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Claims for Breach of Employment Contracts Based Upon "Constructive Discharge"

Klein, Jeffrey S.Pappas, Nicholas J.

(June 2, 2003, New York Law Journal)


By Jeffrey S. Klein and Nicholas J. Pappas

Executives frequently seek to negotiate terms in their employment agreements providing for specified payments in the event of a resignation from employment.  Typically, the executive will propose that the employer will pay severance benefits or liquidated damages in the event the executive resigns following circumstances defined as “Good Reason.” “Good Reason” may include, for example, the employer’s material change in the executive’s job duties, the employer’s failure to pay specified compensation or the employer’s transfer of the executive to a different place of employment.


Many employment agreements are completely silent as to the executive’s entitlement to any payments or benefits upon a resignation.  However, under a growing body of case law, executives have argued that even in the absence of express provisions requiring specified payments or benefits upon a resignation that the executive nevertheless is entitled to contract damages.  In such cases, an executive typically would claim a) that the circumstances which prompted the executive to resign were the employer’s breaches of material obligations to the executive under the employment agreement, and b) that such breaches created working conditions that were so “intolerable” as “to force” the executive to leave employment with the employer.  This cause of action is essentially a claim for breach of contract based upon a “constructive discharge.”


Given today’s challenging business climate, the issue of whether a particular personnel action causes a “constructive discharge” will undoubtedly continue to confront many companies.  As companies search for ways to optimize performance and efficiency, they can be expected to reorganize all or significant parts of their operations.  Such reorganizations in turn typically will involve the assignment of new or different roles to members of the company’s senior management team.  An executive who may be dissatisfied with his or her new role and whose employment agreement is silent or at least ambiguous as to the company’s authority to make such changes consistent with the agreement may argue, rightly or wrongly, that his or her new assignment constitutes a “constructive discharge” under the agreement.


In this month’s column, we analyze several cases decided under New York law which address whether an executive’s resignation under specified circumstances constitutes a “constructive discharge” that entitles the executive to seek contract damages.  We also set forth some suggestions in drafting employment agreements so as to avoid “constructive discharge” claims under such agreements.

Resignation by “At-Will” Employee


Under New York’s long settled common law, in the absence of a written employment agreement, employees are employed “at will” such that the employment relationship can justifiably be terminated by either party to that relationship, for any reason, with or without cause.  See Murphy v. American Home Products, 58 N.Y.2d 293, 305, 461 N.Y.S.2d 232, 237, 448 N.E.2d 86, 91 (1983).  Because in the absence of a written agreement, employment is “at will,” employees discharged by their employers do not have a claim for “wrongful discharge,” “abusive discharge” or any similar claim based on any other nomenclature based upon such a termination of employment. See Murphy, 58 N.Y.2d at 300.  Under these principles, New York courts have recognized that employees employed “at-will” cannot maintain any cause of action for breach of contract on a “constructive discharge” theory following a resignation from employment. See Spivak v. J. Walter Thompson U.S.A., Inc., 685 N.Y.S.2d 247, (1st Dep’t 1999) (citing De Petris v. Union Settlement Ass’n Inc., 86 N.Y.2d 406, 633 N.Y.S.2d 274, 657 N.E.2d 269 (1995)).

Resignation With Written Agreement


Even if an employee has a written employment agreement for a particular term of employment, the general rule in New York remains that an employee’s unconditional resignation from employment precludes the employee from recovering damages for the employer’s alleged breach of the employment agreement.  For example, in Rose v. Green, 536 N.Y.S.2d 822, 824 (2d Dep’t 1988), several months after signing a three-year employment contract, the company’s president delivered to his employer a signed letter in which the president unconditionally resigned.   The Appellate Division held that the unconditional resignation precluded the president from maintaining an action for breach of the employment agreement, even though the agreement provided that the executive was entitled to be paid compensation “even if discharged for cause.”  The court stated that the resignation was intended to be effective upon tender “irrespective of acceptance” and that the “resignation became fully effective as a voluntary and complete relinquishment of the plaintiff’s rights under the 1985 employment contract.”  Id.


Employees often seek to avoid the legal consequences of their resignations by contending that their resignations resulted not from their own voluntary act, but from the improper actions of their employers.  For example, in Levitz v. Robbins Music Corp., 6 A.D.2d 1027, 178 N.Y.S.2d 221 (1st Dep’t 1958), the employee argued that his resignation was the result of being given the choice by the employer of either resignation or discharge.  The Appellate Division rejected this contention holding instead that “the fact that plaintiff was threatened with discharge does not constitute such duress as to render the resignation involuntary.”  See also Laiken v. American Bank & Trust Co., 34 A.D.2d 514, 514, 308 N.Y.S.2d 111, 112 (1st Dep’t 1970) (“Having resigned, the plaintiffs-respondents may not seek damages by reason of the termination of their services.”).

Constructive Discharge


The above cases establish the general rule that voluntary, unconditional resignations preclude employees from recovering damages under their employment agreements.  However, notwithstanding this rule, New York courts have recognized very limited circumstances where a resignation will be deemed a “constructive discharge” and, therefore, entitle the employee to maintain a cause of action for damages.


For example, in Fischer v. KPMG Peat Marwick, 195 A.D.2d 222, 223, 607 N.Y.S.2d 309, 310 (1st Dep’t 1994), the plaintiff alleged that he had been employed as a partner of an accounting firm for 22 years after which time his role within the partnership diminished significantly as a result of the partnership’s reorganization.  After the partnership denied the plaintiff, who was 45 years old, the opportunity to participate in an incentive program offered to retiring partners, the plaintiff resigned.


Following his resignation, the plaintiff brought an action against the partnership alleging that he was “forced” by the actions of the partnership to submit his resignation from the firm.  The court stated that plaintiffs’ cause of action for wrongful expulsion from the firm was analogous to the cases for “constructive discharge of an employee” and that such cause of action exists only “when an employer deliberately makes an employee’s working conditions so intolerable that the employee is forced into an involuntary resignation.”  Fischer, 195 A.D. at 225, 607 N.Y.S.2d at 311 (citing Pena v. Brattleboro Retreat, 702 F.2d 322, 325 (2d Cir. 1983)).  Defendants asserted that plaintiff had no cause of action because, although it was true that the partnership chose not to offer him participation in the incentive program, the firm encouraged him to stay on as partner.  Plaintiff asserted that diminishing his role destroyed any “reasonable expectations of advancement,” thus creating intolerable conditions.


Though the court did not elaborate upon the specific facts it found to be at issue, the court held that the facts were sufficiently in dispute that the issue of whether the employer made working conditions so difficult that a reasonable person would feel forced to resign was a question forthe trier of fact.
The Fischer case is noteworthy because it derived the legal standard for “constructive discharge” under New York state common law for breach of contract from  Pena v. Brattleboro Retreat, 702 F.2d 322, 325 (2d Cir. 1983), a federal decision construing a federal anti-discrimination statute.  Federal and state cases decided subsequent to Fischer similarly confirm that the legal standards for a constructive discharge under New York state contract law require that courts apply all of the stringent requirements the federal courts have recognized under the federal anti-discrimination statutes. 1.
In Kader v. Paper Software, Inc., 111 F.3d 337 (2d Cir. 1997), the Second Circuit Court of Appeals applied the same legal standard in considering a claim for constructive discharge under New York’s common law of contracts as had been applied in Fischer.  In Kader a computer programmer at a software development company resigned during the term of his two-year employment agreement after allegedly suffering humiliation and stress from working under the direct supervision of the company’s president who was conducting a sexual relationship with his estranged wife.  The court affirmed the trial court’s summary judgment.


The Court observed that “constructive discharge occurs when an employer deliberately makes an employee’s working conditions so intolerable that the employee is forced into an involuntary resignation.”  Kader, 111 F.3d at 339.  The court acknowledged that the plaintiff’s working conditions might be deemed “intolerable” and that the president’s liaison with plaintiff’s wife was “intentional” as opposed to inadvertent or fortuitous.  Nevertheless, the court found that there was no evidence to support the inference that the president’s conduct “was a deliberate creation of working conditions, intolerable or otherwise, because the deterioration (if any) of [plaintiff’s] working conditions was only the incidental effect of [the president’s] independent carnal objectives.”  Indeed, plaintiff conceded that “the affair was not commenced in order to force his resignation.”  Id.
Another New York court recently reaffirmed the standard for constructive discharge recognized both in Fischer and Kader, and as in Kader, found plaintiffs’ allegations insufficient to state a claim.  In Evans v. Winston & Strawn, 757 N.Y.S.2d 532, 534 (1st Dep’t 2003), certain former law partners whose law firm was merged into the law firm of Winston & Strawn resigned from the partnership and brought a claim for “constructive removal.”  They alleged that their resignations were actually “constructive removals” because conflicts of interest between their clients and those of the successor merged law firm would have cost them their clients had they joined the new firm, instead of resigning.  They argued that “such a sacrifice was an intolerable condition of employment that effectively forced their withdrawal” from their former law firm.  Id.
The court affirmed the trial court’s dismissal of plaintiffs’ claim for constructive removal.  The court’s decision on this issue turned on the undisputed fact that both defendants (predecessor and merged law firm) wanted plaintiffs to stay on board and join the merged firm, hence, they did not “drive the plaintiffs away or make working conditions intolerable.”  Id.


Relying on Fischer, the court noted that a cause of action for constructive removal “occurs only when the employee is forced into an involuntary resignation by work conditions that the employer deliberately makes intolerable.”  The court found that “[p]laintiffs do not claim that defendants deliberately created the conflicts of interest that forced plaintiffs’ resignations.”  Id.


Drafting Considerations


Employers should take comfort from the high legal threshold for establishing a “constructive discharge” reflected in the cases discussed above.  However, employers may wish to take additional prophylactic measures to avoid constructive discharge claims by employees under their written employment agreements.


Perhaps the most direct way to avoid constructive discharge claims is to provide expressly in the employment agreement, the consequences of an executive’s resignation.  If the employer has sufficient bargaining strength in negotiations with the employee, the employer simply can provide that upon a resignation, the executive will be paid earned salary and any vested benefits, but nothing more.


If such a provision cannot be agreed upon with the employee, the employer can seek to negotiate a specified amount of severance pay as well as a limitation on the circumstances where a resignation will result in the payment of severance.  For example, the employer can seek to define resignations for “Good Reason” as being the only types of resignations that would qualify the employee for severance benefits.  “Good Reason” in turn can be defined as narrowly or broadly as the parties may negotiate.  A narrow Good Reason provision which benefits the employer may provide that Good Reason exists only if the employer fails to pay earned wages or a deliberate and material breach of the agreement by the employer.  A broader provision may provide that Good Reason exists upon a material change in the employee’s job duties without the executive’s consent.


The existence of Good Reason upon a change of job duties is perhaps the provision employers most often wish to avoid.  That is because employers benefit greatly by retaining the flexibility to modify the employee’s job title, functions and reporting relationships without the requirement of obtaining the employee’s consent or of paying the employee severance benefits.


One way to avoid claims of “Good Reason” based on changes in job duties is to define the employee’s job duties broadly.  For example, the employer may undertake to provide the employee a managerial or executive position within the company as may be determined by the President or the Board of Directors from time to time in their sole discretion.  Alternatively, the company may agree to maintain the executive’s corporate title (e.g., “Vice President”, “Director”, etc.) and compensation during the term of employment, but retain for the company the discretion to assign to the executive other roles or responsibilities and any associated functional titles (e.g. Vice President of New Business Development, Director of Word Processing Department, etc.) and reporting relationships.  


Resolution of these issues requires careful consideration of the company’s business environment and its employee relations.  Obviously, no single strategy will be appropriate for all companies.  Thus, employers should seek out the input of human resources professionals or employment counsel before embarking upon any particular course of action.


1.         Under federal anti-discrimination statutes, courts have recognized that to establish a claim for constructive discharge, the plaintiff must demonstrate that the “employer deliberately created working conditions that were so difficult or unpleasant that a reasonable person in the employee’s shoes would have felt compelled to resign.”  Spence v. Maryland Cas. Co., 995 F.2d 1147, 1156 (2d Cir. 1993).  See also Flaherty v. Metromail Corp., 235 F.3d 133, 138 (2d Cir. 2000) (“A court must find a constructive discharge where the employee resigns because an employer causes to exist conditions of such an unpleasant or difficult nature that any reasonable person in the employee’s place would do the same.”); Stetson v. NYNEX Serv. Co., 995 F.2d 355, 360 (2d Cir. 1993) (Constructive discharge requires showing work conditions “so intolerable that [the plaintiff] was forced into an involuntary resignation.”) (quoting Pena v. Brattleboro Retreat, 702 F.2d 322, 325 (2d Cir. 1983)).  Moreover, courts have recognized under the anti-discrimination statutes that a claim for constructive discharge cannot be established “through evidence that an employee was dissatisfied with the nature of his assignments ... Nor is it sufficient that the employee feels that the quality of hiswork has been unfairly criticized ... Nor is the standard [] merely whether the employee’s working conditions were difficult or unpleasant.”  Stetson, 995 F.2d at 360.  A Second Circuit panel similarly has “recognize[d] that a disagreement with management over the quality of an employee’s performance will not suffice to establish a constructive discharge.”  Chertkova v. Connecticut Gen. Life Ins., 92 F.3d 81, 89 (2d Cir. 1996) (citation omitted).  See also Spence, 995 F.2d at 1156 (“[C]onstructive discharge cannot be proven merely by evidence that an employee disagreed with the employer’s criticisms of the quality of his work, or did not receive a raise, or preferred not to continue working for that employer.  Nor is the test merely whether the employee’s working conditions were difficult or unpleasant.”).  Furthermore, “constructive discharge also requires deliberate action on the part of the employer.”  See Whidbee v. Garzarelli Food Specialists, Inc., 223 F.3d 62, 74 (2d Cir. 2000) (holding that the employer’s lack of concern about the alleged hostile work environment was insufficient to show an intention to create a intolerable workplace and affirming the district court’s dismissal of this claim).  The definition of “deliberate” in this context is “something beyond mere negligence or ineffectiveness.”  Id.  See also Mercury Air Group, Inc. v. Perez, No. 00 Civ. 2975, 2001 WL 88228, at *3 (S.D.N.Y. Jan. 31, 2001).  Finally, courts consider whether the employee made an effort to resolve the concerns internally.  See Spence, 995 F.2d at 1157 (“[T]he record reveals that Spence had a quite effective alternative to resignation. He could have lodged a complaint about Loden to the Company’s HRD.”).

Reprinted with permission from the June 2, 2003 edition of the New York Law Journal © 2003 ALM Properties, Inc. All Rights Reserved. Further duplication without permission is prohibited.

   
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