When Does a Personnel Manual Create an Employment Contract?

In Tennessee, most employees are presumed to be “employees at will.” Under this doctrine, employment is for an indefinite period of time and may generally be terminated by either the employer or the employee at any time, for any reason, or for no reason at all (but not based upon unlawful discriminatory reasons, of course). See Williams v. City of Burns, 465 S.W.3d 96, 108 (Tenn. 2015). Stated differently, an employee may be discharged without breach of contract for good cause, bad cause, or no cause at all. This doctrine is based on the notion that employers need the freedom to make their own business judgments without interference from the courts and, likewise, employees have the right to refuse to work for a person or organization. 

The Tennessee Supreme Court recently issued an opinion in the case of Keller v. Casteel, 602 S.W.3d 351 (Tenn. 2015), concerning the “at-will” status of public employees in Tennessee. While the Court declined to find an employment contract existed in that case, the Court noted that personnel manuals could create employment contracts by their language alone. Personnel manuals (aka Policy and Procedures Manuals) may limit the employment at-will doctrine because Tennessee courts may interpret language in a personnel manual as creating a property interest for an employee. If an employee has a property interest in their job, then the employee has a legitimate claim of entitlement to their job, which cannot be taken away without due process. In these situations, an employee is no longer at-will. Rather, when faced with dismissal, the employee is entitled to notice of the charges against them, an opportunity to respond to the charges in a pre-termination hearing, and a more formal post-termination hearing if the employee requests one. Loudermill v. Cleveland Board of Education, 470 U.S. 532 (1985). As a result, it is important that today’s HR managers and supervisors be cognizant of the language contained in their organization’s Personnel Manuals in order to know whether the language creates a property interest and entitles employees to formal hearings connected with due process rights. 

To constitute a contract and bestow a property interest upon an employee, a personnel manual must contain specific language showing an employer’s intent to be bound by the handbook’s provisions. Rose v. Tipton County Pub. Works Dep’t, 953 S.W.2d 690, 692 (Tenn. Ct. App. 1997). In some cases, employees have argued that certain policies or procedures show that they are not merely at-will employees because written policies indicate they can only be dismissed for cause. In other cases, employees argue they have a protected property interest in the procedures promulgated by the employer and petition the court to require the employer to afford them those procedures. 

While these arguments can be hard for employees to prove, they are not all without merit. For example, in Freeze v. City of Decherd, 753 F.3d 661 (6th Cir. 2014), the Sixth Circuit Court of Appeals held that the City’s Personnel Manual did not create a property interest because it contained language that made all city workers at-will employees. But the Court also held that a subsequent Resolution by the Board of Mayor and Aldermen adopting a separate personnel manual for the police department did create a property interest for police officers because the Resolution expressly stated that “all resolutions or parts of resolutions [that] conflict with the Police Resolution are hereby repealed to the extent of that conflict.” Freeze, 753 F.3d at 663. The Court read this language as an unequivocal statement of the City’s intent to be bound by the Police Manual because the Police Manual did not contain language to the contrary. To the extent the City relied on the general personnel manual, the Court determined that the language in the police manual regarding “conflicting provisions” meant that the City’s general personnel manual was not controlling and that police officers therefore had a property interest in continued employment. The Freeze Court also determined that the Police Manual contained language that stated all discipline “shall” be for cause and opined that use of the terms “shall” or “will” create a binding obligation on behalf of the City.

 In the recent Keller case, the Tennessee Supreme Court declined to find that a property interest existed based upon the City of Cleveland’s personnel manual, and also noted that it has not yet found a scenario where an employee handbook could convert an at-will employment agreement into a protectable property interest. On the contrary, federal courts have construed personnel manuals as creating property interests for employees. See Freeze, 753 F.3d at 670. Accordingly, you must be aware of the language contained in your organization’s personnel manual so that it is not used to create a property interest where you do not intend one to be created. 

If your organization does not intend to create a property interest for your employees, it is best to have a statement to that effect in the front of each personnel manual you issue. You must make it clear that the organization’s employees are at-will employees and that nothing in the personnel manual is intended to change that status. You should also review your organization’s written disciplinary procedures to ensure that the procedures do not contain language obligating the city to undertake a progressive discipline system or other procedure. Rather, use of the term “may” should replace use of the terms “shall” or “will” to show that the organization leaves its options open. Lastly, including a statement that the organization may change the provisions of the personnel manual unilaterally without notice to the employee has also been viewed as a stance showing that the organization is not intending to be bound by the provisions of any one personnel manual.