Florida Bar Journal

The Viability of Employer Claims Against At-Will Employees

Lately, there has been a lot of changing landscape in labor and employment law that is keeping us practitioners on our toes. There have also been a lot of economic and labor force changes that have shifted the conversations surrounding workers’ rights, fair wages, and the power balance between employees and employers. My recent experience is that this uncertainty is leading some employers to consider affirmative claims they may have against employees when the relationship sours. When faced with a new or uncommon argument, it is often worth returning to the basics. In Florida, like most of the U.S., that means understanding the doctrine of at-will employment. For good or bad, when considering potential claims, counterclaims, and defenses, the boundaries of this at-will relationship limit the legal claims of both employees and employers, and this is particularly true for employers. With the power to terminate an employee at any time for any reason, there is no need to turn to litigation.

The History of At-Will Employment

In my own practice, I say the following words to explain the concept of at-will employment to nearly every potential client I meet with: as an at-will employee your employer can terminate you for any reason (good, bad, or for no reason at all) at any time as long as your employer does not fire you due to a protected status, such as age, race, sex, disability, pregnancy, or because you complained about unlawful activity.^[1] In my experience, most people already have an understanding of the at-will concept and often bring it up first (although they usually incorrectly attribute it to the fact that Florida is a “right to work” state, which is a different concept). At-will employment is well known to be the basis of our employment system, but why do we default to at-will employment here in the U.S. and in Florida?

At-will employment is not a centuries-old legal concept. Indeed, in most places in the world, employment termination is subject to a “just cause” standard, meaning that an employer has to have a good reason for terminating an employee.^[2] Yet, every state in this country except Montana has rejected just cause in favor of at-will employment.^[3] According to Rebecca Dixon at the National Employment Law Project, the doctrine of employment at will was created in the wake of the 13th Amendment’s prohibition on slavery.^[4] Employers used the 13th Amendment to successfully argue that if workers could quit at any time, employers should also be allowed to fire them at any time, and the U.S. had a new legal doctrine.

The at-will concept reached the U.S. Supreme Court in the context of the anti-labor movement, where the Court found laws that prohibited an employer from terminating its employees due to their union membership to be unconstitutional. In Adair v. United States, 208 U.S. 161, 174-75 (1908), overruled by Phelps Dodge Corp. v. N.L.R.B., 313 U.S. 177 (1941), the U.S. Supreme Court held that when there is no contract controlling the length of the relationship, an employer is not “under any legal obligation, against his [or her] will, to retain an employee in his [or her] personal service any more than an employee can be compelled, against his [or her] will, to remain in the personal service of another.” The U.S. Supreme Court later held the same for state laws restricting an employer’s ability to terminate employees in Coppage v. State of Kansas, 236 U.S. 1, 24-25 (1915), overruled by Phelps Dodge Corp. v. N.L.R.B., 313 U.S. 177 (1941). While Adair and Coppage are no longer good law, and an employer may not terminate an employee due to their union activities, the concept of employment at will remains. Today, in contrast to most of the globe, we consider at-will employment to be the norm.

The Limits of At-Will Employment

As mentioned earlier, there are limits to the doctrine of at-will employment. Employees can quit or be terminated for any reason at any time…except when they cannot. Employees and employers with contracts for a specific term of employment may be required to give advanced notice of early termination. Employment that is subject to a collective bargaining agreement or civil service system will also have specific procedures to follow prior to termination. These employees with specific contract terms, union employees, and public employees would not be considered at will.

Also, there are federal and state laws that place some limits on the reasons employees can be terminated. Florida employers generally cannot terminate employees based on their race, sex, color, religion, national origin, marital status, disability, pregnancy, or because they opposed any discriminatory or unlawful practice.^[5] These laws, however, place the burden on the employee to show that they apply. If an employee wants to bring a claim for wrongful termination, they will need to establish that one of these laws apply.

Breach of Contract Claims

At-will employees often still have employment contracts, albeit not for a specific term of employment. The contract may govern other terms and conditions of the employment, such as job duties, compensation, and post-employment obligations. Generally, in Florida, “no action may be maintained for the breach of an employment contract terminable at will.”^[6] Termination (or some lesser disciplinary action) is the employer’s remedy for an employee’s poor job performance and resigning is the employee’s remedy for an unsatisfactory work environment.

There are, however, certain contractual terms that may be enforced in an at-will employment arrangement. When an employer fails to pay an employee the agreed-upon wages, Florida courts allow an action by an employee for the unpaid wages.^[7] Similarly, when an employee breaches restrictive covenants, like non-competition and non-solicitation provisions, Florida law allows an action by an employer.^[8]

Claims Against At-Will Employees

While most employment litigation is initiated by employees asserting that they were subjected to unlawful discrimination or retaliation, or that they have not been properly compensated, such claims, particularly in breach of contract actions, are sometimes met with counterclaims. It is a generally understood concept that an employer may not sue an employee for failing to meet performance expectations. Indeed, even when an employee’s poor performance is at issue, as is often the case when an employer must articulate a legitimate, non-discriminatory reason for taking an adverse employment action against an employee alleging discrimination, employers do not regularly counterclaim for poor performance. Occasionally, however, an employer will bring a breach of contract claim and test the limits of at-will employment by seeking to hold an employee liable for some harm it suffered due to the employee’s performance (or non-performance).

The absence of caselaw in Florida addressing this issue suggests that Florida courts are not receptive to such claims. When such claims have been tested, courts in other at-will jurisdictions have rejected poor performance as a cause of action for breach of contract and have likewise rejected the notion that an employee could be responsible for an employer’s lost profits due to their performance. In Fried v. Aftec, Inc., 587 A.2d 290, 296-97 (N.J. App. Div. 1991), for example, a New Jersey appellate court upheld dismissal of a counterclaim for breach of contract and reasoned:

Although goals for payment of bonuses and stock were established in the contract, a contract for commercial employment requires nothing more than reasonable diligence (“standard care”) on behalf of the employee to perform its terms. See Restatement (Second) of Agency §379(1) (1958). Absent a special agreement, an employee whose best efforts resulted in poor performance, causing a loss of profits, does not become liable for such losses in a breach of contract action. An employer cannot give an employee negative fitness reports, retain the employee, and later sue him for failure to perform the agreement or for overall negligence or carelessness, allegedly causing the company financial losses.

The court further explained that “[t]he employer’s remedy is to fire the employee for ineptness or lack of diligence.”^[9]

Similarly, in In re Petersen, 296 B.R. 766, 780 (Bankr. C.D. Ill. 2003), where an employer sought to recover lost profits from a debtor in a bankruptcy proceeding due to the debtor’s alleged poor job performance, the bankruptcy court found that the proof of claim “established, at most, poor job performance” and “[a]bsent more, the [employer] has no remedy against the [employee] for lost profits.” Applying Illinois law, the bankruptcy court found that “in order for an employer to recover consequential damages in the form of lost profits as a result of a breach of an employment contract, the profits must have been within the employee’s contemplation when the contract was entered into.”^[10] The court further noted that “[i]f the [employer] believed that the [employee] was not performing her job, its remedy would have been to discipline her or to terminate her employment.”^[11] Like Illinois, Florida has a similar law regarding consequential damages:

To recover damages for lost profits in a breach of contract action, a party must prove a breach of contract, that the party actually sustained a loss as a proximate result of that breach, that the loss was or should have been within the reasonable contemplation of the parties, and that the loss alleged was not remote, contingent, or conjectural and the damages were reasonably certain.^[12]

It is generally not foreseeable, under the terms of a contract for employment at-will, that an employee would be responsible for the lost profits of the employer if they were to underperform in their job. The foreseeable consequence to nonperformance or substandard performance is termination.^[13]

On this issue, the Restatement of Employment Law states:

(a) An employee who breaches any obligation that the employment agreement clearly states is a basis for damages liability is subject to liability for that breach of contract. The employer may recover damages for foreseeable economic loss that the employer could not have reasonably avoided, including any reasonably foreseeable consequential damages and the expenses of reasonable efforts to mitigate damages.

(b) Economic loss under subsection (a) does not include lost profits caused by the employee’s breach unless the agreement expressly provides for such recovery or the employee knew or should have known that the employee would be held responsible for lost profits caused by the employee’s breach.^[14]

Thus, an employee is generally only responsible for damages when a contract clearly states that a provision may subject the employee to damages and, even then, those damages are limited and may not include lost profits.

The comments further elaborate:

As a general matter, an employee’s failure to meet the employee’s contractual obligations to an employer is not redressable in an action for damages…. Unless otherwise agreed, if the employee performs poorly in the position, the employer’s usual recourse is to terminate the employment relationship or implement discipline short of dismissal.^[15]

Given this understanding:

Absent language in the agreement that makes it clear that the parties intend what might be termed an ‘actionable obligation’ — that is, an obligation the breach of which could result in employee liability for damages — employers do not have a cause of action for damages against an employee who breaches his or her contractual obligation to provide competent, satisfactory services.^[16]

Any “employee contractual obligations that can result in damages for breach must be clearly stated as such in an agreement between the employer and employee.”^[17] With respect to damages, the comments elaborate that recovery “is limited to cases of foreseeable economic loss to the employer caused by the employee’s breach” and specifically notes that “[a]bsent an express provision in the agreement imposing liability for lost profits,” an “employee’s responsibility for economic loss caused by the employee’s breach does not normally extend to the employer’s lost profits.”^[18]

Courts that have considered comparable claims based in tort have found similarly. In Willis v. Rehab Sols., PLLC, 82 So. 3d 583, 587 (Miss. 2012), the Mississippi court found there was no cause of action for negligence against an in-house accountant for not doing her job and that the employer’s “only viable action upon these circumstances was to properly monitor its employee and terminate [her] employment — an action the [employer] failed to take.” Applying Georgia law, the court in Nordwald v. Brightlink Communications, LLC, 603 F. Supp. 3d 1030, 1043-44 (D. Kan. 2022), rejected a negligence claim based on a duty of ordinary care owed by an employee to an employer noting that the employer had “not identified any authority — under Georgia law or Kansas law or any other jurisdiction’s law — recognizing a duty of care in tort owed by an employee to the employer with respect to the employee’s performance of the job” and noting that the court had “located only authority casting doubt on the viability of such a claim of duty.”

Accordingly, it is clear that an employer cannot choose to continue to employ someone as an employee, incur losses due to their poor performance, sue them for its lost profits, and expect the courts to condone such actions. There is no basis in Florida law for an employer to recover a financial loss it incurred from a poorly performing employee. Due to the at-will nature of the employment relationship, an employer who is not satisfied with an employee already has the power to employ its remedy: termination.

Minding the FLSA

In considering a breach of contract action against an employee, an employer must also consider whether doing so would undermine the Fair Labor Standards Act (FLSA) and the minimum wage guaranteed by the state. These minimum standards for how employers are to compensate employees cannot be contracted around.

Employers cannot maintain claims that are an attempt to deduct wages from an employee that would be impermissible under the FLSA. In Gortat v. Capala Bros., Inc., 585 F. Supp. 2d 372, 375-76 (E.D.N.Y. 2008), aff’d, 568 F. App’x 78 (2d Cir. 2014), the court dismissed a claim for negligence, finding that “[w]hile negligence claims are not obvious examples of attempted wage deduction, they are treated as such to prevent employers from circumventing the protection of employee wages” and further noted that, as explained above, an employer’s “sole remedy…for an employee’s poor performance is termination.” Similarly, counterclaims are generally not allowed in FLSA actions where the effect is to deprive the employee of their wages. In King v. 12 Visual, Inc., 2:19-CV-00634-FTM-60-NPM, 2020 WL 588285, at *2 (M.D. Fla. Feb. 6, 2020), the court reiterated that “[i]t is well established that set-offs against back pay awards are inappropriate in actions to enforce FLSA minimum wage and overtime provisions because such set-offs deprive employees of their ‘cash in hand.’”

This consideration must include exempt employees. An exempt, salaried employee receives an agreed-upon wage, which cannot be reduced based on the quality or quantity of his or her work, which is what a claim based on poor performance or underperformance would be doing.^[19]

In an action against an employee, it is possible that allowing an employer to obtain a judgment could result in the employee owing the employer an amount that would undermine the FLSA’s minimum wage and other protections.

Unequal Balance of Power in Employment Relationships

Allowing a claim or counterclaim against an employee for poor performance undermines other well-established laws and principles, which recognize that employers are in a position of control over employees. For example, generally speaking, the employer is responsible for the actions of its employees taken within the scope of their employment, even wrongful actions.^[20] This concept is based on the employer’s ability and authority to direct and control the employee.^[21] Similarly, employers also owe specific duties to their employees, due to the special nature of the relationship.^[22] The financial risks of an employer and an employee are likewise not identical. The employer enjoys an opportunity for profit and risks the possibility of loss, while an employee is only owed an agreed-upon wage, no matter how profitable or unprofitable the company itself is. The law recognizes that the role of employer and employee is not one of equals and that the employer has power over the employee.^[23]

Conclusion

If an employee is causing an employer to lose revenue, the employer has the power to correct the employee’s actions, discipline the employee, or terminate the employee. It should not continue to employ such an individual and hope to hold the employee responsible for any resulting financial losses. If such a breach of contract claim were viable, it would leave employers in a position to enjoy all of the benefits of profit when their employees are successful while allowing them to pass the risk of loss onto the employees when they are not. Employees who agree to provide services in exchange for predetermined compensation do not take on the financial risk of the company. The financial risk at-will employees take on — and it is not a small one — is that their income could end at any time without notice or cause. Employers should carefully consider whether any claim they wish to bring against an employee is consistent with the basic notion of at-will employment.

This column is submitted on behalf of the Labor and Employment Law Section, Yvette D. Everhart, chair, and Alicia Koepke, editor.