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Court of Appeals Recognizes Potential “Bad Faith” Claim Arising Out of At-Will Employee Termination

Labor & Employment Alert David B. Kern, Sean M. Scullen

On February 2, 2010, the Wisconsin Court of Appeals, District I, issued an opinion that could have implications for employers in connection with the termination of at-will employees. In Phillips v. U.S. Bank, NA, the appeals court reversed the dismissal of claims filed by a terminated at-will employee, arising out of her discharge and related to incentive payments that were contingent on her being employed at the time of payment.

During her employment, Deanne Phillips participated in a Sales Incentive Plan. In order to be eligible for payment under the Plan, Ms. Phillips was required to be an active employee at the time of the payment. She was also required to have no outstanding performance-related issues, including no discipline or unsatisfactory job performance. Ms. Phillips qualified for a payment under the Sales Incentive Plan but was terminated prior to payment and therefore did not receive it. Ms. Phillips then sued in state court. Although she did not allege wrongful discharge or otherwise contest her termination, she alleged a variety of claims regarding her entitlement to the incentive payment. In its defense, the Bank contended that it terminated Ms. Phillips because she was not truthful about her knowledge of a co-employee's plans to leave the Bank and go to work for a competitor. Although the trial court dismissed Ms. Phillips' complaint on the grounds that she was terminable at-will by the Bank, the court of appeals reversed, finding that there were genuine issues about the Bank's motive for terminating Ms. Phillips.

Specifically, the court of appeals held that while an at-will employee like Ms. Phillips could be fired for any reason, that did not mean she could be deprived of benefits that had already accrued to her if her termination was carried out to prevent payment of those benefits. The court cited cases from other jurisdictions, finding that even in the at-will employment context, an employer must act in good faith when a termination cuts off an employee's entitlement to a particular payment.

The court of appeals also reaffirmed the general principle that an employer has no duty to terminate an at-will employee in good faith, relying on the Wisconsin Supreme Court's seminal decision in Brockmeyer v. Dun & Bradstreet. However, the court of appeals went on to note that, even in the at-will context, both parties have a duty to act in "good faith" in complying with their own contractual obligations. Because the Bank entered into a contract to pay employees certain benefits under the Incentive Plan so long as they fulfilled the Plan's requirements and were employed when the payments were due, the Bank could not avoid paying an at-will employee like the plaintiff the benefits that accrued to her if it fired her merely to avoid paying her those benefits.

The court of appeals' decision in Phillips v. U.S. Bank, NA could have broad implications in the context of the termination of at-will employees. For example, it may prompt plaintiffs' attorneys to assert more claims based not on a theory of wrongful discharge but on the theory that the employee was terminated to avoid the payment of an accrued contractual benefit. In addition, employees may attempt to broaden the concept of the duty to act in good faith during employment in the employment at-will context - for example, with respect to "commitments" to use progressive discipline or to evaluate employees annually - as a means of challenging an employer's actions. While these claims could not attack an employee's discharge itself under Brockmeyer and its progeny, they could provide at-will employees with additional leverage against their employers in terms of litigation costs.

The potential for such claims reinforces the importance of using contractual disclaimers in handbooks and other employment policies. Employers should also be mindful of the impact of Phillips on sales commission, bonus and incentive policies. These policies commonly call for the employee to remain employed through the date of payment. Where benefits are denied under such provisions, employees may well pursue claims that their termination in advance of payment was motivated by the employer's desire to avoid such payment. This can be particularly risky where an employee gives advance notice of resignation to occur after a bonus payment date and the employer does not wish to retain the employee for that entire time. At a minimum, Phillips underscores the importance of proper and thorough documentation of the rationale for an employee discharge, including the use of progressive discipline where appropriate.

If you have questions regarding the impact of Phillips v. U.S. Bank on your organization, or questions regarding how to structure your employment policies in order to minimize the likelihood of such claims, please contact David B. Kern at 414-277-5653 /, Sean Scullen at 414-277-5421 / or your Quarles & Brady attorney.