On June 28, 2018, the Idaho Supreme Court issued an opinion in a case entitled Lunneborg v. My Fun Life that outlines how cause will be defined in employment cases.  Simply put, this case could be a real game changer for employers and particularly those that have employment agreements with senior management or other executives.

This development means the following for employers:

• Summary judgment is going to be much harder to obtain when cause is at issue;
• Idaho now imposes a good-faith standard that demands “a balanced regard for the employee’s interest in continuing employment with the employer’s interest in efficient personnel decisions”;
• The fact-finder, i.e., the judge or a jury likely composed of employees and not human resource professionals, lawyers or executives, is permitted to assess the objective reasonableness of the employer’s factual determination of misconduct;
• Employers will be advised to retain an impartial (outside) third party investigator to undertake an investigation of the purported grounds for termination; and
• Employees should be given notice and an opportunity to cure any deficiencies relied upon to support a termination decision—even when such a provision is not otherwise called for in the employment agreement.

Given My Fun Life, employers have two immediate action items:

1. Consult the standards set forth in case every time you contemplate an employment termination that includes an element of cause. This will likely be the necessary when considering the termination of executives or other high-level corporate employees who receive a severance if they are terminated without cause; and
2. Start thinking now about the employment agreements covering incumbents and future agreements with employees and whether something other than at-will employment is really necessary.

Case Summary

The My Fun Life case arose when the defendant employer terminated the COO of a company who was employed pursuant to contract that provided for at-will employment.  That employment contract further provided, as is often the case for officers, executives and other members of senior management, that if the COO is terminated without cause, the employer would pay a severance (in this case six months of salary).

The trial court found the COO fully and completely performed his duties during his two-and-a-half-month period of employment.  Further, the factfinder determined the COO was notified of his termination by written letter, alleging two grounds that the Idaho Supreme Court said were both incorrect.

Believing that cause existed for the COO’s termination, the employer did not pay the severance amount following termination.  Because cause was not proved at trial, the court ruled the severance was not timely paid and the six months of salary was subject to being trebled as a penalty under the Idaho Wage Claim Act.

Appeal Summary

On appeal, the employer asked the Idaho Supreme Court to review the lower court ruling that cause had not been established.  The trial court’s decision was affirmed.  In its opinion, the Idaho Supreme Court adopted the analysis from a California appellate opinion, Cotran v. Rollins Hudig Hall Int’l, Inc., 948 P.2d 412, 418-19 (Cal. 1998).

Writing for a unanimous court, Justice Bevan cited to a North Dakota Supreme Court opinion that outlined the parameters of the Cotran analysis (think of the following passage as the jury instruction when a case involving similar facts goes to trial):

We conclude the objective standard exemplified by Cotran is the better approach for assessing an employer’s decision about whether an employee actually committed the acts leading to discharge, and, if so, whether the act constituted cause for termination.  We adopt the objective good-faith standard under which an employer is justified in terminating an employee for good cause for fair and honest reasons, regulated by good faith on the part of the employer, that are not trivial, arbitrary or capricious, unrelated to business needs or goals, or pretextual.  A reasoned conclusion, in short, supported by substantial evidence gathered through an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond.

The court specifically ruled that employers can no longer rely on an argument that the judge or jury is not allowed to “second-guess” employment decisions or sit as a super human resources or personnel department.

Just Cause Test

Practitioners with a traditional labor law background are no doubt familiar with the seven-factor “just cause” test developed by Professor Daugherty in 1966 that included the following:

1. The employee knew of the company’s policy
2. The company’s policy was reasonable
3. The company investigated to determine that the employee violated the policy
4. The investigation was fair and objective
5. Substantial evidence existed of the employee’s violation of the policy
6. The company’s policy was consistently applied
7. The discipline was reasonable and proportional (the punishment fit the crime)

The similarities of that analysis and the Idaho Supreme Court’s pronouncement should be rather obvious.  If you have arbitrated termination cases, you know how formidable this test can be.

The My Fun Life case is anything but that for unsuspecting employers.  Please don’t get caught off guard.