Preface PR 15

Employment Contracts

The law that governs relationships between employers and employees comes from many sources: contract law, labor law, wages and hours laws, tort law (e.g., wrongful discharge, discrimination, sexual harassment), criminal law, health and safety laws, and so forth, with overlap between kinds of law. This chapter provides an overview of contract law as it relates to employment contracts.

A. Employment as a Contract

The employment relationship establishes a contract, whether it is written or oral, express or implied. As summed up in Foley v. Interactive Data:

We begin by acknowledging the fundamental principle of freedom of contract: employer and employee are free to agree to a contract terminable at will or subject to limitations. Their agreement will be enforced so long as it does not violate legal strictures external to the contract, such as laws affecting union membership and activity, prohibitions on indentured servitude, or the many other legal restrictions . . . which place certain restraints on the employment arrangement.

A contract is defined as an enforceable agreement between two parties. An employment contract is an enforceable agreement between two parties that contains whatever terms and conditions of employment the parties agree upon and, when accepted, becomes controlling upon the employment relationship. The contract may be oral or written, express or implied (the latter terms are defined below).

The following sections limit the discussion of employment contracts to those contracts between an employer and an employee contracts between an employer and an independent contractor or self-employed person, as described in A.1., below, do not raise an issue for UI purposes unless UI status as an employee is also in question. While Tax Branch will make the determination of employee status, the discussion in A.1. is included for informational and comparison purposes.

If the employment proceeds normally as negotiated, the contract is considered as being performed; if the contract does not proceed according to its terms because one of the parties does not perform as agreed, that party is said to be in breach.

NOTE: The employment contract may be modified by the parties, and what started out to be a breach in the contract may become a new term and condition of employment.

Example 1:

Annie starts work for the ABC Company as a typist. She goes to night school, where she learns stenography. When the employer discovers that she has stenographic skills, he asks her if she will take dictation as an additional duty, and offers an increase in pay. She agrees. The contract has been reformed, and the second agreement is incorporated into the earlier contract as a new condition of employment. If Annie then refuses to take dictation, her refusal will be a breach of the employment contract (and disqualifying for our purposes if she is terminated, unless Annie had other good cause for the refusal).

Example 2:

Bob starts work for the XYZ Company as a typist. He goes to night school, where he learns stenography. When the employer learns that he has stenographic skills, he asks him if he will take dictation as an additional duty, but states he cannot afford an increase in pay. Bob refuses the additional work. The contract has not been reformed, and the request is not incorporated into the earlier contract as a new condition of employment. Bob’s refusal to reform the contract, as well as his refusal to take dictation, cannot be the basis for a discharge for breach of the employment contract (if Bob is discharged solely for refusal to take dictation, the discharge will be for reasons other than misconduct in connection with the work).

- "Major Breach"

A major breach of contract is defined as "failure, without legal excuse, to perform any promise which forms the whole or part of a contract" (Black’s Law Dictionary). A major breach may result in either a quit or discharge and the claimant may file for UI benefits. A major breach occurs when the contract is not salvageable, either because one of the parties does not want it to be salvageable, or for other, outside, reasons.

Example 3:

Carl understands he must be at work at 8 a.m. each day. He is habitually late without good cause, and Sam warns Carl each time that his tardiness may result in discharge. Eventually, Sam fires Carl because of the habitual tardiness. Carl is in major breach of the contract, and Sam’s discharge of Carl will be considered to be for misconduct.

Example 4:

Betty works two weeks, and Jane tells Betty on the regularly-appointed payday that Betty will have to wait an additional two weeks for her paycheck because Jane cannot meet the payroll. Jane is in breach of the employment contract, payroll provisions being governed by the Labor Code, and Betty’s leaving will be with good cause.

- "Minor Breach"

A minor breach is less serious than a major breach, and does not give one party the right to consider the contract as having ended. In some cases, the minor breach may be forgiven, or "condoned," by one of the parties.

Example 5:

The CDE Company publishes an employee handbook that contains information to the effect that the employee is to leave the key to his locker in his locker when he removes his personal possessions at the end of the shift. In practice, no employees ever lock their locker, having lost their keys years ago. After several lockers are rifled and personal possessions are missing, the employer threatens all employees with adverse action if the lockers are not kept locked, but refuses to replace the missing keys. Although the employees are technically in breach, the breach is minor because the employees have no way of complying with the employer requirement, which has now become unreasonable if the employer will not supply duplicate keys.

Example 6:

The claimant, a painter, is asked to go to HIJ Paint Store to pick up six gallons of paint, color "Desert Sand." In error, he picks up six gallons of "Sahara Sand," just slightly off the correct color. He paints the rooms with the wrong paint, and the homeowner approves his work. His employer, however, has noticed the name of the paint that was applied, and refuses to pay him because he used the wrong color. Even though the claimant may have slightly breached the contract, his employer suffered no loss because the homeowner liked the paint and paid the bill. This minor breach would not be grounds for termination.

Example 7:

Frieda has an hour for lunch each day. She usually takes one and a half hours, returning to work a half hour late each day. Although aware of it, the employer says nothing and the long lunch hours continue for several months. Frieda makes up the time, before or after work (there is no time clock violation). The employer, in disgust, finally confronts Frieda and discharges her for the long lunch hours. The employer has condoned Frieda’s minor breach for several months and, in the absence of warnings that the minor breach will not be tolerated, the discharge is for reasons other than misconduct in connection with the work.

In contrast, an offer of work is not a contract, but an offer to make a contract, providing both parties can agree to contract terms. If the claimant refuses to consider the employer’s offer, the interviewer needs to know the terms of the contract before deciding if the work was suitable, and if so, whether there is a job refusal or preclusion issue.

If the terms and conditions of the offered contract are considered suitable for the claimant, then the interviewer must decide whether or not the refusal or preclusion was with good cause.

Example 8:

Dan offers Eugenie a job as a salesperson in his downtown store. Eugenie refuses the job. The interviewer determines that Eugenie has been a salesperson all of her adult life and is otherwise available for work. The interviewer must now determine what there was about the offered employment that caused Eugenie to refuse: the wages, the hours, the working conditions, etc.

1. "Employee," Distinguished From Other Statuses

An employment contract can be negotiated between any two parties, such as an employer and an independent contractor, an employer and a leased employee, or an employer and an employee. For our purposes, we are interested only in the "employee," one whose service is defined under the Unemployment Insurance Code. Section 601 of the Unemployment Insurance Code defines "employment" as:

"Employment" means service, including service in interstate commerce, performed by an employee for wages or under any contract of hire, written or oral, express or implied.

Employees are extended greater protections in the workplace than are, for instance, independent contractors. The status of being an employee is critical, therefore, to a determination of the rights and obligations assigned to the parties.

The primary test of employee status is the "right to control." In Empire Star Mines v. California Employment Commission, a landmark case decided in 1946, the California Supreme Court wrote:

The most important factor is the right to control the manner and means of accomplishing the result desired. If the employer has the authority to exercise complete control, whether or not that right is exercised with respect to all details, an employer-employee relationship exists.

The Supreme Court did, however, discuss other factors it considered relevant to determining status:

Whether the person performing the work has a distinct occupation indicative of independent contractor status;
Whether the work is usually performed without supervision;
Whether the worker possesses a special skill;
Whether the worker provides his or her own tools;
Whether the worker performs the job over a short period of time;
Whether the worker is paid a salary rather than an hourly wage;
Whether the work performed is not a normal part of the principal’s business: and
Whether the parties intended the worker to be an employee or an independent contractor.

In Tieberg v. Unemployment Insurance Appeals Board, a 1970 California Supreme Court case, Tax attempted to collect contributions from Lassie Television for salaries paid to writers who wrote television stories and plays. Lassie contended that the writers were independent contractors under rationale expressed in Empire Star Mines and other cases.

The writers were free-lance writers who wrote stories for films and sold the rights to the stories to production companies. The writers developed their own ideas, presented the ideas for sale, and occasionally changed the story lines as directed by the purchaser. If a sponsor approved the story line, Lassie and the writer entered into a contract for the purchase of the story and its making into a teleplay. Among other provisions, the contract incorporated the Writers Guild of America, West (representing the writers), and the Alliance of Television Film Producers (representing the producers).

For purposes of a pension plan, the contract distinguished between writers who were employees and those who were independent contractors; the producers reserved the right to retain, as independent contractors, writers to create basic format, theme, or characterizations. Under the terms of the contract, the writers who were regarded as employees could only be compelled by the producer to make two drafts of a teleplay; they could be required to work elsewhere than the employer’s studio and they could be compelled to make script changes; but they could work on their own time, at their own expense, in their own way, with their own equipment, and wherever they selected. While the writers could not guarantee satisfactory results, they were required to use their talents and skills to the best of their abilities. The writers did not work exclusively for one producer, but sometimes had simultaneous and overlapping jobs for several producers.

The trial court issued its decision based primarily on the Empire Star Mines criteria, the right of control. The Supreme Court found:

(While) (T))he right to control the means by which the work is accomplished is clearly the most significant test of the employment relationship . . . (cases) determining liability for federal unemployment insurance taxes, hold that the right to control and direct the individual who performs services as to the details and means by which the result is accomplished is the most important consideration but not the only element in determining whether an employment relationship has been created.

(T)he trial court was correct in relying upon (the agreements between the employer and the employees). Not only did both agreements give Lassie the right to direct the writers in making modifications or revisions in their teleplays, but the collective bargaining agreement referred to the writers as employees throughout and contained other provisions, such as those relating to the pension plan, which would be appropriate only if the writers were employees. There is a strong implication from this language that Lassie had the right to control the manner in which the writers made these changes.

The trial court here did not rely solely upon the provisions of the contract but held that Lassie in fact exercised control and direction over the writers. There is substantial evidence to support this finding of fact. . . . Lassie exercised considerable control over the manner and means by which a writer fabricated a teleplay from a story.

An analysis of the record shows that some of (the factors listed as (1) through (8), above) point to a conclusion that the writers were employees, others reflect an independent contractor relationship, while still others are irrelevant under the circumstances or are not conclusively established either way by the evidence.

The Court found the writers were employees, based on the totality of their relationship. Determining factors, in addition to the broad "right of control," were that the employers reserved specific authority to require the writers to revise their teleplays, the agreement referred to the writers as "employees," and the producers normally supervised the writers.

In S. G. Borello and Sons, Inc. v. Department of Industrial Relations, decided in 1987, the California Supreme Court held that agricultural laborers harvesting cucumbers under a written "sharefarmer" agreement were employees for Workers’ Compensation purposes. The Court noted that the "right to control" test (the traditional test) was not controlling for Workers’ Compensation; it should not be used "rigidly and in isolation." The Court held that several secondary factors must be considered in compensation cases, including consideration of the remedial purpose of the statute, the class of persons intended to be protected, and the relative bargaining positions of the parties. The Court found that, although the parties had agreed to a contract defining the sharefarmers as independent contractors, Borello had, in fact, retained all necessary control over the harvest portions of its operations. The Court stated:

A business entity may not avoid its statutory obligations by carving up its production process into minute steps, and asserting that it lacks "control" over the exact means by which one such step is performed by the responsible workers.

2. The "Express" Employment Contract

An express employment contract is one that has been either memorialized on paper or otherwise agreed to for the benefit of both parties; in both Tieberg and Borello, above, the employees had formal, written employment contracts. For an example of an express written contract, see the last pages of this chapter.

The express employment contract may, however, be oral and not written; the only requirement in an express contract is that the terms and conditions are stated and that the parties "expressly" agree to them. Obviously, the party claiming breach has a greater power of persuasion if he or she has a written contract to prove the element of the contract that he or she claims was breached, but inability to "see the terms and conditions of employment in print" does not make the oral contract invalid.

As noted in Tieberg, above, the language of the agreement between the writers and the producers, which also incorporated the collective bargaining agreement, ultimately determined their status as employees: the Court found that the agreement referred to the writers as "employees" and contained provisions that were only appropriate if the writers were employees; and the writers’ failure to comply with the terms and conditions of employment agreed to, could result in forfeiture of future employment. There was a strong presumption that the writers were, in fact, employees.

In Borello, the Court looked at the written "sharefarmer" agreement and concluded that the employer had the greater bargaining power, and therefore the written agreement was invalid in that it purported to hold the sharefarmers to independent contractor status.

The express employment contract may include many things besides employee status; most usually, the contract covers terms and conditions of employment in general, but may become very specific.

The express contract will have:

a. "Material Terms"

"Material terms" of an employment contract may be compared to those of an installment purchase agreement: the contract must be reasonably definite in its terms, essentially the "who, what, when, and where" of the agreement. With reference to an installment purchase agreement, we would not sign a contract to buy item(s) "on time" if the contract failed to specify the product, the quantity, the unit price, payment terms and due dates, delivery date, and the interest charged. In addition to the terms mentioned above, no seller would release the item(s) without the names of the parties making the agreement and the signature of the person responsible for payment.

But an express employment contract will not be invalid if a part of the contract is vague or indefinite; terms, other than material terms, may be implied, such as salary (e.g., union scale in a union job); the location where the work is to be performed (particularly if the employer has only one jobsite); wages to be paid on a regular payday; etc.

Example 1:

In P-B-307, the claimant was a decorator and painter of pottery. She was assigned tasks not normally within the scope of duties of a painter/decorator, consisting of restroom cleaning. The Board, in deciding that the claimant had good cause for quitting because of her secondary duties as housekeeper (and other incidents that occurred), intimated that the housekeeping duties, as a required assignment, could not be reasonably implied from the express job description as painter/decorator, and her quit (in lieu of discharge) was therefore with good cause.

Generally, express employment contracts must specify the length of employment. But the length of employment may be expressed in several ways: by reference to a pre designated condition ("until the job is completed"), or for days, months, or years (e.g., teaching contracts or contracts for overseas work),

Example 2:

In P-B-275, the claimant entered into a written contract under which the claimant would work for two Years in a foreign country. When the contract expired, the claimant refused to enter into a new contract, and returned home. The Board held that the claimant was involuntarily unemployed as of the time the contract expired. The fact that the employer wants to either extend the existing contract, or negotiate a second contract, does not modify the terms of the original contract unless the claimant agrees to the modification; if the claimant does not agree, there is no meeting of the minds and no contract (although there may be a suitable work issue for failure to enter into a second contract).

Employment classified as "permanent" or "lifetime" employment raises a different problem. Some courts have found that all that is meant is that the employment will be steady, as opposed to seasonal or for a particular project. Other courts have held that the "permanent" designation means that the employee is entitled to work only so long as he can do the job properly and the employer stays in business.

b. Termination Only "For Cause":

Although there is a presumption in Section 2922 of the Labor Code that employment is "at-will," (see 4., below), there may be facts which indicate a promise to discharge only for cause. This ’’cause’’ IS NOT related to "misconduct," the UI standard. The written or oral contract may specify that the employee will be discharged only "for cause," as provided for by Section 2924 of the Labor Code:

An employment for a specified term may be terminated at any time by the employer in case of any willful breach of duty by the employee in the course of his employment, or in case of his habitual neglect of his duty or continued incapacity to perform it.

NOTE: The phrase, "continued incapacity to perform" (the employment). While incapacity may constitute "cause" for an employer to terminate an employee, incapacity to perform the required service does not constitute misconduct for UI purposes. "Cause" is the reason for which the employer may breach the contract without repercussions; it is a contract concept, and not an unemployment insurance concept, although a "willful breach of duty by the employee" may also constitute misconduct for UI purposes

If a contract uses the term "cause" without a definition, the courts will look to the circumstances of the contract’s formation to determine what the parties meant by the term.

The courts will also use understandings between the parties that were not written into the contract at the time it was formalized.

In the absence of any clear indication of the understandings of the parties, the courts will use the statutory standard of the Labor Code, quoted above. While the terms "willful breach of duty," "habitual neglect of duty," and "continued incapacity to perform duty" are not specifically defined, their natural meanings are:

- "Willful breach of duty:" An intentional act, even if limited to one incident:

- "Habitual neglect of duty:" An unintentional or merely negligent failing, but one that occurs repeatedly;

- "Continued incapacity to perform duty:" A prolonged incapacity to perform one or more important functions of the job.

Typically, the most common express contract requiring cause for termination is a collective bargaining agreement, specifying the conditions under which a person will work and under which a person may be terminated; another is a special employment agreement negotiated between a company and a high-ranking executive. If the parties have taken the time to negotiate an express employment contract, termination will generally only be allowed for cause; or alternatively, generous severance pay is provided if the termination is without cause.

Other than the two situations mentioned immediately above, the most common conclusion that there is a policy of not terminating except for cause may result from employer assurances that the employee has job security; a transfer, with the understanding that continued employment is not dependent upon the success of a new product line; a statement that, if the job were to end, the employee would be transferred elsewhere in the company; a non competition and disclosure agreement; consistent promotions, salary increases, and bonuses; written "termination guidelines" limiting the employer’s power to terminate at will; and the employer’s established practice of terminating only for cause. For the application of this principle, see Pugh v. See’s Candies, 3. below.

In Just Cause: The Seven Tests, there are seven tests given that arbitrators use in determining whether there is just cause to terminate. These seven tests are also applicable to the fact-finding process required of a misconduct determination:

Notice: Did the employer give the employee forewarning or foreknowledge of the possible or probable consequences of the employee’s misconduct?
Reasonable Rule: Was the employer’s rule against the misconduct reasonably related to the employer’s legitimate business interests?
Investigation: Did the employer conduct an investigation before imposing the discipline?
Fair investigation: Was the employer’s investigation conducted fairly?
Proof: Did the investigation produce substantial proof of the employee’s misconduct?
Equal treatment: Has the employer treated employees the same for the same misconduct?
Penalty: Was the penalty reasonably related to the seriousness of the offense, taking into account the employee’s service record with the employer?

c. The Covenant of Good Faith and Fair Dealing:

The covenant of good faith and fair dealing, which has lost most of it impact since Foley v. Interactive Data Corp. was decided by the Supreme Court in 1990 (see below), means merely that neither party to the contract may engage in conduct to deny the other party his benefits under the contract. To establish a breach, the employee must show that the employer engaged in conduct, separate and apart from performance under the contract, without good faith and for the purpose of depriving the employee of his rights and benefits under the contract. This covenant is not an Unemployment Insurance concept.

d. Termination in Violation of Public Policy

A breach of employment contract under a "public policy" violation usually results when an employee is discharged for:

- Exercising a legal right, or

- Fulfilling a legal obligation;

- Refusing to do something illegal, or

- Reporting the employer’s misconduct to responsible authorities ("whistle blowing").

Example:

In Foley v. Interactive Data Corp., a 1988 California Supreme Court decision, Mr. Foley was employed by Interactive Data from 1976 until 1983, working his way up from assistant production manager to branch manager of the Los Angeles office. In 1983, Mr. Foley held a private conversation with his former supervisor, a vice president of the corporation, to the effect that he had learned that his immediate supervisor was under investigation by the FBI for embezzling from the Bank of America (he was subsequently convicted). Foley contended that he "made this disclosure in the interest and for the benefit of his employer." Mr. Foley was told to keep quiet. Two months later, the supervisor told Mr. Foley that he was being replaced for "performance reasons" and he could transfer from Los Angeles to Massachusetts; if he did not, he might be demoted, but he would not be fired. Mr. Foley accepted the transfer to Massachusetts; but one week later, he was told he was not doing a good job. After some negotiations, Mr. Foley was told he had the choice of resigning or being fired. Mr. Foley sued on three counts, one of which was a breach of contract in contravention of public policy.

Part of the court’s considerations concerned the definition of "public policy." Generally, a discharge in violation of public policy is one in which the employer either discharges the employee for failure to commit a criminal act, or for acting in accordance with law. In a footnote to Foley:

(A) discharge is wrongful under three circumstances. First, if it is in retaliation for refusal to violate or to report a violation of public policy. Public policy is defined as a policy covering health, safety or welfare and established by constitutional provision, statute, or administrative rule. Second, the employee had successfully completed his probationary period and the discharge was not for good cause. Third, the discharge was in violation of express terms of a written personnel policy.

The rationale behind a finding of discharge in violation of public policy is that:

"(T)he threat of discharge could be used to coerce employees into committing crimes, concealing wrongdoing, or taking other action harmful to the public weal . . . . We must still inquire whether the discharge is against public policy and affects a duty which inures to the benefit of the public at large rather than to a particular employer or employee."

The court then considered whether Mr. Foley’s discharge was based on a public policy. They found it was not:

Whether or not there is a statutory duty requiring an employee to report information relevant to his employer’s interest, we do not find a substantial public policy prohibiting an employer from discharging an employee for Performing that duty.

The absence of a distinctly "public" interest in this case is apparent when we-consider that if an employer and employee were expressly to agree that the employee has no obligation to, and should not, inform the employer of any adverse information the employee learns about a fellow employee’s background, nothing in the state’s public policy would render such an agreement void. (Emphasis in original.)

In accordance with the holding in Foley, the public policy must be:

- Fundamental,

- Substantial, and

- Public (for the benefit of the public at large, and not for a particular employer).

3. The "Implied" Employment Contract

An implied employment contract comes into being when the parties do not explicitly agree to terms, but their words or conduct reasonably imply they agree to certain terms. The following case demonstrates both the implied employment contract and a "for cause" requirement for termination.

In Pugh v. See’s Candies, a 1988 appellate court decision, Mr. Pugh was employed by See’s for 32 years. He started his employment in 1941, washing pots and pans in See’s San Francisco plant. He was promoted to candy maker in 1942, and returned to that position in 1946 after military duty. In 1947 he was promoted to production manager in charge of personnel, ordering raw materials, and supervising the making of candy. When See’s moved into a larger plant in 1950, Mr. Pugh designed the plant layout; he also took night classes in plant layout, economics, and business law. As See’s grew, Mr. Pugh’s responsibilities increased, and in 1971 he was promoted to vice president in charge of production and placed on the Board of Directors "in recognition of his accomplishments." A year later he was gifted with a gold watch "in appreciation of 31 years of loyal service." In May of 1973, the Pugh family and Mr. Huggins, the President of See’s, traveled to Europe to visit candy manufacturers and inspect new equipment.

On June 25, 1973, when he returned from Europe, Mr. Pugh received a message from Mr. Huggins directing him to fly to Los Angeles to meet with Mr. Huggins. Since the preceding Christmas had been the most successful in See’s history, the following Valentine’s Day had set a new sales record, and the March 1973 newsletter praised his efforts, Mr. Pugh was expecting a further promotion. Instead of promotion, Mr. Huggins terminated him with no expressed reason, suggesting that Mr. Pugh only "look deep within (him)self." Mr. Pugh "looked deep" and filed a suit for wrongful termination.

During the 1981 trial (the first trial, or Pugh I), evidence was introduced on Mr. Pugh’s behalf that the President and General Manager in 1941 had frequently told him, "If you are loyal to (See’s) and do a good job, your future is secure." Laurence See, President of the company from 1951 to 1969, had a practice of not terminating employees except for good cause, which was subsequently continued by Charles See, who succeeded Laurence See as President. During the entire period of his employment, there was never a formal, written criticism of his work, and no notice that there was a problem that needed correction, nor warning that disciplinary action was being contemplated.

On See’s behalf, Mr. Huggins testified that he had recommended termination of Mr. Pugh in 1953 for a personality conflict with Huggins’ assistant, and in 1968 for lack of cooperation in contract negotiations with the union representing See’s candy makers. In April of 1973, during establishment of the negotiating team for the upcoming contract, Mr. Pugh expressed reservations at being on the bargaining team because of perceived inequities in the contract to be negotiated, and his termination followed.

In a second trial in 1988 (Pugh II), See’s further contended that they had good cause to discharge Mr. Pugh, citing insubordination in failing to train assistants and cooperate with the management team; failing to discourage employees from giving him gifts; and for being rude, argumentative, belligerent, and uncooperative on the European trip. Taken together, the reasons were for "incompatibility and outright insubordination." An expert witness testified for See’s, stating that employees have three kinds of skills: technical (the doing of specific things); human (how one gets along with people); and conceptual (seeing the whole picture). The expert also indicated that as an employee moves higher in the management structure, the Chief Executive Officer (CEO) must evaluate top-level managers to ensure that they work as a team. Mr. Pugh was alleged, by employees, former employees, and business associates, to be disrespectful, disloyal, and uncooperative.

In its discussion of the principles of employment law, the court pointed out:

(T)he employer’s right to terminate employees is not absolute. . . . Two relevant limiting principles have developed, one of them based upon public policy and the other upon traditional contract doctrine. . . . (T)he second (precludes dismissal) when the discharge is contrary to the terms of the agreement, express or implied. (Pugh I.)

In determining whether there exists an implied-in-fact promise for some form of continued employment courts have considered a variety of factors. . . . These have included, for example, the personnel policies or practices of the employer, the employee’s longevity of service, actions or communications by the employer reflecting assurances of continued employment, and the practices of the industry in which the employee is engaged. (Pugh I.)

(I)t seems difficult to defend termination of such a longtime employee arbitrarily, i.e., without some legitimate reason, as compatible with either good faith or fair dealing. . . . Here, . . . there were facts in evidence from which the jury could determine the existence of such an implied promise: the duration of appellant’s employment, the commendations and promotions he received, the apparent lack of any direct criticism of his work, the assurances he was given, and the employer’s acknowledged policies. . . . (I)t is appropriate to consider the totality of the parties’ relationship: Agreement may be "shown by the acts and conduct of the parties, interpreted in the light of the subject matter and the surrounding circumstances." (Cite omitted.) (Pugh I.)

Concerning breach of the covenant of good faith and fair dealing, and the "for cause" requirement in the implied contract of employment, the Pugh II court held:

The employee has the burden of proving that the employer’s action was in bad faith, that is, the employer had a wrongful motive in depriving the employee of the benefits of contract, and the employer’s good or bad faith is the only issue, other than the existence of the contract and damages, to be decided. . . . Whether the employer exercises sound business judgment or whether the employee’s work performance is satisfactory are not issues to be decided . . . . Good cause to discharge is, however, evidence of the employer’s justification for its actions and inferentially of its good faith. The converse is also true. Lack of good cause is evidence that the employer acted in bad faith, i.e., had a wrongful motive in depriving the employee of the benefits of the employment contract. (Pugh II.)

4. The "At-Will" Employee

California Labor Code Section 2922 provides:

An employment, having no specified term, may be terminated at the will of either party on notice to the other. Employment for a specified term means an employment for a period greater than one month.

"At-will" employment for an unspecified length of time, then, may be terminated by either party by the giving of notice. Even though the employment appears to be "at-will," however, union contracts or other bargaining agreements may underlie the employment relationship and provide that the employment may be terminated only for cause. Conversely, the employee may change status during his employment. In Miller v. Pepsi-Cola Bottling Co., a 1989 appellate court decision, Mr. Miller worked his first six years under a collective bargaining agreement, and the last five years as an "at-will" employee.

Mr. Miller was hired in 1972 as a truck driver, becoming a member of the Teamsters Union as a result. His employment was covered by a collective bargaining agreement, providing that covered union employees could be terminated only for "just cause." Mr. Miller worked as a truck driver and route sales driver for approximately six years, during which time he received commendations, awards, and promotions for his work; he was assured by corporate personnel that his future was secure if he did a good job; and he was told that Pepsi did not terminate employees who had been there for a long time and were loyal, except for cause.

In 1978, Mr. Miller was promoted to a non-union sales position, with no written contract and no verbal assurances of job security. He was terminated in 1983 and filed suit based, in part, on an implied employment contract. The court found:

It is uncontroverted that Pepsi had no established policies, written or unwritten, governing the termination of sales personnel. Miller cannot claim . . . that he received repeated oral assurances of job security while employed by Pepsi. The only oral promise occurred at the time he was first hired when he was told "you (will) have a job for the rest of your life, as long as you (do) your job." He was, however, hired as a truck driver and was covered by a collective bargaining agreement which provided that covered employees could be terminated only for "just cause." Miller admits the absence of any oral promise of job security following his advancement to a sales position which was not covered by any collective bargaining agreement.

Basically, the record revealed that all Miller can urge are two promotions and regular salary increases during his 11 years with Pepsi. Promotions and salary increases are natural occurrences of an employee who remains with an employer for a substantial length of time. These factors should not change the status of an "at-will" employee to one dischargeable only for "just cause." We hold that, as a matter of law, Miller had no enforceable contract with Pepsi.

In 1989 the Ninth Circuit found, in Mundy v. Household Finance corporation that 33’ years’ longevity in employment was insufficient to protect the claimant from an "at-will" discharge, because Mr. Mundy had an integrated, signed contract providing for "at-will" termination.

B. "Conditional" Contracts

A claimant may be employed "conditionally," pending the outcome of a company-required physical, submission of required proof of licensing or documentation, background checks, or references, or on a "trial basis," etc. If failure to meet the conditions results in a separation, generally the failure to meet the employer’s requirements, or standards, is not disqualifying.

But: Since a contract is a meeting of the minds between two parties, a contract is not formed if there is no meeting of the minds. In addition to the claimant’s outright rejection of the contract, lack of contract formation may come up in one of three ways: mistake, misunderstanding, and fraud.

The claimant may have performed some services by the time the mistake, misunderstanding, or fraud is discovered, however, an the Performance of the presumed contract constitutes an employment contract, regardless of its length, for our purposes. Although the lack of ability to meet an employer’s standards means that neither party is in breach, actively misleading the employer concerning physical or educational qualifications, etc., may be a disqualifying act as, without the misleading information, the employer would not have hired the claimant, even conditionally.

1. Mistake

"Mistake," for our purposes, means that there is an error going to the substance of the transaction, and that the parties could not have entered into the contract but for the mistake.

The mistake may be made by the employee, by the employer, or by both. If only one party recognizes the mistake, however, that party may not snap up the proposal if he knows it is the result of a mistake unrecognized by the other party.

Example:

Adele has a typist job which she has advertised in the newspaper and with Job Service for $8 an hour. When Adele interviews Brad, Adele mistakenly says "$18" rather than "$8." Brad cannot hold Adele to the $18 per hour figure because Brad has reason to know that the last quoted figure was the product of a mistake, and knows exactly what Adele meant to say.

2. Misunderstanding

As in Mistake, above, the misunderstanding will prevent formation of a contract if one of the parties understood and the other did not. But if one party is aware his knowledge is limited, but treats that knowledge as sufficient, then that party assumes the risk.

Example:

Charles answers an ad for a taxi driver position. Charles has driven around the city, but has never actually driven a cab; he sees no reason why he can’t, because driving a cab is like driving a car. When David asks him if he has the required license, Charles understands David to mean a Class C license, and answers "yes." David hires Charles as a trainee cab driver. When David checks Charles’ Motor Vehicle record, he discovers the Class C license, which is not sufficient; a Class 1 license is required. Charles knew that his knowledge was limited, based on lack of experience; he assumed the risk of the misunderstanding, and may be held responsible for his misunderstanding of the requirements.

3. Fraud, Material Misstatement, and Misrepresentation

a. Fraud

A fraudulent misrepresentation is one made with the intention of inducing the other party to rely on it, by a person who either knew the misrepresentation was false or knew that he didn’t have the factual basis to support the representation. The fraudulent misrepresentation only becomes important in an employment contract if the fraud contributed significantly to the making, or continuation, of the employment contract. When the person (either claimant or employer) relies upon the fraudulent misrepresentation, he either suffers a financial loss or does not receive the bargain he thought he was getting.

Reliance upon the misrepresentation must be reasonable. Opinions are not generally regarded as misstatements or representations, however, unless the opinion is expressed by a professional (an "expert"). Most of us are familiar with the commercials that state, "These cars are as good as new," or "These knives will last a lifetime." This is known as "trade talk," "seller’s puff," or "puffery," highly-colored and optimistic statements of opinion written by copywriters or advertisers and uttered by salespersons.

Example 1:

The claimant states, "I am the best truck driver in the world." This is an opinion; and without a factual basis, belief in this opinion is unreasonable because it is mere puffery.

Example 2:

The claimant states, "I’m sorry she fell, but I turned on the light so she could see the boxes stacked against the wall." To an employer who wasn’t present, or to a blind employer who was present but cannot know whether or not the light was on, initial reliance upon this statement is reasonable. To the sighted employer who was there, there is no reasonable reliance on the claimant’s statement.

Example 3:

The claimant states, "I can fix any kind of truck on the road."

- If the employer and the claimant have had some relationship of trust and confidence (e.g., the employer has had his fleet of trucks fixed by this mechanic in the past, with no complaint), the expression of opinion may justify reasonable reliance on the part of the employer.

- On the other hand, the employer may later discover that the claimant (whom he has never met before the interview in which the statement was made) has never worked on anything but John Deere tractors. The employer’s reliance is not reasonable. The employer has an obligation to check references if there is any doubt as to the claimant’s expressed abilities which are this expansive in scope.

b. Material Misstatement or Misrepresentation

The Supreme Court of Vermont wrote in Chamberlin v. Fuller, in l887:

The law will afford relief even to the simple and credulous who have been duped by art and falsehood. . . . No rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool.

There is a difference between nondisclosure and concealment: the latter is a positive action designed to hide the truth or stymie the other party’s investigation. When a claimant or employer makes a partial disclosure, lack of full disclosure (a half-truth) may constitute misrepresentation.

Example 1:

Harry drafts a contract which he reads to Jane, the prospective employee. In addition to reading the contract very rapidly, he skips several important sections, ending with "Well, it’s all standard stuff; sign here!" Jane signs. Is Jane bound by what she has signed? The answer will depend upon what sections were not read to Jane, or understood by her: there is a rebuttable presumption that Jane was deceived in relying on Harry’s statements if the misrepresentation is material to the employment contract.

Example 2:

In Elizaga v. Kaiser Foundation Hospitals, Inc., a 1971 case from the Oregon Supreme Court, the hospital established a surgical preceptorship in 1962 that was approved by the American Board of Surgery. The program was renewed annually, not without problems, until June 30, 1969. In August of 1968, the Board of Medical Examiners informed the hospital that the program would "definitely terminate" on the following June 30.

In 1967, Dr. Elizaga applied for a preceptorship. He had attended medical school, performed his internship, and served a five-year surgical residency in the Philippines; he asked the hospital for reassurance about his qualification for the program and the possibility of a temporary Oregon license.

The hospital reassured Dr. Elizaga, and offered him a position that he was unable to accept because he could not obtain a visa. He finally obtained a visa, and the hospital offered Dr. Elizaga a position starting July 1, 1969, months after the hospital had become aware that the preceptorship would end on June 30, 1969. Dr. Elizaga and his family moved to Portland. The hospital advised Dr. Elizaga that he could not be hired, and he should look elsewhere for employment. Dr. Elizaga filed suit.

In its decision, the Oregon Supreme Court stated:

It is recognized that nondisclosure of material facts can be a form of misrepresentation where the defendant has made representations which would be misleading without full disclosure.

Moreover, defendant persisted in its nondisclosure after learning that plaintiff intended to come to Portland well before the job was to begin. We hold that in light of all this evidence a jury could conclude that defendant knew the preceptorship probably would not be renewed; that defendant nevertheless offered plaintiff a job beginning July 1, 1969; and that plaintiff accepted the offer with the firm belief that there would be a job for him. Under these facts a jury could also decide that the misrepresentation produced by the failure to disclose was done in reckless disregard of the fact plaintiff was being misled.

Perhaps the claimant or employer has made a statement in good faith, but something that happens later makes the statement no longer true, or new information indicates the statement wasn’t true when it was made. The person discovering the error has a duty to correct it, even if he did not make the error.

Example 3:

Lorna plans to expand her business and hire a new interior designer, financed by a hefty bank balance from the prior year. She interviews Myra, who has exactly the qualifications that she is looking for. Myra is to start the job the following Monday, and quits her then-present job on Friday. Over the weekend, Lorna is informed that the bank balance was permanently appropriated two weeks before by the bookkeeper, who is now nowhere to be found. Lorna must now tell Myra that she is unable to hire her at the present time. The embezzlement is a matter that was unknown at the time the job was offered, and even though Lorna impliedly represented that she had sufficient funds to cover her payroll, her misrepresentation was not willful.

For a discussion of misrepresentation and misstatement specifically in connection with Unemployment Insurance Code Section 1257(a), see Miscellaneous (MI) 45.

C. Contract Formation

As described above, the formation of an employment contract consists of a meeting of the minds on material issues, with eventual acceptance on the part of the claimant and the employer. Formation of a contract has three parts, of which two are discussed here.

1. The Offer

Either the claimant or the employer can make an offer of a contract. An offer is defined as a present manifestation of intent to be bound if the contract is accepted.

Example 1

The employer places a job order with Job Service for work as a service station attendant. All the material terms and conditions of employment are specified in the job order: the location, the hours, the rate of pay, and the duties of the job. The employer has placed an offer on the table, even though the offer was not made to a specific person. The employer is also free to withdraw the offer at any time until it is accepted; once it is accepted, the employer is not free to withdraw, as refusal to honor the contract is a breach.

Example 2:

The claimant completes a work application in response to an ad (ads are considered offers to negotiate), stating her experience, work she is qualified to do, starting salary wanted, and other factors requested by the employer. The claimant has made an offer of herself as an employee.

But:

Example 3:

The claimant sends out a resume to a company, advising the company that her services are available for doing a specified kind of work at

a specified rate of pay, and stating her qualifications. While the resume is not technically an offer (it is a pre-offer or opening gambit, called an "offer to negotiate"), the employer may respond: "We are interested in your background as a/an (insert occupation), and would like to interview you on . . . ." Rarely will the employer accept the claimant’s offer of services without further negotiation, unless the claimant is a former employee or well-known to the employer.

2. The Acceptance

Acceptance of the offer occurs when the employer and the claimant mutually agree that the claimant will start work, or return to work, for the employer. Acceptance of an employment contract means that both parties understand all the material terms of the contract and any special conditions they wish to add.

Example:

Jane and Harry agree that Harry will start work as a service station attendant on Monday morning; his hours are 6:30 a.m. to 2:30 p.m. Sunday through Thursday; and he will pump gas and wash windshields, assist at the self-service pump as needed, etc. Jane believes that Harry understands that he must pay for cleaning of his uniform; Harry has never paid for cleaning of his uniform, and does not understand that Jane requires him to pay for it. When Jane mentions the cleaning to Harry, he balks and refuses that condition of employment. There is no meeting of the minds and no contract has been formed.

For UI purposes, this is a job refusal issue. The work appears suitable; whether Harry will have good cause for refusing the offered employment, whose only drawback is the requirement to pay for uniform cleaning, may be resolved by what is usual in the industry, and whether it is reasonable for Jane to require Harry to pay for uniform cleaning.

3. Negotiating Terms and Conditions of Employment

The parties may negotiate terms and conditions of employment before a contract is formed, or the employer may merely lay down conditions which the claimant is free to accept or reject. The type of job, principally, will determine whether the claimant and the employer are free to negotiate.

Example 1:

Tom sends out resumes to twelve businesses for work as a manufacturer’s representative. He specifies that he requires use of a company car and credit card. An interested employer responds that Tom may use a business credit card, but he must have his own car and the employer will pay mileage. Tom rejects the counteroffer, and extends another offer: if the employer will supply the company car, he’ll use his own credit card and submit chits for car expenses at the end of each month. The employer rejects the offer, and counteroffers to pay for a leased car without mileage, and use of the company credit card. Tom accepts. Providing there are no other outstanding issues to resolve, a contract has been formed.

Example 2:

Una contacts the XYZ Company for work as a receptionist. She knows the job is 8 a.m. to 5 p.m., Monday through Friday, with an hour for lunch. She tells the personnel department that she needs to leave at 10 a.m. to take her child to nursery school, and at 3 p.m. to pick up another child from school and to go home to fix dinner for the family. The employer signals, "Take a walk." These terms and conditions are not negotiable.

a. In General

Within the constraints of applicable law (see Preface 20), the employer and the claimant may negotiate almost any term or condition of employment. The phrase, "terms and conditions of employment," refers to such things as wages, meals, housing, hours, safety rules, workload and scheduling, break periods, holiday and vacation time, sick leave, promotions and transfers, the hiring process, allowable causes of discharge, grievance and arbitration procedures, layoffs, retraining, severance pay, subcontracting, plant relocations, partial shutdowns, and termination or sale of the business, as applicable.

In the absence of a collective bargaining agreement (see 4., below) or an express contract, the implied terms of an unwritten employment contract between an employer and an employee give the employer absolute discretion over terms and conditions of employment; he may hire as he pleases and may discharge for good cause, bad cause, or no cause at all, because the claimant is an "at-will" employee. The only requirement, for UI purposes, is that the employer’s terms and conditions are reasonable.

Even for the "at-will" employee, however, there are safeguards against unreasonable employer demands. Some safeguards are addressed by various laws (e.g., polygraph testing as a condition of hire; an arrest, without conviction, as a reason for discharge; discrimination; sexual harassment laws; health and safety considerations; and search and seizure and privacy considerations), but some are contained in employee handbooks and manuals, promises of job security, etc.

The employee who is hired in a specialized field may be asked to accede to other, written contract terms, described in the following sections.

b. Employee Confidentiality Agreements

Every employee is under an implied obligation not to divulge or use confidential information acquired in the course of the employment. California Labor Code Section 2860 provides:

Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.

The employee also has a duty of loyalty, codified in Section 2863 of the Labor Code:

An employee who has any business to transact on his own account, similar to that entrusted to him by his employer, is required always to give preference to the business of the employer.

"Confidential information" usually comes up in the context of a "trade secret," defined as a formula, pattern, or device, processes or techniques, customer lists, or compilations of information used in the business which gives the employer an opportunity to gain an advantage over competitors who do not have it.

Revealing confidential information breaches an employee’s duty of loyalty. In Fowler v. Varian Associates, a 1987 appellate court decision, Mr. Fowler, the marketing manager, brought a suit for wrongful termination against his employer, Varian. Fowler was hired under a written contract; his supervisor was Johnson. About two and a half years after Fowler was hired, Johnson and Fowler discussed forming a new company, with Fowler as a one third owner. The business was going to manufacture an amplifier, designed for military use, which would be a "reasonable or viable alternative" to Varian’s products, competitive with Varian, and sharing the same group of customers. At that time, Varian had a competitor called Alpha Industries. Fowler and Johnson called their business Omega, and met with Alpha management, who were interested in investing in Omega. One of the Alpha employees contacted Varian (apparently accidentally) to advise Fowler and Johnson that they were interested in investing in Omega, and Varian promptly reacted to the information that a rival company was being formed. A Varian vice president and the corporate counsel interviewed Fowler, who denied that he was already a partner with Johnson, but refused to supply details because of a "prior obligation to Johnson." Varian also asked Fowler to sign an addendum to a confidentiality agreement he had signed at the time of hire, but Fowler refused until he could consult with an attorney. Varian refused to allow him to return to work until the addendum was signed, although they continued his pay. After consultation with Johnson’s attorney, Fowler refused to sign. Varian filed suit against Johnson and Alpha for unfair competition. Two months later, Fowler presented his own version of the addendum that Varian accepted, but stated that they were happy with his replacement and would find an alternative job for him. Then Fowler resigned and went to work for Narda Microwave, another competitor of Varian’s, and sued Varian for wrongful termination.

The Court stated:

"Undisputed facts establish that Varian had good cause to discharge Fowler. (From footnote:) Even if the employer merely has a good faith, reasonable belief in the existence of cause, regardless of whether cause actually exists, the implied covenant (of good faith) is not violated."

While California law does permit an employee to seek other employment and even to make some "preparations to compete" before resigning, California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ "undivided loyalty." Because Fowler preferred Omega’s interests to Varian’s, Varian had good cause to discharge him.

As Varian’s marketing manager, Fowler had an acknowledged obligation to share with his employer information about competitors’ plans. In effect, Fowler disabled himself through his involvement with Omega from giving his undivided loyalty to Varian . . . Varian had good cause for discharge based on either of two events: (1) Fowler’s refusal to disclose his information about, or (2) his assistance in obtaining financing for, an enterprise organized to become Varian’s direct competitor.

By the same token, the employer has a responsibility not to disclose certain information coming to his attention. In 1988, Section 1026 of the Labor Code was added to require employers to make reasonable safeguards for employee privacy when the employee is participating in a rehabilitation program; failure to do so breaches the employment agreement, even through the Employee Assistance Program may not be a bargained-for condition of employment. Beyond the language of the statute itself, under which the employee may seek redress for violation, some collective bargaining agreements provide for arbitration if employee confidentiality is violated.

c. Employee Invention Agreements

California Labor Code Section 2870 provides:

" (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

(2) Result from any work performed by the employee for the employer.

(b) To the extend a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable."

California Labor Code Section 2872 provides:

"If an employment agreement entered into after January 1, 1980, contains a provision requiring the employee to assign or offer to assign any of his or her rights in any invention to his or her employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention which qualifies fully under the provisions of Section 2870. In any suit or action arising thereunder, the burden of proof shall be on the employee claiming the benefits of its provisions."

There are three different situations in which the employee invention agreement is of importance:

- The employer hires the employee to invent a particular thing:

In this case, the employer is entitled to the patent regardless of whether the employee invented the thing within the scope of employment, or outside it. For example: if the employee is hired to invent a new machine, he cannot invent that machine in his off hours and claim the patent for himself.

But if the employee invents something other than what he was hired to invent, the patent belongs to the employer only if the invention was done within the scope of his employment: whether the invention was made during working hours, whether the invention is within the nature of the employer’s business, and whether the employee was assigned tasks similar to the subject of the invention.

- The employer hires the employee to exercise his inventive skill generally;

(See above.)

- The employer hires the employee for a non-inventive position.

In this case, the employer has no right to the invention, but may claim a "shop right," a non-exclusive right to use the invention. The shop right arises when a non inventive employee invents something during his hours of employment, and while using the employer’s materials and appliances.

In Aero Bolt and Screw Company v. Iaia, an appellate court case from 1960, the employer distributed aircraft hardware, including nuts, bolts, screws, washers, O-rings, and cotter pins. Mr. Iaia was hired in 1951 as a telephone order clerk. In 1952, he began to develop a self-sealing fastener. He offered the idea to Aero’s manager/vice President, who said the idea was not practical. Iaia worked on his invention at home in the evenings and on weekends; paid for all the expenses incurred in perfecting the invention and securing the patent; was permitted to use a drafting board belonging to an Aero employee who stored it at Iaia’s house, where Iaia could use it without strings attached: he had a castoff spec. book; bolts and Teflon were permitted to be used for personal use by the company; and he did not work on samples during working hours. In 1953, he applied for his first patent, which was issued in 1956, and also applied for subsequent patents for improvements. All of the costs involved in securing the patents and in pursuing other applications were borne by Mr. Iaia. In 1955, Iaia and Aero entered into an oral agreement by which Iaia licensed Aero as the exclusive manufacturer, user, or seller of Iaia’s invention; on Aero’s part, they paid royalties of 20 percent. Iaia instituted a suit for copyright infringement against another business with Aero’s full knowledge, and in 1957 was held to be the sole and exclusive owner of the patent, with the exclusive right to seek redress for infringement of his patent. That same year, Iaia and Aero negotiated another oral agreement: Aero’s rights to manufacture, use, or sell the fastener were no longer exclusive, Iaia was to leave Aero to manufacture the fasteners himself, and Aero was to pay Iaia 20 percent of its sales as a royalty. During the winter of 1958 Iaia delivered fasteners but Aero refused to pay the 20 percent royalty. Iaia filed suit, and Aero countersued.

Aero contended that they were entitled to an assignment of all patents; alternatively, to royalty-free shop rights; and as a third alternative, that they were entitled to an exclusive license.

Iaia contended that he owned all rights to the patents and applications; Aero had no interest in them; and Aero had no shop rights. Additionally, Aero owed a royalty of 20 percent of gross fastener sales covered by the patents.

In its decision, the court found:

Shop rights: There can be no claim for shop rights where the Parties have agreed to payment on a royalty basis.

Assignment of the patent: The claim for assignment of the patent was similarly rejected; the court, in an earlier suit, found that Iaia was the sole holder of the patents.

Exclusive license: No duration was stated in the oral agreements; and since the agreements were oral, they were unenforceable.

d. Employee Non-Competition Agreements

In contrast to the general rule for confidentiality agreements, that revealing confidential information breaches a duty of loyalty to the employer, the "non-competition" agreement is generally invalid. The Business and Professions Code, section 16600, declares all contracts void "by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind." The only exception to the rule is when a non-competition agreement is necessary to promote trade secrets. An employer may prohibit, for instance, a former employee from soliciting customers when their names and addresses were obtained from the employer’s confidential customer lists.

An employer is, however, permitted to contract to prohibit conduct that constitutes unfair competition. In general, a former employee has the right to engage in a competitive business for himself and to compete against his former employer, so long as the competition is fairly and legally conducted. Use of the former employer’s customer lists is regarded as unfair competition .

In Vacco Industries, Inc. v. Van Den Berg, van Den Berg went to work for Vacco in November, 1961. Vacco developed, designed, produced, and marketed products for the military, aerospace, and petrochemical and nuclear industries. During the course of 23 years’ employment, he worked as a truck driver, machinist, technician, and engineer, and by the early 1980s, was a corporate officer. He was also a stockholder of Vacco stock, ultimately acquiring about three percent of the outstanding shares.

In 1983, Vacco and Emerson Electric Company entered into an agreement by which Emerson would purchase Vacco; in anticipation of the sale, Vacco drafted non-competition agreements with twelve major shareholders, including Van Den Berg. The terms of the non-competition agreement provided that Van Den Berg acknowledged he was selling all his shares of Vacco stock to Emerson and he would not carry on any business that was competitive to Vacco for the lesser of: 1) five years from the date of the agreement, or 2) "so long as Vacco conducts business within the territory," defined as the territorial limits of the United States. Under an employment agreement, executed separately and to be effective only if Emerson bought the Vacco stock, he was to be employed for a period of three years at a stated salary and could be terminated only for specific causes. At the time he signed the non-competition agreement, he was paid $500,000 for his shares of stock.

Vacco engineered, manufactured, and tested three products which it considered to be proprietary and confidential: a "quiet manifold" and a three-way bypass valve used by the U.S. Navy on nuclear submarines, and a filter to filter contaminants. Vacco took extensive steps to keep the engineering notes, drawings, and detailed plans secret.

Van Den Berg and another Vacco employee bought all the stock of Kamer, which manufactured solenoid products and had been a subcontractor to Vacco, but not in competition with Vacco. Van Den Berg’s brother, also employed by Vacco, shipped Van Den Berg two boxes containing the complete set of all Vacco’s proprietary plans and drawings, including those for the quiet manifold; and about six months before his termination, Van Den Berg instructed employees to break some welds on the quiet manifolds, place each element on a labeled index card, and describe its configuration. He explained that he was going into the "spare parts" business.

Van Den Berg was terminated six months later for reasons not pertinent to this example. Through his new company, Kamer, he began to solicit Vacco customers directly and to sell them products in competition with Vacco. Included in the items sold were the "quiet manifold" and the three-way bypass valve.

All parties sued and countersued each other over the non competition agreement and other matters. The jury found that Van Den Berg had breached his non-competition agreement. At the appellate court level, the court asked, "Is Van Den Berg’s non competition agreement enforceable?"

The appellate court cited Business and Professions Code Section 16601, which provides an exception for non-competition agreements to be binding when a party sells the operating assets of a corporation together with its goodwill or all of the shares of stock in a corporation, and agrees with the buyer not to compete. The rationale behind the permissible restriction on competition is that the buyer’s interests will be protected and the value of the business will not be diminished.

The court found that Van Den Berg was the ninth largest shareholder in the corporation, as well as one of its principal officers; as such, the exception in the Business and Professions Code applied to him, and the non-competition agreement was upheld. (The court also found, as a separate matter, that Van Den Berg misappropriated trade secrets which were fully protected by Vacco, and therefore their use was wrongful under the Uniform Trade Secrets Act.)

4. The Collective Bargaining Agreement

D. Summary

An employment relationship is governed by a contract, in which the expectations of both parties are wrapped. The contract may be oral or written, express or implied. All contracts have material terms, but other terms of a contract may be implied as well as express. The contract may fail because of mistake, misunderstanding, or fraud and misrepresentation.

If a contract does not meet the expectations of the parties, and therefore there is a severance of the employer-employee relationship which we know as a voluntary quit or a discharge, the severance of the employment relationship will be for either a major or minor breach of the contract.

Contracts may also be "conditional," depending on subsequent events to happen. If those events do not happen, a contract may not be formed; the employee who has started work before the conditions have been met, must satisfy the conditions or risk loss of the job. Generally, "inability" separations are conditional contracts, and the separation is not disqualifying.

Management or professional employees generally may negotiate terms and conditions of employment with an employer. The employer may impose special contract terms upon the employment through use of employee confidentiality and invention agreements; these agreements are generally binding upon the employment relationship. Employee non competition agreements are more rigorously scrutinized, and may or may not be binding, depending upon the circumstances.

The claimant who is subject to terms of a collective bargaining agreement that was in place at the time the claimant was hired, is controlled by the terms and conditions of that agreement.