II. PROMISSORY AND EQUITABLE ESTOPPEL

There are four elements to the doctrine of promissory estoppel: 1) a clear and definite promise, 2) made with the expectation that the promisee will rely on it, 3) reasonable reliance on the promise, 4) which result in definite and substantial detriment. Lobiondo v. O’Callaghan, 357 N.J. Super. 488, 499 (App. Div. 2003); Malaker Corp. Stockholders Protection Comm. v. First Jersey Nat’l Bank, 163 N.J. Super. 463, 479 (App. Div. 1978), certif. den. 79 N.J. 488 (1979). “The essential justification for the promissory estoppel doctrine is to avoid the substantial hardship or injustice which would result if such a promise were not enforced.” Pop’s Cones, Inc. V. Resorts International Hotel, Inc., 307 N.J. Super. 461, 469 (App. Div. 1998).

Equitable, promissory and judicial estoppel are distinct legal concepts. Equitable estoppel is defined as:

“Conduct amounting to a misrepresentation or concealment of material facts, known to the party allegedly estopped and unknown to the party claiming estoppel, done with the intention or expectation that it will be acted upon by the other party, and on which the other party does in fact rely in such a manner as to change his position for the worse.” Carlsen v. Matsers, Mates & Pilots Pension Plan Trust, 80 N.J. 334, 339 (1979).

The doctrine of promissory estoppel “renders binding a promise when the promisor should reasonably expect the promisee or a third party to act or forbear to act in reliance on the promise, if the promisee or third party does so and justice requires.” Woolley v. Hoffmann-LaRoche, 99 N.J. 284, 303, n.9.

The doctrine of judicial estoppel protects the integrity of the judicial system by preventing a party from arguing a position inconsistent with one previously asserted in the same or prior judicial or quasi-judicial proceeding. It applies only if, in the earlier proceeding, the court accepted the position that the party seeks to disavow in the subsequent proceeding. Ramer v. N.J. Transit But Operations, Inc., 335 N.J. Super. 304, 311-12 (App. Div. 2000).

In Peck v. Imedia, Inc., 293 N.J. Super. 151 (App. Div. 1996), the plaintiff gave up clients, rented her Boston apartment and leased an apartment in New Jersey in reliance upon Imedia’s offer of employment. Shortly before she was scheduled to move, Imedia advised her that it had changed its mind. The court found that plaintiff could not establish a breach of contract claim. It distinguished the facts in Peck from the facts in Shebar v. Sanyo Business Systems Corp., 111 N.J. 276 (1988).

In Shebar, plaintiff had tendered his resignation in order to take a job with the Sony Corporation. Plaintiff’s supervisor told him that he would not accept his resignation and that he had a job with Sanyo for life. Based on that assurance, Plaintiff rejected the offer from Sony. Four months later, Sanyo fired him. The court held that a contract was formed which altered that at-will employment relationship. Plaintiff agreed to relinquish his new position at Sony in exchange for job security at Sanyo and Sanyo agreed to relinquish its right to terminate plaintiff’s employment at will in exchange for the retention of a valuable employee. This was considered ample consideration for an enforceable contract.

In Peck, however, plaintiff could not prove that defendant agreed it would terminate her only for cause or that she had employment for any specific period of time. However, the court found that plaintiff could make out a claim for promissory estoppel. Although plaintiff could have been terminated at any time, the promissory estoppel doctrine recognizes that “there may be losses incident to reliance upon the job offer itself, even though the employer can terminate the relationship at any time.” Id. at 167. The court also took note of the fact that the employer waited ten days to convey its decision to rescind the job offer, during which time plaintiff continued to turn away business in Boston and prepared to move to New Jersey.

The Peck court held that allowing plaintiff to prove damages suffered as a result of her reasonable reliance on defendant’s offer of employment was consistent with the good faith and fair dealing requirement found even in contracts that are terminable at will. Even though the length of an at-will employee’s engagement is not controlled by contract, other aspects of the employer-employee relationship may still be governed by the obligation to act in good faith. Thus it allowed plaintiff to proceed on a theory of promissory estoppel to pursue damages for defendant’s lack of good faith and fair dealing attributable to the delay in expressing the decision to terminate the relationship.

In Pop’s Cones, Inc. v. Resorts International Hotel, Inc., 307 N.J. Super. 461 (App. Div. 1998), the court allowed the plaintiff to pursue a claim for promissory estoppel even though the terms of the agreement on which plaintiff relied had not been fully negotiated. The court reasoned that the plaintiff was not seeking damages relating to the lost lease but, rather, was seeking damages flowing from its reliance on promises made to it. This is the distinction between a promissory estoppel claim and a breach of contract claim. Thus, plaintiff could seek damages for the loss of it prior location which it gave up in reliance on defendant’s promise that it could do business at defendant’s location, as well as out of pocket expenses incurred in trying to locate an alternative location.

The Pop’s Cones court noted that earlier New Jersey decision seemed to require heightened proof as to the first element, namely whether there was a clear and definite promise by the promisor, before considering the remaining three elements. But it found that this was not necessary, particularly where the plaintiff was not seeking to enforce a contract but was instead seeking damages resulting from its detrimental reliance upon promises made during contract negotiations despite the ultimate failure of those negotiations. Id. at 469-470.

III. DAMAGES

In a wrongful discharge case, an employee is entitled to his or her salary for the remainder of the employment period, less whatever wages he/she has earned, or could have earned through reasonable diligence.

Mitigation principles require the discharged employee to accept similar employment in terms of the type of work, the location and the rate of compensation. As time passes, the discharged employee is expected to lower his/her sights and accept employment with lower pay, or different type of work, or at a more distant location. But if the employee lowers his/her sights too early, the defendant can argue that he failed to fully mitigate his damages. Doubts should be resolved in favor of the employee.

Mitigation is an affirmative defense. The burden rests with the employer. Unemployment benefits are not deducted from any judgment awarded. See, e.g., Sporn v. Alebrity, Inc., 129 N.J. Super. 449, 459 (Law Div. 1974). “Reducing recovery by the amount of the benefits received by plaintiff would be granting a windfall to defendant by allowing him an undeserved credit on his own wrongdoing”. Ibid.

For a full discussion on damages, see Goodman v. London Metals Exchange, Inc., 86 N.J. 19 (1981).

IV. SALES COMMISSIONS

Even at-will employees may sue if their employers terminate them to avoid paying them commissions. They may pursue a breach of the covenant of good faith and fair dealing claim for the wrongful termination, and a breach of contract claim for the unpaid commissions. If individual defendants participate in the plan to deprive plaintiff of earned commissions in order to benefit the corporate defendant, the individual defendants may be liable on a tortuous interference claim.

In Cappiello v. Ragen Precision Industries, Inc., 192 N.J. Super. 523 (App. Div. 1984), plaintiff was a commission salesman who claimed he was terminated by defendants so they could appropriate his right to accrued commissions. The jury found in his favor and awarded him compensatory and punitive damages. Even though plaintiff was an employee at will, he had an agreement with his employer for the payment of commissions. A breach of that agreement would entitle plaintiff to compensatory damages, but punitive damages are only available if tortuous conduct is proved. Pierce v. Ortho Pharmaceutical,supra. The court found that plaintiff’s supervisor and the president of the corporation acted for the corporation by terminating plaintiff in order to secure sizeable commissions owed to him. The court affirmed the award of punitive damages against the individual defendants on the theory that they tortuously interfered with plaintiff’s contract, and affirmed against the corporate defendant on a vicarious liability theory. See also Schwartz v. Leasametric, Inc., 224 N.J. Super. 21 (App. Div. 1988).