Posted in Blog, Commercial Litigation, Employment Law by

By Joseph G. Ballstaedt
801-365-1021
[email protected]

There are a variety of laws that protect employees, such as minimum wage and overtime laws, but many Utah and federal laws seem to favor employers over their employees. The Utah Supreme Court recently issued an opinion that seems to be in line with the majority of employment laws in that it favors employers. It allows Utah employers to not pay employees commissions by firing them just before they technically earn the commissions.

This post explains two legal principles that relate to employment contracts, and it then explains how most of the justices in the Utah Supreme Court applied these two principles and recognized that the result was not necessarily fair. It then explains why one justice from the court disagreed.

At-Will Employment

Utah employers can fire at-will employees in Utah for any reason (or no reason), so long as the reason is not prohibited by law. Reasons that are prohibited by law include discrimination based on age, gender, religion, etc. For example, an employer could probably fire an at-will employee for small reasons, such as because the employee showed up thirty seconds late or accidentally spilled a drink in the break room. The employer could also likely fire an at-will employee for ridiculous reasons, such as because the employer didn’t like the employee’s recent haircut, or for a reason that would generally support a pay raise, such as the employee showing up on time every day (yes, this would likely never happen). Almost any reason goes.

The opposite of an at-will employment relationship is one that requires good cause to fire the employee. Good cause generally means that there is a compelling reason to fire the employee, such as poor performance, failure to show up at work, harassing other workers, theft, or insubordination to supervisors.

Covenant of Good Faith and Fair Dealing

An implied covenant of good faith and fair dealing is in every contract, including employment contracts, regardless of what the parties state or sign. In the employment context, it requires the employer and employee to perform the contract in good faith and resolve disputes in a way that the parties would have agreed had they contemplated the dispute at issue. Under this covenant to act in good faith, neither the employer nor the employee can do anything to prevent the other from receiving the intended benefits of the employment contract.

The covenant of good faith and fair dealing has limits. It cannot be used to create rights and duties to which the employee and employer did not agree or that conflict with the express terms of the contract. For example, if a contact between an employee and an employer says that an employee receives only ten days of sick days a year, the covenant of good faith cannot be used to give the employee, say, twenty sick days just because the employee became very sick that year. It doesn’t matter that providing ten additional days might be kind or fair. Also, this covenant cannot be used to change an at-will employment contract into a one that requires good cause before firing.

The Supreme Court’s Decision

The Utah Supreme Court recently discussed these at-will employment, the covenant of good faith and fair dealing, commissions, and other employment principles in Vander Veur v. Groove Entertainment Technologies. In this case, Mr. Vander Veur worked as an at-will sales representative for Groove. He secured contracts for television services, which were apparently installed by other employees of Groove. His compensation agreement stated that he was entitled to a commission on each sale after installation of the services and only while he was employed by Groove. Mr. Vander Veur had secured six contracts but no services had been installed on these contracts, and, at this point, Groove fired him. Mr. Vander Veur claimed that Groove fired him just so that it could avoid paying him his commissions.

Although the Utah Court of Appeals concluded that the covenant of good faith and fair dealing could prevent an employer from using at-will termination to avoid paying commissions, the Utah Supreme Court disagreed. It concluded that Groove could fire under the express terms of the contract and thereby avoid paying his commissions. The contract stated that commissions were only paid during employment, and commissions were only paid once installation occurred, so even though Mr. Vander Veur had technically earned the commissions by doing his part of the sale before he was fired (he had no part in the installation), he was not an employee at the time of installation and was consequently not entitled to his commissions.

The Utah Supreme Court recognized that this result might not be fair, but it followed the written terms of the contract. Utah courts are especially reluctant to stray from the express terms that parties agreed to in a contract. In fact, Utah courts will usually enforce a contract even if it is unfair for and creates hardship for a party, so this result is not surprising. Utah courts don’t like to act paternalistically and save people from bad deals they make.

The Dissent from Justice Pearce

One Utah Supreme Court justice, Justice Pearce, disagreed. He believed that the covenant of good faith and fair dealing was intended to address this type of situation where good faith may likely be lacking. He gave several examples of similar situations that highlighted this injustice and unfairness to Mr. Vander Veur. A homeowner could hire a neighborhood teen to mow his lawn under the conditions that 1) the teen could be fired at any time and 2) he wouldn’t be paid until he mowed the entire lawn. The harsh way the Utah Supreme Court views contracts would likely allow the homeowner to wait until the teen was just feet from finishing the entire lawn, fire the teen, and in doing so avoid his entire obligation to pay. This result is unjust, of course, and the implied covenant of good faith and fair dealing comes in to save the day.

Justice Pearce provided other similar examples:

“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. The implied covenant exists to provide a remedy for those who find themselves improperly deprived of the benefits flowing from the contracts they enter and perform in good faith. We should apply the doctrine in a fashion that protects those justified expectations.”

Certainly, Justice Pearce’s view of contract law is fairer, but it is not the law. For better or worse, Utah contract law does not always rescue parties from the express terms of the contracts they negotiate, even when one party unfairly and harshly uses those provisions to take advantage of the other.

Help with Employment Disputes and Contracts

If you are an employer dealing with disputes and contract issues related to your business and your employees, or if you are an employee dealing with issues with your employer, I am happy to help. Give me a call to discuss your questions and concerns. I provide a free consultation. My direct dial is 801-365-1021, or you can e-mail me at [email protected].

joseph-g-ballstaedt

Joseph G. Ballstaedt
801.365.1021
[email protected]

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