Employee Handbooks - New Illinois Supreme Court Decision

New Decision Creates Trap for Unwary Employers
Where Employee Handbooks are Concerned

by James B. Sherman, Esq.

Revising employee handbooks has gotten a lot more complicated, thanks to a recent decision from the Illinois Supreme Court. By now, most employers have learned that vague and otherwise poorly drafted employee handbooks containing promises or employee entitlements (e.g., discharge only for "just cause") run the risk of being construed in court as enforceable contracts. Over the years, prudent employers have revised their handbooks by removing any such problematic language and adding disclaimers that the handbook is not a contract and that employment is "at-will," terminable at any time by the employer or employee, alike. However, employers may now be shocked to learn that previous changes they have made to their handbooks never became effective in the eyes of the law. The result? Employees may still be able to claim contractual rights under old employee handbooks their employer’s modified or replaced long ago.

The plaintiffs in this troublesome case were four nurses who had been hired between 1960 and 1972. In 1971 the employer issued an employee handbook that contained, among other provisions, an "Economic Security" policy that outlined certain factors the employer would consider before terminating an employee. In 1983 the employer issued a new handbook containing a disclaimer stating that the handbook was not intended to be a contract and that the employer was free to terminate the employees at any time without notice.

After the nurses were discharged in 1991 they sued their employer for breach of contract claiming that they were terminated in violation of the "Economic Security" provisions of the old employee handbook. The court agreed with the nurses, stating: "Employers who choose to set forth policies in employee handbooks and manuals as an inducement to attracting and retaining a skilled and loyal work force cannot disregard those obligations at a later time, simply because the employer later perceives them to be inconvenient or burdensome." The court went on to say that before an employer can change contractual rights created by a handbook it must provide employees with adequate "consideration;" i.e. something of value in exchange for the employees relinquishing rights created by the previous handbook. Significantly, the court noted that continued employment with the employer was insufficient consideration to support the new handbook, except as to those employees hired after its effective date.

This case requires that employers exercise great care in evaluating changes, past as well as present, in any employee handbook or similar document. In order to effectively get rid of bad language that creates contractual rights in a handbook, employers have to offer employees something of value – a bonus, pay raise, promotion, etc. – in exchange for their forfeiture of rights under the new or revised handbook. Employers who have already changed handbooks may have to review whether old provisions may still be enforceable by employees. Finally, it is highly advisable to include in any new handbook an express reservation of the employer’s right to unilaterally change any of its terms in an effort to avoid these kinds of problems in the future.

Posted 5/18/99