Metcalf v. Intermountain Gas Co.

778 P.2d 744, 116 Idaho 622, 4 I.E.R. Cas. (BNA) 961, 1989 Ida. LEXIS 128

• Court: Idaho Supreme Court
• Decided: August 8, 1989
• Docket: 17369
• Status: Published

Opinions

BAKES, Justice.

Plaintiff, Armida Metcalf, appeals the district court’s decision granting partial summary judgment for her former employer, defendant Intermountain Gas Company (Intermountain), on two of her five causes of action: i.e., breach of the employment contract, and breach of a covenant of good faith and fair dealing. The trial court denied Intermountain’s motion for summary judgment on the three other causes of action: sex discrimination, age discrimination and breach of public policy, each of which is still pending and awaiting trial. On appeal we consider only the dismissal of the claims for (1) breach of employment contract and (2) breach of an implied covenant of good faith and fair dealing.¹ We reverse.

I

Metcalf began working for Intermountain in 1979. She performed clerical duties in Intermountain’s Hailey, Idaho, office which consisted of seven employees. While on full time status, Metcalf incurred some illness which required her to take sick leave. Under the Intermountain policy an employee could accrue sick leave at a rate of one day per month. Although her illnesses did not exhaust all of her accrued sick leave, Metcalf was absent for eight weeks in 1984 and 1985. During this time, Metcalf underwent a hysterectomy and a thyroidectomy. However, the amount of sick leave which Metcalf took did exceed the company average for that time, as it did for fellow Hailey full time office clerk Betty Munster. According to the manager of the Hailey office, the absences of Met-calf and Munster, the only office clerks, created serious work problems for that office.

In June, 1986, Intermountain hired a part time clerk to replace Munster who retired. This clerk was elevated to full time status in August; in September Metcalf’s status was changed from full to part time, in part allegedly because of her sick leave history.

In January, 1986, Metcalf filed discrimination charges against Intermountain with the Idaho Human Rights Commission, alleging age and sex discrimination. Shortly thereafter, her hours were further reduced to two hours per day. In September, 1986, Metcalf voluntarily resigned to pursue other full time employment. The issue on appeal is whether the trial court properly granted summary judgment against Met-calf on the two counts in Metcalf’s complaint alleging (1) breach of employment contract, and (2) breach of covenant of good faith and fair dealing.

II

Regarding the breach of employment contract claim, Metcalf argues that the employment-at-will doctrine, which Metcalf acknowledges has been adopted and approved by this Court in innumerable decisions, has been modified in this case either by an express agreement or by an implied-in-fact agreement. As a result, Metcalf alleges that she could not be discharged, nor could her full time employment status be withdrawn, merely because she used a substantial portion of the sick leave she had accumulated pursuant to the employment contract. Intermountain, on the other hand, disputes this contention and asserts that there is no evidence in the record, and, particularly, nothing in the Personnel Manual and Employee Handbook which expressly or even impliedly limits Intermountain’s right to discharge Metcalf or to reduce her working hours. The district court agreed with Intermountain and found that “the sick leave policy of the defendant [did] not reach that level of specificity required to constitute an offer for contract, limiting the reason for which the plaintiff could be discharged.”²

We agree with the district court that there is no substantial evidence of an express contract provision precluding the employer from dismissing Metcalf “at will.” However, viewing the entire record, including the Personnel Manual and Employee Handbook, we conclude that there is a triable issue of fact regarding whether there was an implied-in-fact contractual agreement that Metcalf’s employment would nbt be terminated or reduced because of her using the accumulated sick leave which both parties agree was part of the oral employment contract.

As the result of numerous decisions of this Court in recent years, it is now I settled law in this state that:

Unless an employee is hired pursuant to a contract which specifies the duration of the employment or limits the reasons for which an employee may be discharged, the employment is at the will of either party and the employer may terminate the relationship at any time for any reason without incurring liability. MacNeil v. Minidoka Memorial Hospital, 108 Idaho 588, 701 P.2d 208 (1985); Jackson v. Minidoka Irrigation Dist., 98 Idaho 330, 563 P.2d 54 (1977).

Spero v. Lockwood, Inc., 111 Idaho at 75, 721 P.2d at 175 (1986). Thus, in the absence of an agreement between the employer and the employee limiting the employer’s (or the employee’s) right to terminate the contract at will, either party to the employment agreement may terminate the relationship at any time or for any reason without incurring liability. MacNeil v. Minidoka Memorial Hospital, 108 Idaho 588, 701 P.2d 208 (1985). However, such a limitation on the right of the employer (or the employee) to terminate the employment relationship “can be express or implied.” Harkness v. City of Burley, 110 Idaho 353, 356, 715 P.2d 1283, 1286 (1986). A limitation may be implied if, from all the circumstances surrounding the employment relationship, a reasonable person could conclude that both parties intended that the employer’s (or the employee’s) right to terminate the employment relationship-at-will had been limited by the implied-in-fact agreement of the parties. See, e.g., Spero v. Lockwood, Inc., 111 Idaho 74, 721 P.2d 174 (1986); Wagenseller v. Scottsdale Mem. Hospital, 147 Ariz. 370, 710 P.2d 1025, 1036 (Ariz.1985) (en banc) (“An implied-in-fact contract term ... is one that is inferred from the statements or conduct of the parties.”); 1 A.Corbin, § 17, at 38 (1960).

This Court has recognized that “[a]n employee’s handbook can constitute an element of the contract.” Harkness v. City of Burley, 110 Idaho 353, 356, 715 P.2d 1283, 1286 (1986); Johnson v. Allied Stores Corp., 106 Idaho 363, 679 P.2d 640 (1984). Unless an employee handbook specifically negates any intention on the part of the employer to have it become a part of the employment contract, a court may conclude from a review of the employee handbook that a question of fact is created regarding whether the handbook was intended by the parties to impliedly express a term of the employment agreement. Spero v. Lockwood, supra; Harkness v. City of Burley, supra; Johnson v. Allied Stores Corp., supra; Wagenseller v. Scottsdale Mem. Hospital, supra.

In the present case the employee handbook was silent on the question of whether the terms and employee benefits set out in the handbook affected or otherwise modified the employer’s right to terminate the employment relationship at will.³ Accordingly, we conclude, after considering all the circumstances of this case, that a material issue of fact exists regarding whether, by providing for accumulated sick leave benefits, the employer impliedly agreed with the employee that the employment relationship would not be terminated or the employee penalized for using the sick leave benefits which the employee had accrued. “The trier of fact must determine whether ‘a contract existed between the parties by virtue of the ... policy manual.’ ” Harkness v. City of Burley, 110 Idaho at 356, 715 P.2d at 1286.

Accordingly, the partial summary judgment on Metcalf’s breach of contract cause of action is reversed, and that cause remanded for trial.

Ill

Metcalf also appeals from the trial court’s granting of partial summary judgment on her cause of action which alleges that “[ijmplicit in [the parties’ employment contract] was a covenant of good faith and fair dealing which governed the circumstances and manner of terminating [her] full time employment.” Metcalf asserts essentially that there is an implied-in-law (as distinguished from an implied-in-fact) covenant of good faith and fair dealing in every employment contract. Metcalf makes no specific factual allegations which would support a finding that the parties’ agreement contained such a covenant of good faith and fair dealing. Rather, she asserts that the law should imply such a covenant in all employment contracts, or at least in this employment contract.

Until today, this Court has not recognized an implied-in-law covenant of good faith and fair dealing in employment contracts. In MacNeil v. Minidoka Memorial Hospital, 108 Idaho 588, 701 P.2d 208 (1985), this Court unanimously stated:

The rule in Idaho, as in most states, is that unless an employee is hired pursuant to a contract which specifies the duration of the employment, or limits the reasons for which the employee may be discharged, the employment is at the will of either party, and the employer may terminate the relationship at any time for any reason without incurring liability. See Jackson v. Minidoka Irrigation Dist., 98 Idaho 330, 563 P.2d 54 (1977) and the cases cited therein. The only general exception to the above rule is that an employer may be liable for wrongful discharge when the motivation for discharge contravenes public policy. Jackson, supra.

108 Idaho at 589, 701 P.2d at 209 (emphasis added). In Anderson v. Farm Bureau Mutual Ins. Co. of Idaho, 112 Idaho 461, 732 P.2d 699 (Ct.App.1987), the Court of Appeals, quoting from our earlier decision in MacNeil v. Minidoka Memorial Hospital, 108 Idaho 588, 701 P.2d 208 (1985), recognized that:

The only general exception to this rule [employment-at-will doctrine] is that an employer may be liable if the discharge is for a reason contravening public policy.

112 Idaho at 469, 732 P.2d at 707 (emphasis added).

Recently, in Clement v. Farmers Insurance Exchange, 115 Idaho 298, 766 P.2d 768 (1988), a case involving a principal-agent (independent contractor) relationship, appellants had argued “that an implied covenant of good faith and fair dealing so requires the invalidating of an express termination provision of a written contract.” The Court responded, “We decline to so hold,” stating:

We hold that the express written contract term authorizing the termination upon 90-days notice is not overridden by an implied covenant of good faith and fair dealing which would supplant the express language of the contract and permit termination only upon good cause.

115 Idaho at 300, 766 P.2d at 770.

Nevertheless, it is the opinion of this Court today that in employer-employee relationships (as distinguished from principal-agent (independent contractor) relationships, Clement v. Farmers Insurance Exchange, supra) we should adopt an implied-in-law covenant of good faith and fair dealing (the covenant) as hereinafter outlined. In changing this Court’s prior course, it is important to explain what the covenant which we adopt is. For guidance we turn to the rationale of some of our adopting sister states. Recognizing that we are joining the minority view in this country, we further acknowledge the concerns expressed by courts which have rejected the covenant out of concern that it would place undue restrictions on management and would infringe on the employer’s legitimate exercise of management discretion.

First, the covenant is implied in contracts. A breach of the covenant is a breach of the employment contract, and is not a tort. The potential recovery results in contract damages, not tort damages. See, Foley v. Interactive Data Corp., 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373 (1988) (en banc); Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025 (Ariz.1985) (en banc). In Wagenseller, the Arizona Supreme Court, while adopting the implied covenant, rejected a rule which would allow tort damages. Referring to an earlier decision in California which allowed for such recovery (later rejected in Foley v. Interactive Data Corp., supra), the Arizona court wrote:

We find neither the logic of the California cases nor their factual circumstances compelling for recognition of so broad a rule in the case before us. Were we to adopt such a rule (tort damages), we fear that we would tread perilously close to abolishing completely the at-will doctrine and establishing by judicial fiat the benefits which employees can and should get only through collective bargaining agreements or tenure provisions.

710 P.2d at 1040 (emphasis in original).

The California Supreme Court recently has also rejected the rule that a breach of the implied covenant of good faith and fair dealing is a tort, permitting tort damages. The California Courts of Appeals had adopted such a tort approach commencing with the case of Cleary v. American Airlines, Inc., 111 Cal.App.3d 443, 168 Cal.Rptr. 722 (1980). However, in Foley, the California Supreme Court rejected the doctrine in which a breach of the implied covenant of good faith and fair dealing is a tort. After noting that “[t]he covenant of good faith and fair dealing was developed in the contract arena and is aimed at making effective the agreement’s promises,” the court in Foley observed that “the clear majority of jurisdictions have either expressly rejected the notion of tort damages for breach of the implied covenant in employment cases or impliedly done so by rejecting any application of the covenant in such a context.” 254 Cal.Rptr. at 227, 229, 765 P.2d at 389, 391. The court in Foley then reversed the earlier decisions of the California Courts of Appeals and held that a breach of the covenant of good faith and fair dealing is a breach of contract compensable only by contract damages, not tort damages. We agree with the analysis and conclusions of both the California and Arizona courts and conclude that the covenant is implied in contracts, and breach of the covenant is the breach of the contract, not a tort.

Second, we hold that the covenant protects the parties’ benefits in their employment contract or relationship, and that any action which violates, nullifies or significantly impairs any benefit or right which either party has in the employment contract, whether express or implied, is a violation of the covenant which we adopt today. When the Arizona Supreme Court adopted the implied covenant of good faith in the Wagenseller case, it carefully considered the concerns of those courts which have rejected the covenant and wrote:

[T]he implied-in-law covenant of good faith and fair dealing protects the right of the parties to an agreement to receive the benefits of the agreement that they have entered into. The denial of a party’s right to those benefits, whatever they are, will breach the duty of good faith implicit in the contract. ...

We ... recognize an implied covenant of good faith and fair dealing in the employment-at-will contract, although that covenant does not create a duty for the employer to terminate the employee only for good cause. The covenant does not protect the employee from a “no cause” termination because tenure was never a benefit inherent in the at-will agreement. The covenant does protect an employee from a discharge based on an employer’s desire to avoid the payment of benefits already earned by the employee, such as the sales commissions in Fortune [v. National Cash Register Co., 373 Mass. 96, 364 N.E.2d 1251 (1977)], but not the tenure to earn the pension and retirement benefits in Cleary [v. American Airlines, 111 Cal.App.3d 443, 168 Cal.Rptr. 722 (1980)]....

... [B]ecause we are concerned not to place undue restrictions on the employer’s discretion in managing his work force and because tenure is contrary to the bargain in an at-will contract, we reject the argument that a no cause termination breaches the implied covenant of good faith and fair dealing in an employment-at-will relationship.

710 P.2d at 1040-1041 (emphasis added).

We agree with the foregoing standard and analysis of the Arizona Supreme Court in Wagenseller, and adopt the implied-in-law covenant of good faith and fair dealing in employment contracts as set out above. Any action by either party which violates, nullifies or significantly impairs any benefit of the employment contract is a violation of the implied-in-law covenant. However, we reject the “amorphous concept of bad faith” as the standard for determining whether the covenant has been breached. See, Thompson v. St. Regis Paper Co., 102 Wash.2d 219, 685 P.2d 1081, 1086 (1984) (en banc); Brockmeyer v. Dun & Bradstreet, 113 Wis.2d 561, 335 N.W.2d 834, 838 (1983). As those and other courts have pointed out, it is difficult to distinguish a “bad faith” discharge from a no-cause discharge (which is permitted under the at-will doctrine) or a discharge in violation of public policy (which is not permitted under the at-will doctrine). MacNeil v. Minidoka Memorial Hospital, 108 Idaho 588, 701 P.2d 208 (1985); Jackson v. Minidoka Irr. Dist., 98 Idaho 330, 563 P.2d 54 (1977). The California Supreme Court, in Foley v. Interactive Data Corp., 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373 (1988) (en banc), observed that simply interjecting a requirement of “bad faith” does nothing to determine those cases in which damages should be awarded. “Virtually any firing (indeed any breach of a contract term in any context) could provide the basis for a pleading alleging the discharge was in bad faith under the cited standards.” 254 Cal.Rptr. at 239, 765 P.2d at 401. Furthermore, a bad faith standard would require a judicial inquiry into the subjective intentions of the party who is alleged to have violated the covenant. As the court stated in Foley, “Resolution of the ensuing inquiry into the employer’s motives has been difficult to predict and demonstrates the imprecision of the standards thus far formulated.” 254 Cal.Rptr. at 238, 765 P.2d at 400. Accordingly, without tying the violation of the covenant to the “amorphous concept of bad faith,” we conclude that any action by either party which violates, nullifies or significantly impairs any benefit of the employment contract is a violation of the implied-in-law covenant of good faith and fair dealing which we adopt today. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025 (Ariz.1985); Foley v. Interactive Data Corp., 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373 (1988).

We recognize that our decision today is a departure from long established principles of contract law. As the California court in Foley noted:

Significant policy judgments affecting social policies and commercial relationships are implicated in the resolution of this question in the employment termination context. Such a determination which has the potential to alter profoundly the nature of employment, the cost of products and services, and the availability of jobs, arguably is better suited for legislative decisionmaking.

254 Cal.Rptr. at 235, 765 P.2d at 397. While we have not gone as far in interpreting this implied covenant as a small minority of courts have, see Monge v. Beebe Rubber Co., 114 N.H. 130, 316 A.2d 549 (1974); Toussaint v. Blue Cross & Blue Shield of Michigan, 408 Mich. 579, 292 N.W.2d 880 (1980), we recognize that our decision today is a departure from prior law. Accordingly, it will only be applied prospectively to breaches or violations of the covenant occurring after the effective date of this opinion, and to the claims in this case. Smith v. State, 93 Idaho 795, 473 P.2d 937 (1970). The summary judgment of the trial court is reversed, and the case is remanded to the trial court for further proceedings consistent with this opinion. Costs to appellant. No attorney fees awarded.

JOHNSON, J., concurs. HUNTLEY, J., concurs in the result. SHEPARD, J., sat, but did not participate due to his untimely death.

1 . The partial summary judgment dismissing these two claims was certified as final under I.R.C.P. 54(b). Therefore, we do not address questions raised by appellant on her breach of public policy claim, as that cause of action was not resolved by the trial court and is still pending. Metcalf also sued Intermountain in federal court. That court dismissed all pendent state claims. Metcalfs federal suit consists now of discrimination claims under Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act. A stay on those proceedings has been issued by the federal court.

2 . Intermountain, in its brief on appeal, asserts that the district court’s decision is supported by a “long line of [Idaho] cases which continues to grow, upholding] the traditional rule that an employee-at-will can be discharged at any time and for any reason, except those violative of strong public policy. See, Jones v. EG & G Idaho, Inc., 111 Idaho 591, 726 P.2d 703 (1986); Spero v. Lockwood, Inc., 111 Idaho 74, 721 P.2d 174 (1986); Watson v. Idaho Falls Consolidated Hospitals, Inc., 111 Idaho 44, 720 P.2d 632 (1986); Harkness v. City of Burley, 110 Idaho 353, 715 P.2d 1283 (1986); MacNeil v. Minidoka Memorial Hospital, 108 Idaho 588, 701 P.2d 208 (1985); Jackson v. Minidoka Irrigation District, 98 Idaho 330, 563 P.2d 54 (1977); Holmes v. Union Oil Co. of California, 114 Idaho 773, 760 P.2d 1189 (Ct.App.1988); Arnold v. Diet Center, Inc., 113 Idaho 581, 746 P.2d 1040 (Ct.App.1987); and Staggie v. Idaho Falls Consolidated Hospitals, Inc., 110 Idaho 349, 715 P.2d 1019 (Ct.App.1986).”

3 . Subsequent to the employee’s termination in this case, the employee handbook was modified to provide:

This handbook is not a contract and cannot create a contract. As an employee of IGC, you should understand that employment is "at will.’’ That means that employment can be terminated at any time by either you or the company, with or without cause and with or without notice.