Alabama Recent Supreme Court Decision Is a Warning to Employers: Watch Your Employee Handbook’s Language
This alert was originally published by Phelps on January 23, 2023, and was expanded for additional publication by Law360 under the title Ala. Ruling Is An Employee Handbook Cautionary Tale.
A recent case from the Alabama Supreme Court is a cautionary warning to employers on the importance of carefully considering the language of their employment policies and procedures to avoid unintentionally creating a unilateral contract.
In Davis v. City of Montevallo,[1] a 5-4 majority of the court concluded that an employee handbook that included language specifying mandatory employee discharge/termination procedures created a contract between an employer and its at-will employee.
In rejecting multiple arguments raised by the defendant employer, however, the case does provide a roadmap to employers on how to avoid such claims.
Facts of the Case
The plaintiff employee was hired in 2007 as an at-will employee and received a copy of his employer's handbook upon hiring.
The handbook included detailed step-by-step discharge procedures that the employer stated it would follow before terminating an employee, including written notice of termination, a determination hearing in which the employee and a representative could participate, final review of the decision by the mayor of the employer city, and employee appeal rights.[2]
In 2015, the employer determined that the plaintiff employee had violated several provisions of the handbook and terminated his employment, but in doing so allegedly did not follow the handbook's specific discharge procedures.
The employee sued for breach of contract over the employer's alleged failure to follow the discharge procedures, but the trial court granted the employer's motion for summary judgment.[3]
The Handbook: Mandatory Language Created a Binding Contract
On appeal by the employee, the Alabama Supreme Court initially stated that it is well-settled law in Alabama that the employment of an employee hired at will may be terminated by either the employer or the employee "with or without cause or justification," meaning "a good reason, a wrong reason, or for no reason at all."[4]
Citing prior precedent, however, the court noted that it "has recognized that an employee handbook can represent a binding contract obligating an employer to satisfy certain conditions precedent to dismissing an employee."[5] The court then restated its prior three-part test to determine if a handbook created a contract:
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- The language in the handbook must be specific enough to constitute an offer;
- The offer must have been communicated to the employee by the issuance of the handbook; and
- The employee must have accepted the employer's offer by either accepting or retaining employment after the employee has become generally aware of the employer's offer — the handbook's language.[6]
The court also observed that, "Whether a proposal is meant to be an offer for a unilateral contract is determined by the outward manifestations of the parties, not by their subjective intentions."[7]
Turning to the language of the handbook in question, the Alabama Supreme Court observed that the handbook's pervasive use of "shall" when describing the discharge procedures convinced it that the employer intended these procedures to be binding.
The court explained that the mandatory meaning of "shall" was made clear by comparing it with the handbook's frequent use of "may" when describing other procedures or policies.
The court reasoned the use of mandatory versus permissive, discretionary language demonstrated that the employer knowingly chose to make some provisions of the handbook, specifically the discharge procedures, binding on the employer.[8]
The court further concluded that, "An employee, faced with such exhaustive, mandatory language, 'could reasonably believe that, as long as he worked within the guidelines set out in the handbook, he would not be terminated until all procedures set out in the handbook would be followed.'"
Accordingly, the court held that the discharge procedures were specific enough to constitute an offer of contract.[9]
The Court Rejected Multiple Arguments by the Employer
The employer offered several arguments that were rejected by the Alabama Supreme Court.
First, the court said the employee's status as at-will was irrelevant to the question of whether the employer had to follow its discharge procedures, because the reason for termination is distinct from the means of termination.[10]
Second, the employer cited the disclaimer of a contract language in the handbook.
The court acknowledged that a disclaimer in a handbook that states it does not create any contract whatsoever would defeat the employee's claims, but the handbook's limited disclaimer only disclaimed a contract for any specific period of time. Thus, the language was not sufficiently broad enough to disclaim away the employee's contract argument.[11]
Finally, the employer argued its handbook was not a contract because it contained language stating the employer retained the freedom to change the policies and procedures.
The Alabama Supreme Court disagreed, however, and noted that the employer's stated right to change its procedures was different from language expressly reserving the right to deviate from those procedures — a reservation of rights the court has previously held to be sufficient to conclude that any alleged promises in such a handbook were illusory and could not constitute an enforceable contract.[12]
The court explained that the employer's reserved right to change its procedures did not render the promise to follow existing procedures to be an unenforceable contract and, therefore, the employer's discharge procedures could be characterized as follows:
I promise I will not dismiss you without exhausting specific procedures unless I change this policy before you are discharged. [13]
The court reversed the summary judgment ruling in favor of the employer and sent the case back to the trial court to address the issue of whether the employer, in fact, violated the handbook's discharge procedures.[14]
Important Employer Takeaways and Practical Pointers
The result of this case is not necessarily a surprise, given the facts and prior Alabama Supreme Court precedent.
Nonetheless, the decision is a helpful reminder to employers to scrutinize their employee handbook language. And the decision is an important lesson to employers that they cannot rely merely on the fact that an employee is hired at-will to defend against claims of a contract based on handbook language.
While serving as a warning of the dangers of promises in a handbook, the decision does offer Alabama employers key takeaways and practical pointers on the subject, including the following.
Careful drafting is critical.
The decision highlights the importance of carefully drafting the provisions in handbooks to accurately convey the employer's intent.
Employers should be mindful of the promises and statements they make in handbooks and ensure they are not unintentionally creating enforceable obligations.
To that end, employers should use plain, unambiguous language that is easy to understand, and avoid legalese, and ensure that the policies in the handbook are not internally inconsistent.
Include a clear no-contract disclaimer.
As noted by the Alabama Supreme Court, to have an effective contract disclaimer, the handbook should broadly disclaim the creation of any contract of employment.
A reservation of rights is only effective if it includes the right to deviate from stated policies.
The decision also teaches that an employer cannot rely on the reservation of the right to change handbook provisions in the future to avoid the creation of a contract. Instead, the employer must state clearly that it reserves or retains the right to deviate from its stated policies.
For example, as illustrated by the decision, employers should state clearly that they have the right, in their discretion, to accelerate or skip progressive discipline steps and, if appropriate, move to immediate termination for certain types of misconduct.
They should also consider if a written policy is necessary if it addresses an unlikely issue, unless required by applicable law. The absence of a written policy may provide the employer with more flexibility to address the situation if it actually arises.
Regularly review and update handbook language.
Handbooks should be reviewed on a regular basis, at least annually, so that necessary updates can be made based on a change in applicable law or the employer's intent.
Be aware of state laws.
The significance of this ruling may vary depending on state laws. Alabama has few state-specific employment laws, and some states may provide greater protection to employees.
Employers, especially those with operations across multiple states, should be aware of the specific laws that might apply to handbooks in each state in which they operate.
As just one example, an employee's entitlement to receive accrued but unused paid leave upon their separation of employment may be governed by the handbook and may vary from state to state.
Train supervisors on the handbook.
Employers should regularly train supervisors and other employees who administer the handbook's policies.
Supervisors should consult with the progressive discipline policy and any other applicable policy, if possible, before disciplining or terminating an employee.
Effectively communicate the handbook to employees.
Employees should receive a copy of the handbook and all updates and sign acknowledgment of receipt forms that are maintained indefinitely by the employer.
The handbook should be easily accessible to employees during their employment, either in paper form or electronically.
Specific policies from the handbook, such as the equal employment opportunity policy, anti-harassment policy and safety procedures, should be the subject of training at hiring and regular intervals thereafter.
Please contact Michael Turner, Caleb Diaz or any member of Phelps’ Labor and Employment team if you have questions or need advice or guidance.
[1] Davis v. City of Montevallo, 2023 Ala. LEXIS 7, 2023 WL 180252 (Case No. 1210016) (January 13, 2023). https://acis.alabama.gov/displaydocs.cfm?no=1127177&event=6IV0YI0RD.
[2] 2023 Ala. LEXIS 7, at **2-3. (There is no discussion in the case of any constitutional rights to due process the employee might have had as a municipal employee).
[3] 2023 Ala. LEXIS 7, at *3.
[4] 2023 Ala. LEXIS 7, at *5 (citing Hoffman-La Roche, Inc. v. Campbell, 512 So. 2d 725, 728 (Ala. 1987)).
[5] 2023 Ala. LEXIS 7, at *5 (quoting Harper v. Winston Cnty., 892 So. 2d 346, 351 (Ala. 2004).
[6] 2023 Ala. LEXIS 7, at **5-6 (citing Hoffman-La Roche, 512 So. 2d at 735). (Factors two and three are often not disputed, and they were not at issue on this appeal).
[7] 2023 Ala. LEXIS 7, at *6 (citing Hoffman-La Roche, 512 So. 2d at 731).
[8] 2023 Ala. LEXIS 7, at **7-10.
[9] 2023 Ala. LEXIS 7, at *10 (citing Hoffman-La Roche, 512 So. 2d at 736-37).
[0] 2023 Ala. LEXIS 7, at **10-11.
[1] 2023 Ala. LEXIS 7, at **11-15. The three members of the Court writing in dissent, however, believed that a portion of the disclaimer language — "I understand that nothing in this Handbook ... place[s] a limitation on ... the City's freedom to terminate the employment relationship at any time" — was effective to disclaim away any contract. Id. at **24-28.
[2] 2023 Ala. LEXIS 7, at *16-17 (citing Harper, 892 So. 2d at 351; Stinson v. American Sterilizer Co., 570 So. 2d 618, 621 (Ala. 1990); and Campisi v. Scoles Cadillac, Inc., 611 So. 2d 296, 300 (Ala. 1992)).
[3] 2023 Ala. LEXIS 7, at *17-18 (citing Hoffman-La Roche, 512 So. 2d at 735) (internal bracket and ellipsis removed).
