The implied covenant of good faith and fair dealing is an often used “add on” claim in lawsuits for breach of contract, including lawsuits involving claims for breach of employment contracts. The implied covenant of good faith and fair dealing prohibits a party to a contract from acting in bad faith to deprive the other party from receiving the benefits of the contract. The Utah Supreme Court recently struck a blow to the viability of the implied covenant of good faith and fair dealing in employment contracts in the case of Vander Veur v. Groove. In Vander Veur, the employer’s business was to provide television services to large scale customers, such as hotels. The employee was hired as a sales representative and was paid a commission based on his sales of the employer’s services to customers. In order to be entitled to a commission, however, “installation” of the employer’s services for a customer had to be completed. The employee signed multiple at-will acknowledgments during the course of his employment. The employer ultimately terminated the employee. At the time of termination, the employee had secured verbal commitments for six installations, but the installations were not completed until after the employee had been terminated. The employee filed a lawsuit claiming that the employer violated the implied covenant of good faith and fair dealing by terminating him “to avoid” paying his commission.
The Utah Supreme Court disagreed. The Court explained that the implied covenant of good faith and fair dealing cannot be used to alter the express terms of a contract. In Vander Veur, the express terms of the contract stated that the employee was not entitled to a bonus until “installation”; because “installation” had yet to occur on the six verbal commitments prior to the employee’s termination, the employer did not owe commissions on those six projects. Three of the five justices on the Court adopted this reasoning. Two of the justices, however, disagreed and dissented. They sided with the employee.
The dissenting justices argued that there should be some limitations on an employer’s ability to terminate an employee in such a situation. The dissenting justices wrote:
“Indeed, it is not hard to imagine ways in which a bootless implied covenant would permit an employer to engage in unchecked mischief. For example, under the majority’s reasoning, a homeowner could hire a neighborhood teen to mow his lawn. He could tell the teen that he would pay her $30 for the job as long as she understood: (1) she wouldn’t be paid until she mowed the entire lawn; and (2) he could terminate her at any time. The homeowner could then stand on the lawn to watch her work, wait until she pushed the mower towards the grass on which he was standing, and then terminate her just as she approached that final patch of grass. When she asked for her $30, arguing that she should be paid since she had mowed the entire lawn except for the ground under the homeowner’s feet, and would have mowed that if he had not stopped her, the homeowner could tell her that he didn’t have to pay her because he could terminate her at any time and that her right to get paid was conditioned on her mowing the entire lawn. And if he was feeling generous, the homeowner might advise her that next time she should bargain for better protections before agreeing to mow someone’s lawn.
Similarly, a summer sales employer could offer a longevity bonus for any employee who works for the company through August 31, and then terminate all employees at 11:59 p.m. on August 30 simply to avoid paying the bonus. Or a company could terminate an employee the day before her stock options vest just to prevent her from obtaining an ownership interest in the enterprise.”
Vander Veur offers employer’s new freedom in terminating employees who are on the cusp of receiving a commission or bonus. Before terminating an employee, however, it is always best to review the facts and circumstances of the termination with legal counsel.
To discuss this or other related employment matters, contact Sean Monson at (801 532-1234 or send an email to firstname.lastname@example.org.