Massachusetts Employment Law Letter

Employment contracts: who makes the call?

Employment contracts can be beneficial to both employers and employees because they can cover things such as bonus distribution, salary increases, and how to treat confidential information.  These contracts, however, can also lead to litigation regarding their terms and conditions and how they apply to a particular situation. In a recent case decided by the First Circuit Court of Appeals, the court looked to the employment contract to determine who determined whether an employee was terminated for “good cause” and ultimately whether a former employee could succeed on his breach of contract claim and get paid for a bonus.  

Generous bonus plan

In 2004, DHL Express, an express mail services company, acquired Airborne Express, a company that employed Jeremy Weiss.  After the acquisition, Weiss continued his employment with DHL, and between 2004 and 2007, he was promoted several times to a number of different sales positions.  When he became Director of National Accounts in 2007, Weiss was asked if he wanted to participate in the company’s “Commitment to Success Bonus Plan.”  If he chose to participate, he was eligible for a $60,000 service-based bonus if he remained employed with DHL through the end of 2009.  He was also entitled to a $20,000 bonus if DHL met its performance goals for 2009.  The Bonus Plan employment contract outlined, among other things, that the company’s Employment Benefits Committee (“Committee”) had sole discretion and authority to interpret the Bonus Plan and make amendments.  Weiss chose to participate in the Bonus Plan.

In October 2008, the Committee amended the Bonus Plan.  The Amendment provided that while Weiss was still eligible to receive $80,000 in bonuses, no portion of it was tied to DHL meeting its goals.  The bonus, instead, was tied only to continued employment through the end of 2009.  Specifically, Weiss was entitled to $20,000 in January 2009 and the remaining $60,000 in January 2010 so long as he was not terminated for “good cause.”  The Amendment did not alter any other terms or conditions of the Bonus Plan.

A multimillion dollar problem

Prior to his promotion to Director of National Accounts in 2007, Weiss was the Regional Sales Director.  Following an organizational change within Weiss’ District, Regional Sales Director Christopher Cadigan told Weiss that sales representative Sergio Garcia had set up rates on a customer account incorrectly.  As a result, Weiss met with Garcia and warned him that his error could result in disciplinary action.  Weiss issued Garcia a verbal warning, but it was not documented or sent to Human Resources. Weiss apparently did not consult with anyone regarding the discipline or the extent of his investigation.

Months later, Cadigan received a customer complaint alleging that another customer was also receiving lower rates.  Cadigan began an investigation.  The investigation revealed that several other sales representatives were also extending unauthorized rates to some customers and were ignoring company procedures when doing so.  As a result, several sales representatives were forced to resign.  Cadigan did not discover any concrete information linking Garcia to the unauthorized activities, and Weiss was not involved in the investigation.

In October 2008, DHL’s loss prevention department launched an investigation after discovering that employees were continuing to give clients unauthorized rates, resulting in a  multimillion dollar loss for the company.  The investigation revealed information that implicated Garcia.  Garcia refused to participate in the investigation but somehow managed to keep his job.  However, in April 2009, Weiss received a complaint from a customer that Garcia was asking customers to pay kickbacks in exchange for providing them with low shipping rates; Garcia ended up resigning as a result.

DHL turned to an outside attorney to conduct a thorough investigation into the entire scheme.  The attorney’s investigation concluded that Garcia, and others, had been perpetrating the scheme for years, including during the time when Weiss had responsibility for the district.  According to the results of the investigation, Weiss was responsible for a number of “management failures” related to the scheme including his failure to properly discipline Garcia his behavior in 2007, his failure to consult with human resources and security regarding the warning, and his failure to adequately investigate the extent of Garcia’s infraction in 2007.

Eventually, DHL terminated Weiss in September 2009.  The termination letter noted that he was terminated for “just cause” based on the results of the investigation.  As a result, Weiss did not receive his $60,000 bonus:  the Committee determined that Weiss had been terminated for good cause under the employment contract and therefore was not entitled to the bonus.

Not up to a jury

Weiss filed suit against DHL to recover the bonus alleging, among other things, breach of contract.  At trial, Weiss claimed that the jury should decide whether he was in fact terminated for good cause.  If the jury decided that he was not terminated for good cause, then he should receive the bonus.  DHL, however, argued that the contract expressly stated that the Committee had the sole authority to determine whether he was terminated for good cause, and, therefore, the matter should not be in the hands of the jury.  The trial court agreed with Weiss and instructed the jury that if they determined that Weiss was not terminated for “good cause,” he was entitled to the bonus under the contract.  Ultimately, the jury returned a verdict for Weiss after determining that it did not believe that he had been terminated for good cause.  DHL asked the trial court to throw out the jury’s verdict, but the judge refused to do so.  DHL then appealed.

On appeal, DHL continued to argue that the employment contract expressly stated that the Committee was responsible for interpreting the agreement, including whether “good cause” existed for the termination, and, therefore, because the Committee determined that Weiss was terminated for good cause, there could be no claim for breach of contract.  Weiss, however, argued that the “good cause” standard was part of the amendment to the employment contract, and since the amendment did not expressly state that the Committee was responsible for determining “good cause,” it was correct for the jury to decide.

The First Circuit Court of Appeals agreed with DHL.  In doing so, the court noted that interpreting an employment contract is typically a question of law for the court to decide, rather than a question for a jury.  A court is required to interpret a contract by the plain terms, unless the language is ambiguous.  When contracts are ambiguous, a jury must decide what it means.  The Appeals Court found that there was no ambiguity in the employment contract:  the plain language clearly provided that the Committee was to be the sole decision maker regarding whether a participant was terminated for good cause.  The court also determined that the amendment had not modified the Committee’s role in any way because the amendment was not extensive enough to change terms of the earlier contract, other than those specifically addressed in the amendment.  As a result, the court read the two employment agreements together and decided that it was clear that the Committee had sole discretion to determine whether Weiss had been terminated for good cause.  And, according to the undisputed testimony at the trial, the Committee had in fact made that determination.  As a result, Weiss could not proceed on his breach of contract claim because there had been no breach.  The case is Weiss v. DHL (1st Cir. 2013).

Bottom line

Employment contracts can be beneficial to employers for a number of reasons.  This particular case really highlights the importance of the use of clear and unambiguous terms when drafting employment agreements.  Clear and unambiguous terms can help employers potentially avoid litigation altogether and, even when there is litigation, help employers avoid judgments in the employee’s favor.  When drafting these agreements, it is always important to have the assistance of experienced labor and employment counsel.

Article By: Amelia J. Holstrom, Esq.

Reprinted from the July 2014 issue of the  Massachusetts Employment Law Letter.