Demasse v. ITT Corp.
194 Ariz. 500, 15 I.E.R. Cas. (BNA) 97, 984 P.2d 1138 (1999)
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Rule of Law:
An employer may not unilaterally modify an employee handbook to rescind a pre-existing implied-in-fact contractual term, such as a seniority-based layoff provision. A modification of an employment contract requires mutual assent and consideration, and an employee's continued employment is not sufficient consideration for a modification that is disadvantageous to the employee.
Facts:
- ITT Cannon ('ITT') hired Roger Demasse and several other employees ('Demasse employees') as hourly workers between 1960 and 1979.
- Early versions of ITT's employee handbook contained a provision stating that layoffs would be conducted in reverse order of seniority.
- In 1989, ITT issued a revised handbook that, for the first time, included a general disclaimer of continued employment and a provision reserving ITT's right to unilaterally amend, modify, or cancel the handbook.
- The Demasse employees signed an acknowledgment form stating they had received, understood, and would comply with the 1989 handbook.
- In April 1993, ITT announced that layoffs would no longer be based on seniority but on employee abilities and performance.
- Shortly after this announcement, ITT laid off the Demasse employees, all of whom had more seniority than other employees who were retained.
Procedural Posture:
- The Demasse employees sued ITT in the U.S. District Court for the District of Arizona for breach of an implied-in-fact contract.
- The parties filed cross-motions for summary judgment.
- The district court granted summary judgment for ITT, ruling that the most recent handbook's terms were controlling and that ITT had validly modified the layoff policy.
- The Demasse employees, as appellants, appealed the decision to the U.S. Court of Appeals for the Ninth Circuit.
- The Ninth Circuit, finding no controlling Arizona precedent, certified two questions of law to the Arizona Supreme Court.
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Issue:
May an employer unilaterally modify an employee handbook to eliminate a seniority-based layoff provision that had previously become an implied-in-fact term of an employment contract?
Opinions:
Majority - Feldman, Justice
No, an employer may not unilaterally modify an employee handbook to eliminate a contractual term. Once a handbook policy becomes an implied-in-fact contract term, it is governed by traditional contract law, which requires an offer, acceptance, and consideration for any modification. The 1989 handbook's new terms constituted an offer to modify the existing contract, but the employees' continued employment did not constitute acceptance or consideration. Consideration requires a bargained-for exchange, and allowing an employer to rescind a promise of job security in exchange for not breaching that same promise is absurd. For an employee to accept such a modification, they must receive legally adequate notice and affirmatively assent; mere continued performance is insufficient, as it would force employees to quit to preserve their contractual rights.
Dissenting - Jones, Vice Chief Justice
Yes, an employer may unilaterally modify the handbook. The employment relationship remained at-will, characterized by its indefinite duration and the employees' right to quit at any time. In such a unilateral contract, the employer offers terms, and the employee accepts by performing (i.e., continuing to work). When ITT offered new terms in the 1989 handbook, the employees accepted this modification by continuing to work. The employer's forbearance from shutting down operations and its offer of continued employment constitute sufficient consideration. The majority's holding improperly transforms a unilateral at-will relationship into a bilateral one, creating unmanageable chaos for employers and undermining their ability to adapt to changing business needs.
Dissenting - Martone, Justice
Yes, an employer may unilaterally change a handbook policy. The seniority promise was not a perpetual guarantee for each individual employee, but rather a general policy applicable to all employees so long as it remained in effect. An employer can unilaterally change such a policy for all employees prospectively without it being an illusory promise, as the employer must apply the change to its entire workforce. To hold otherwise makes a handbook promise better than a collective bargaining agreement and will lead to the demise of employee handbooks, as employers will fear being locked into anachronistic policies forever.
Analysis:
This decision significantly strengthens employee rights in Arizona by rejecting the employer-friendly doctrine of unilateral modification of implied-in-fact contracts. By applying traditional contract principles of mutual assent and consideration, the court makes it much more difficult for employers to revoke job security provisions previously granted in employee handbooks. The ruling creates a stable and predictable framework for employment relationships based on handbook promises, requiring employers to explicitly bargain for any changes that diminish employee rights. This precedent forces employers to either honor past promises or provide new, tangible benefits to employees in exchange for their agreement to modify them, thereby preventing employers from treating handbook promises as illusory.
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