DEVELOPMENTS IN STATE TORT LAW AFFECTING THE EMPLOYMENT RELATIONSHIP. By Edward T. Ellis and Robin D. Leone *

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1 DEVELOPMENTS IN STATE TORT LAW AFFECTING THE EMPLOYMENT RELATIONSHIP By Edward T. Ellis and Robin D. Leone * Although employment-at-will remains the fundamental concept behind the common law of employment in the United States, the common law torts of wrongful discharge, interference with contract, defamation, negligent misrepresentation, and negligent hiring and retention have weathered the at-will doctrine in most states. This paper reviews recent case law in the employment tort area and addresses trends in statutory development, including the increase in laws providing immunity to employers from claims previously allowed under the common law. This paper is not a tutorial on how the law came to be, but rather an overview of recent developments that demonstrates the broad spectrum of judicial and statutory treatment of these topics, from conservative states like New York, to more liberal jurisdictions like California. A list of sources appears in an appendix. I. AT-WILL EMPLOYMENT AND THE PUBLIC POLICY EXEMPTION A. Defining the Public Policy Exemption Under the doctrine of employment-at-will, the employer and employee are on equal footing, with both holding the right to discontinue the employment relationship at any time and for any reason. The result is that only employees covered by valid employment contracts are protected from an unexpected discharge, and those only to the extent of contract damages. One of the major exceptions to this doctrine is the public policy exemption. Followed to varying degrees in most states, the exemption enables discharged employees to pursue a cause of action for wrongful discharge in limited circumstances. Generally, the employee must show that the discharge implicates public policy on some level,

2 such as when an employer retaliates against an employee for performing a lawful act or for refusing to engage in unlawful conduct. See e.g., Shick v. Shirey, 716 A.2d 1231 (Pa. 1998) (retaliatory discharge for filing a worker s compensation claim). Courts have also found a public policy exception to the doctrine of employment-at-will when an employer discriminates against a particular employee because of race, gender, or disability. City of Moorpark v. Superior Court, 959 P.2d 752 (Cal. 1998) (disability discrimination); Phillips v. St. Mary Reg l Med. Ctr., 116 Cal. Rptr. 2d 770 (Cal. Ct. App. 2002) (racial and sexual discrimination). Finding a public policy implication or defining public policy at all is challenging for every state, no matter how expansively the courts elect to interpret the exemption. For example, California, which has perhaps the most evolved framework of exceptions to the at-will doctrine, employs a four-part test that requires showing that the public policy: 1. Has its basis in a constitutional or statutory provision; 2. Affects the public at large, not just the employer s or employee s personal interests; 3. Has been articulated at the time of the employee s discharge; and 4. Is fundamental and substantial. White v. Ultramar, Inc., 73 Cal. Rptr. 2d 262, 266 (Cal. Ct. App. 1998). B. The Exemption in Practice 1. Limiting Recognition of Public Policy Claims The state-by-state variation is immense, with some states limiting use of the public policy exception to fact-specific situations. New York, for example, simply does not recognize the common law claim of wrongful discharge. Lobosco v. New York Tel. Co., 751 N.E.2d 462 (N.Y. 2001). In Lobosco, the court found that the state s whistleblower law did not apply to the facts of the case, which involved an employee who refused to testify untruthfully on behalf of his employer and who

3 blew the whistle on a fellow employee s wrongful acts. The New York Court of Appeals also recently elected not to broaden an extremely narrow exception to the employment-at-will doctrine relevant only to associate attorneys working for a law firm. The only exceptions to the employment-at-will rule ever adopted by this Court have involved very specific substitutes for a written employment contract. Horn v. New York Times, 2003 WL (N.Y. Feb. 25, 2003) In Horn, the court concluded that a physician working in a corporate setting could not be analogized to an associate attorney working in a law firm for two reasons: 1) service to clients is the only reason an associate is employed at a law firm; providing medical services was a part of Dr. Horn s corporate management job, rather than the central purpose of her employment at the company, and 2) the associate and the employer law firm share a common professional enterprise and have a mutual obligation to uphold the same ethical standards; Dr. Horn provided medical services to Times employees, while the company itself was in the business of publishing newspapers. Even in Horn s predecessor case, the court did not recognize a tort of abusive discharge, but instead found an obligation implied in the professional ethics laws. Wieder v. Scala, 609 N.E.2d 105 (1992). Compare Bohatch v. Butler & Binion, 977 S.W.2d 543 (Tex. 1998) (finding no cause of action for one partner in a law firm against the partners who expelled her for reporting suspected over-billing by another partner). Texas joins New York at the conservative end of the spectrum, recognizing only the so-called Sabine Pilot exemption. Nearly 20 years ago, Sabine Pilot established the precedent that an at-will employee can bring suit for wrongful discharge if the only reason for termination is refusal to perform an illegal act that could result in criminal penalties. Sabine Pilot Serv., Inc. v. Hauck, 687 S.W.2d 733, 735 (Tex.1985). The Texas Supreme Court has declined to add any further exceptions to the doctrine, including refusing to expand coverage to private employees discharged for reporting

4 illegal activities. Austin v. HealthTrust, Inc., 967 S.W.2d 400, 403 (Tex.1998). See also Guient v. Hogan & Assoc., No CV, 2001 WL (Tex. App. June 28, 2001) (unpublished opinion) (declining to recognize a common law cause of action for constructive discharge based on sexual harassment or retaliation). Texas also has followed New York s lead in refusing to imply a duty of good faith and fair dealing in the employment relationship. City of Midland v. O'Bryant, 18 S.W.3d 209, 216 (Tex. 2000); Simmons Airlines v. Lagrotte, 50 S.W.3d 748 (Tex. App. 2001). 2. Expanding Application of the Public Policy Exemption California is on the opposite end of the spectrum and continues to test the outer limits of the public policy exception. California recently addressed the issue of protecting regulated professionals, such as physicians, and has responded in a typically expansive manner. In evaluating the case of a physician terminated for advocating medically appropriate health care, the California Supreme Court readily identified a violation of public policy. Khajavi v. Feather River Anesthesia Med. Group and Del Pero, 100 Cal. Rptr. 2d 627 (2000). Also in recent years, California courts have ruled that federal law can establish state public policy and that administrative regulations are sufficient to demonstrate a public policy commitment. Green v. Ralee Eng g Co., 960 P.2d 1046 (Cal. 1998). In Green, the court implicated the Federal Aviation Act, embodied in a series of administrative regulations, as the source for both a federal and state public policy of commitment to air safety. [I]f a statute that seeks to further a public policy objective delegates the authority to adopt administrative regulations to an administrative agency... and that agency adopts regulations that... effectuate the statutory policy, then those regulations may be manifestations of important public policy. Green, 960 P.2d at Green goes beyond the statutory requirements of California s whistleblower protection statute by eliminating the requirement to report any alleged wrongdoing of an

5 employer or fellow employees to an outside regulator, rather than through internal channels. 3. Moderating Use of the Public Policy Exception Some states that allow wrongful discharge actions in certain situations e.g., Pennsylvania continue to characterize the exception to employment-at-will as a narrow one. As a result, even if the state of the law is more like California s in practice, the courts describe the exemption as if adhering to New York s more stringent scheme. For example, the Supreme Court of Pennsylvania found an exemption on public policy grounds in a case involving a supervisory employee terminated for refusing to engage in conduct prohibited by public policy. Rothrock v. Rothrock Motor Sales, Inc., 810 A.2d 114 (Pa. Super. Ct. 2002). Such an exemption would be a harder sell in a court in Texas or New York. Like Pennsylvania, Illinois limits application of the exception to instances where an employee has been terminated for filing a worker s compensation claim or for whistleblowing. Jacobson v. Knepper & Moga, P.C., 706 N.E.2d 491 (Ill. App. Ct. 1998). However, Illinois courts have made room for other exceptions, such as in public safety cases. Sherman v. Kraft General Foods, Inc.,651 N.E.2d 708 (Il.App.Ct.1995).To prove a claim in Illinois, the employee has to show his/her termination was in retaliation for performing a protected activity, such as filing a worker s compensation claim or reporting illegal activity to a regulatory agency. McGrath v. CCC Information Servs., Inc., 731 N.E.2d 384 (Ill. App. Ct. 2000). In McGrath, the plaintiff could not show that a dispute over stock options and the amount of an employee bonus were matters of public policy. The court held instead that plaintiff's claim is more in the nature of a private and individual grievance insufficient to justify a claim of wrongful discharge. Id. at 391. Every state, including California, disavows adherence to the public policy exemption in a number of circumstances, such as in cases requiring balancing between constitutional rights and public