Labor Logic

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Interpreting ‘cause’ in an ambiguous
employment contract

John D. Finerty, Jr.

Attorneys who draft employment contracts are familiar with the meaning of the term "for cause." Not every employee, however, knows what the term means. It seems prudent, therefore, that every employment contract with a just cause provision would define precisely the types of employee conduct that warrant termination for cause.

But what if a contract contained no such definition? The recent case of Joy v. Hay Group, Inc., Case No. 04-2114 (7th Cir. Apr. 8, 2005), provides guidance on how to deal with such a situation.

Background

Lynn Joy quit her job at Hewitt & Associates to work for a competitor, the Hay Group, Inc. (HGI). HGI was starting an executive compensation consulting practice and needed Joy to service its existing clients. HGI gave Joy an employment contract that entitled her to severance benefits if she was terminated "for reasons other than cause."

The term "cause" was not defined in the contract. There was, however, some discussion among two management level employees about what "cause" meant before the parties executed the agreement. One of the managers was Joy’s former supervisor at Hewitt; the other was his boss. The two management employees understood that cause meant serious wrongdoing.

After approximately 6 years, HGI terminated Joy "for cause" and refused to give her severance pay. HGI claimed that Joy failed to meet her quota in annual billings.

But Joy was told when she was hired that she was not expected to bring in new business; rather HGI needed her executive compensation consulting expertise. The issue was, therefore, the meaning of the term "cause" in the employment agreement and whether or not HGI met that standard.

A Question of Ambiguity

Joy sued HGI for her severance pay. In deciding a motion for summary judgment, the district court judge picked up a dictionary and looked up the word "cause." He found "cause" defined as "a reason, motive, or ground for some action." (The judge ruled, thus, that any reason — as in "cause" and effect — was good enough).

The Seventh Circuit rejected that interpretation and noted that "dictionaries give a range of linguistic possibilities; rarely do they help a court decide which one the drafter of the contract or statute in question intended…." The court held that the written contract was unclear and, thus, any evidence admissible under the Rules of Evidence may be used to establish its meaning. The court remanded the case for a trial.

The Differing Roles of "Cause" in Employment Agreements

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Judge Posner in the Joy decision drew an important distinction between a contract that uses "cause" for discharge and "cause" for denial of severance pay. When a contract refers to "cause" for termination, but otherwise does not define the term, a discharge may be upheld on the basis that the term means unsatisfactory performance as judged by the employer. Business firms, the court in Joy noted, almost always reserve the right to fire an employee if the company decides his or her performance is unsatisfactory. This is usually not the type of mutual agreement that underlies a severance pay agreement.

Employment contracts often provide for a severance precisely because of job insecurity. Employees need money to live on while they search for subsequent employment. The reasoning behind this is even more pronounced when one considers that, in this case, Joy left a good job with a prominent employer to go to work for a competitor that was starting a new line of business. This type of objective circumstantial evidence would be enough for a court to determine the parties did not vest the employer with complete discretion to determine cause for termination.

For more information or for help writing or enforcing an employment agreement, please contact John D. Finerty, Jr. at Michael Best & Friedrich LLP at (414) 225-8269 or by email.