## Facts

- Long-term hourly production employees worked for ITT Cannon (a division of ITT Corporation) in the Phoenix, Arizona area.
- Over time, ITT issued employee handbooks that provided layoffs for hourly employees would be conducted by seniority.
- The seniority layoff provision was treated as having become part of the employees’ employment contract based on employee expectations and reliance.
- In 1989, ITT issued a revised handbook adding an at-will disclaimer and a clause reserving ITT’s unilateral right to modify handbook policies.
- ITT did not bargain with existing employees or provide additional compensation or benefits in exchange for the 1989 changes.
- In 1993, ITT announced new layoff guidelines changing layoffs from seniority-based to performance/ability-based factors.
- Shortly after announcing the new guidelines, ITT laid off higher-seniority employees (including plaintiffs) while retaining less senior employees.
- Employees sued for breach of contract in federal court, and the Ninth Circuit certified questions of Arizona law to the Arizona Supreme Court.

## Issues

1. After a handbook seniority-based layoff policy becomes a term of an employment contract, may the employer unilaterally change the policy to allow layoffs without regard to seniority?
2. Must employees exhaust an internal handbook complaint procedure before suing for breach of contract based on handbook representations?

## Decision

- The Arizona Supreme Court answered both certified questions “no.”
- ITT could not unilaterally modify a handbook term that had become part of the employment contract; modification required mutual assent and consideration.
- Employees’ continued employment alone did not constitute acceptance of, or consideration for, a modification that reduced an existing contractual protection.
- Employees were not required to exhaust the handbook complaint procedure because it was not clearly mandatory or exclusive for this type of dispute.

## Legal Principles

- Employment-handbook provisions may become enforceable implied-in-fact contract terms when employees reasonably rely on them.
- Once a handbook provision becomes a contract term, it is modified under ordinary contract rules, requiring mutual assent and consideration.
- A unilateral “right to modify” clause in a later handbook does not, by itself, eliminate existing contractual rights for current employees.
- Continued employment, without more, is generally insufficient to show assent to waive established contractual protections or to supply consideration for a unilateral reduction of those protections.
- Internal handbook complaint procedures are not a prerequisite to suit unless the contract clearly makes them mandatory and exclusive (e.g., as a condition precedent).

## Conclusion

The court held that an employer may not revoke a handbook-based seniority layoff protection for existing employees through unilateral handbook revisions without mutual assent and consideration, and it further held that a permissive internal complaint process in the handbook did not bar employees from bringing a breach-of-contract action in court without exhaustion.


Demasse v. ITT Corp., 194 Ariz. 500, 984 P.2d 1138 (Ariz. 1999)