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
- 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?
- 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.