Avoid Liability with Express Disclaimers in Employee Manuals and Handbooks

Josh SchmandJosh Schmand

Last month, in Sanchez v. Whole Foods Mkt. Grp., Inc., the United States District Court for the District of Maryland reaffirmed the general rule that express disclaimers in employee manuals and handbooks will protect employers from creating unintended implied contracts under Maryland law.

This is a good reminder of the importance of including clear and conspicuous disclaimers, even as simple and overt as “this manual is not a contract,” because absent such language employee manuals and handbooks can create contractual obligations for employers.

Employee manual was not a contract under Maryland law

Employees supervised by Ms. Sanchez complained about her managerial style. They alleged that she touched employees inappropriately and that she intimidated and harassed them. Whole Foods placed Ms. Sanchez on administrative leave, investigated the allegations, concluded that she was not meeting the expectations of her role, and presented her with a Final Written Warning for “repeated inappropriate behavior.” Her offense constituted a “major infraction” under the employee manual.

After resuming her job, Whole Foods gave Ms. Sanchez an action plan for improving conditions within the team and performance in general. However, Ms. Sanchez failed to achieve the objectives set forth in the plan, and Whole Foods terminated her employment. In turn, Ms. Sanchez filed a lawsuit alleging, among other claims, that Whole Foods breached its contractual obligations arising from its employee handbook. Specifically, Ms. Sanchez argued that Whole Foods failed to follow its own progressive discipline policy contained in the employee handbook and that she was terminated without verbal counseling, written reprimand, or a legitimate final warning.

Whole Foods argued in response that the employee handbook that Ms. Sanchez relied on repeatedly states that employees are employed at-will and that the employee handbook creates no contractual rights or obligations. And, Whole Foods highlighted that it had its employees, including Ms. Sanchez, sign a similar disclaimer every time a policy in the employee handbook was updated. The Court agreed with Whole Foods (and the United States District Court for the District of Columbia’s similar 2018 opinion) that, based on the repeated express disclaimers, the employee handbook was not a contract under Maryland law.

Progressive discipline policies allow employers to use their discretion

Even though the Court found that no contract existed based on the employee manual, it addressed Ms. Sanchez’s other arguments. In response to one of Ms. Sanchez’s arguments, that Whole Foods’ corrective action policy contained in the employee handbook required progressive discipline before employees can be terminated, the Court noted that the policy gave Whole Foods the discretion and flexibility to use differing disciplinary procedures and to terminate employees without prior notice. The corrective policy defined different types of infractions, and carved out situations where counseling and warnings were not required.

Takeaways

Besides ensuring that their employee manuals and handbooks actually have an express disclaimer that nothing contained therein creates any contractual rights or obligations, employers should also:

  • Place an express disclaimer on the first page (or in the preface or introduction) to indicate that it applies to the employee manual or handbook;
  • Repeat the express disclaimer throughout the employee manual or handbook;
  • Make sure that the express disclaimer is prominently highlighted; and
  • Have employees sign and acknowledge the express disclaimer.

Because of the recent updates to Maryland’s employment laws (discussed throughout Employment Edge), now is the perfect time for employers to review their employee manuals and handbooks for the appropriate disclaimer language needed to avoid potential contractual liability.

For more information, contact Josh at 301-347-1273 or jcschmand@lerchearly.com.

On the Hook: Business Owners could be Personally Liable for Employees’ Unpaid Wages

Michael NearyMichael Neary

Employee wages must be the number one debt obligation your business pays on time, no matter the financial burdens your business faces. If your business cannot pay wages, rightsize your workforce immediately – or else you personally could be on the hook for the wages.

A recent Maryland Court of Special Appeals case demonstrates yet again why that is the case. While most business entities limit the possibility of personal liability, the Fair Labor Standards Act, the Maryland Wage and Hour Law, and the Maryland Wage Payment and Collection Act allow for personal liability. In Lin v. Cruz, the Maryland intermediate appellate court again found all three of these wage laws can hold individuals liable for the wages owed by a business under the economic realities test.

The Economic Realities Test

In Lin, a group of employees sued a restaurant and six individuals seeking to recover unpaid wages. The trial court found one individual liable for close to $400,000 in wages and enhanced damages. On appeal, the Lin court affirmed the trial court by applying the economic realities test.

The economic realities test asks whether the individual the plaintiff seeks to hold liable “(1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” The economic realities standard can easily extend individual liability past the owners of a business depending on the level of authority the individual had over the employee seeking wages. The ability of plaintiffs’ attorneys to stretch wage statutes to attach liability outside the core ownership group is bolstered by the view expressed in Lin that wage laws should be given an “expansive interpretation” to achieve the “broad remedial purposes” of those laws.

Because of cases like Lin, employees seeking to recover unpaid wages increasingly name individuals as defendants. Plaintiffs filing wage lawsuits can recover the unpaid wage, enhanced damages (up to four times the wage owed in one local jurisdiction), and attorneys’ fees. The enhanced damages increases the exposure for any individual named in a wage lawsuit. Since the economic realities test is fact specific, most individuals named as defendants will find it difficult having the claims dismissed on a motion to dismiss. Accordingly, the individuals could be stuck in the lawsuit through discovery and ultimately, depending on the facts, could be held liable for the damages awarded.

Prioritize Wages No Matter What

Because of the high stakes to the company and individuals in the management group from wage lawsuits, businesses should ensure employees are timely and properly paid for all hours worked no matter how tight the company finances become.

For more information, contact Michael at 301-657-0740 or mjneary@lerchearly.com.