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The Montana Wrongful Discharge From Employment Act, Twenty Years Later

So what happens if you give the right to termination only for good cause to all employees who are non-union as well as the right to have the issue of just cause determined by an arbitrator or by a jury trial? A workers' paradise? The end of discrimination? Full employment for arbitrators? Not quite. In fact, the big winners are - you're not going to believe this - employers! Yeah, really. That's what actually happened in Montana.

In 1987 the Montana Legislature enacted what has come to be known as the Wrongful Discharge from Employment Act or the WDEA. As it stands now, it covers all non-union employees who are not otherwise subject to an employment contract for a set term, who have been on the job for at least six months, unless the employer has an established probationary period. In that case WDEA rights kick in once probation is over. Its main feature is that it prohibits discharge for other than good cause, and it gives the employee the right to challenge a termination in court or before an arbitrator. The WDEA pushes employees and employers toward arbitration by making the party who rejects an offer to arbitrate, and who then loses in court, responsible for the other party's costs and attorney fees. It also gives the employee who prevails in arbitration the cost of the arbitration.

"Good cause," according to the statute, means a performance deficiency or some business related justification. In 2001, the Montana Supreme Court brought the statutory definition of good cause in line with the tradition developed by arbitrators

page 1 under collective bargaining agreements. According to the court, the definition of good cause includes an obligation on the part of the employer to properly train, supervise, evaluate and warn the employee. In other words, the performance deficiency must be attributable mainly to the employee and not the employer's failure to train or apply the principles of progressive discipline in order to make out a case of "good cause".

You might guess that it was a bunch of plaintiff's employment lawyers or civil rights activists who piloted the WDEA through a legislature controlled by liberal democrats. But in fact it was the insurance defense bar and their clients that fought for the WDEA.

LeRoy Schramm, who was Chief Legal Counsel for the Montana University System, was one of the WDEA's supporters. In a 1990 law review article, he explained that the WDEA was in large part a reaction to a series of pro-plaintiff decisions by a left leaning Montana Supreme Court. In a series of decisions that began in 1982, the Court basically eviscerated the at-will employment rule by expanding the "duty of good faith and fair dealing."

The duty of good faith and fair dealing is a principle of contract law which states that neither party to a contract will do anything to interfere with the other party's enjoyment of the benefits of the contract. An example of a common or garden variety good faith and fair dealing claim might involve sales commissions. A salesperson gets a client who places large orders over an extended period of time. The employer/manufacturer decides that the salesperson has had a good run and now wants to take the client "in house" and stop paying commissions. This would be a violation of the duty of good faith and fair dealing because the salesperson contracted to obtain commission by page 2 bringing in clients. Taking away the client is depriving him of the benefits of the contract.

Most states accept the duty of good faith and fair dealing as part of the common law of contracts. Damages for breach are usually contract damages, that is, damages for economic loss only. Only in cases where the plaintiff proved actual fraud could damages be recovered for emotional or psychological injury for violation of the duty of good faith and fair dealing. However, several states, most notably California and Montana expanded the duty of good faith and fair dealing into a quasi-tort in which economic damages as well as damages for emotional pain and suffering could be achieved in cases where an implied right not to be terminated except for just cause could arise out of such circumstances as longevity. In other words, an employee could obtain an implied right not to be terminated except for cause just by remaining on the job for an extended period under the duty of good faith and fair dealing.

In Montana, the applicability of the doctrine was expanded to such an extent that oral and implied employment contracts were interpreted as having an implied provision that the employee would not be terminated except for just cause. A termination for any other reason would interfere with the employees enjoyment of the fruits of the contract. Under these rulings employment termination cases could (and did) result in tort claims involving compensatory and punitive damages. Even probationary employees became eligible to bring claims under Montana common law.

As a result of big verdicts against their clients under this regime, the defense bar in Montana took their case to the legislature. The original bill was, as Schramm put it, a "dramatic shift in employers' perceptions of what was acceptable" in terms of employee

page 3 rights. The bill did not try to reinvigorate the at-will rule. What it envisioned was rather a trade-off. Employers accepted the demise of at-will employment in exchange for limitations on the damages that an employee could win for a discharge without good cause.

Under the WDEA, as it stands today, damages are limited to up to four years of lost wages, including the value of fringe benefits, with interest. Interim earnings are subtracted. However the statute allows expenses incurred by the employee in searching for new employment or relocating as a setoff against interim earnings. The law also allows punitive damages against an employer when it is established by "clear and convincing" evidence that the employer engaged in fraud or acted out of malice. The statute does not specify whether the lost wages can include "front pay" as well as "back pay". However it has been interpreted to allow for future lost earnings. The relocation and expenses aspect of damages may be of considerable importance. I found one case in which an arbitrator awarded the cost of commuting and extra living expenses involved in commuting from Montana to Chicago, which was well over $100,000, as a setoff against interim earnings. The award was upheld by the Montana Supreme Court.

There is no doubt that the WDEA has brought about some positive changes for employees. For one thing, it has a leveling effect, at least for those with substantial wage income. Although the WDEA can be preempted by federal and state civil rights statutes, the WDEA gives those who can not claim disparate treatment, based on membership in a protected class, a way to fight unfair treatment. If the law has any deterrent effect, all covered employees may experience less inequity page 4 altogether.

Moreover, federal discrimination laws presume at-will employment. This often means that the employer does not need to prove a legitimate reason for a termination. The employer need only "articulate" a non-prohibited reason. Under the at-will regime, nearly any such reason will due. So cases that lack direct evidence that racism, or ageism, or someother illegal reason was a substantial motivating factor for termination are hard to win. Therefore even employees who have a reasonable suspicion that membership in a protected classification was a factor in their job loss may fare better under the WDEA by putting the employer to the proof of good cause.

However, even plaintiffs' attorneys who recognize the benefits of the WDEA for some of their clients raise some important concerns. Stephen Pohl, who represents plaintiffs in WDEA cases in Bozeman Montana, points out that as a practical matter, those toward the lower end of the wage scale are mostly left out of WDEA protections. WDEA cases, of necessity are usually taken on a contingent fee basis. Where a low income worker is involved there is just too much work and risk for too little reward, because damages are restricted to lost wages and benefits. Plaintiffs' lawyers don't take these cases, even though there is no doubt that even the loss of a lower paying job can cause significant damage to the concerned worker - not to mention the cost to society.

For me, however, as an arbitrator, the most significant problem with the WDEA is with the arbitration provision. According to law professor and arbitrator William Corbett, of the National Arbitration Center in Missoula, Montana, a significant number of WDEA cases do go to arbitration, but most cases go to court. Wayne Kessler, VP for Communications of the American Arbitration Association reports that from 2004 page 5 through 2006 a total of only seven cases from Montana went to arbitration through the American Arbitration Association (AAA). Corbett's opinion is that plaintiffs' lawyers try to avoid arbitration because they believe that bigger awards will come from juries than from arbitrators. Stephen Pohl agrees that most cases are going to the court, despite the statutory incentives for arbitration. However, he gives what may be a more practical explanation. The cost of arbitration is just too high for many plaintiffs. If a plaintiff loses after a lengthy arbitration and has to pay half the fee of an arbitrator who is charging three hundred dollars an hour, it can be devastating. Pohl points out that when the parties cannot agree on an arbitrator the court steps in and may impose an arbitrator from the AAA, and their fees, along with the triple A's administration fees, may be prohibitively high.

But as a practical matter, many trial courts in Montana have mandatory mediation programs under which some attempt at alternative dispute resolution is required as a prerequisite for a trial date. So even the many WDEA cases that escape arbitration may yet be resolved through mediation at a lower cost than full blown arbitration before an actual trial. Pohl reports that the program in Bozeman is more or less successful, and the few cases go all the way to trial.

All the gains achieved by workers under the WDEA came at the expense of losing the ability to collect damages for emotional pain and suffering. There is little doubt that the workers' sacrifice of their pain and suffering damages to get rid of at-will employment went right to the bottom line of Montana business. In 1998, Steven Abraham of State University of New York, published an article in Industrial Relations, entitled, "Can a Wrongful Discharge Statute Really Benefit Employers?" The piece is a careful review and interpretation of economic data related to shareholder returns for major Montana employers since the passage of the WDEA. Abraham concludes that there was "overwhelming empirical support" for the proposition that the WDEA increased shareholder returns and shareholder estimates of future profitability. Shareholder returns were significantly higher after the passage of the Act. Abraham linked the increase in profitability to the benefits that the WDEA gave employers by controlling the cost of terminating an employee.

The increase in profitability gave Montana employers an incentive to hire more workers. In a 2005 paper in the Industrial and Labor Relations Review, a Cornell ILR publication, Ewing, North and Taylor conducted a study of job growth rates in Montana before and after passage of the WDEA. They found that prior to the Act, job growth was in decline due to seminal wrongful discharge cases coming out of the Montana Supreme Court. After passage of the WDEA the original job growth rate prior to the expansion of wrongful discharge law by the Montana Supreme Court was restored. They credit the WDEA's control over the damages that a discharged employee may receive. The basic idea is that by controlling the economic impact of wrongful discharge cases, the law helped to create a stable economic environment for greater profitability and consequent business expansion.

The WDEA has had an influence outside of Montana. Arizona copied its most employer friendly aspects into an Arizona Wrongful Discharge Act. The Arizona law preserves and codifies the at-will rule. Like the Montana law, it limits the damages that can be achieved to lost wages and shortens the time within which a claim may be brought to one year.

From my perspective, as an ADR practitioner, the most important reflection of the WDEA may be the Model Employment Termination Act or "META" as it has come to be known. In 1991 the Conference of Commissioners On Uniform State Laws recommended for enactment in all States, a law similar in essential respects to the Montana law. Like the Montana law the META does away with at-will employment in favor of a "good cause" standard for termination. Like the Montana law the META restricts damages to lost wages.

However, under the META lost wages are further limited to back pay and the prospect of lost future earnings is replaced by the possibility of reinstatement. In other words an arbitrator could award reinstatement, but not front pay. This is consistent with remedies under collective bargaining agreement grievance arbitration and traditional remedies for discrimination. Perhaps the most important difference between the META and the WDEA is that under the META arbitration is not just encouraged, it's mandatory and at public expense. A prevailing employee is entitled to attorney fees under the META, but the employee bears the burden of proving an absence of good cause for his termination. Traditionally, in grievance arbitration and under the WDEA, the employer has the burden of proving good cause.

I think that the META addresses the problems with the WDEA described by lawyers and arbitrators. Giving the prevailing employee attorney fees may go toward practical WDEA coverage of at least some lower income wage earners. It gives the low wage earner a way to get a lawyer to take the case, at least when the case looks like a winner. By making arbitration mandatory and at public expense, the META effectively forecloses the most practical objection to the arbitration process - the cost. Another way to address the cost issue would be to require arbitration and make the employer responsible for the cost. Now that it is clear that employers have been a financial beneficiary of the WDEA it is reasonable to propose that employers pick up the tab for the cost of arbitration. A countervailing consideration is that arbitration costs could be prohibitive for small and sometimes even medium size businesses. One way to address this problem is to create a state arbitration fund through the imposition of a modest but progressive tax on business, and, consistent with the META, have the state pay for arbitration costs. The value added to business by the WDEA is an argument in favor of such a plan.

The META has been proposed as legislation in many states, but no state has enacted it. The closest thing to it is the Montana WDEA. The experience of Montana after twenty years under the WDEA suggests that the META might be a good idea for employers as a case of enlightened self interest. The experience of Montana under the WDEA suggests that it would be worth the cost for employers to pay for ADR costs in contested terminations under the META.

As far as employees are concerned, the META is not perfect. For the employee who is terminated without cause, but who finds another job and does not want reinstatement, it may not provide any practical recourse. But for most employees who worry about maintaining health insurance and retirement benefits, it provides a measure of security and stability. Experience with the WDEA indicates that the META, possibly with modification, would provide a set of reasonable expectations for employees and business. This is a condition that would foster economic growth and security as a value added to society through ADR.

Glenn Solomon is a mediator/arbitrator in Portland, Oregon. He is pursuing a Certificate In Conflict Resolution through the Cornell ICR. He is the author of You Could Be Fired For Reading This Book (Berrett-Kohler, 2004).


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