AZ employers may not change provisions of their employee handbooks...

[Sheila K]

The Arizona Supreme Court ruled Tuesday (May 25) that companies may not unilaterally change provisions of their employee handbooks without the approval of covered employees and without compensating them for any entitlements they may lose.

The decision could require Arizona companies to honor provisions of old handbooks, though they have been replaced by more current policies. It could prompt businesses to retroactively get employee sign-offs on past changes and somehow compensate them for the changes.

"It creates a profound distincentive for employers to communicate openly and in writing with their employees," noted John Alari Doran, a Phoenix attorney who represented ITT Corp., the defendant in the case.

According to Doran, the decision affests employee handbooks issued prior to 1996 when the Arizona Employment Security Act specifically stated that, unless otherwise designated, employment policy manuals do not constitute employment contracts. But, Doran noted the state's top court is now weighing the constitutionality of the act, and if it is thrown out, all handbooks could be subject to the ruling.

Especially affected by this week's ruling are provisions in the handbooks that could be argued to grant an employee some kind of entitlement, such as vacation and holiday pay, medical benefits, sick time o other perks. "Employers will have to revisit how handbooks are written, what is contained in them and how they communicate with their employees," Doran said. Many may simply elect to do away with them.

The case, known as Demasse vs. ITT Corp., involves six employees, including Roger Demasse, who worked for ITT in the Phoenix area from the 1960's until they were laid off about 1993, Doran said. The employees claimed they were illegally fired because provisions in th ecompany handbooks, dating from the time of their initial employment, outlined a seniourity system under which layoffs would occur.

"These people believed the longer they stayed with the company, the more secure their jobs were," said Jack Levine, a Phoenix attorney representing the workers. "As a result, the didn't look for other work or take advantage of employment offers or other openiings elsewhere in the company."

By the time the employees wee furloughed, the company had done away with the seniority protection in the event of a layoff and the policy had been eliminated from subsequent editions of the company's employee handbook. The employees argued that the handbooks at the time they were hired relfected contractual terms of their empoyment which they never agreed to change and therefore were still in place at the time they were fired.

In 1994, the U.S. District Court for Arizona ruled that employers could change the conditions of employment outlined in their handbooks at any time without the approval of the employees and dismissed the case. Levine appealed to the 9th U.S. Circuit Court of Appeals in 1996 and the case was remanded to the Arizona Supreme Court for a determination. The case was argued in October.

The top court disagreed with the decision of the district court and concluded in the 3 to 2 ruling that the employment provisions in handbooks can represent binding contracts and cannot be unilaterally altered without the employees' consent and an offer of compensation to make up for any lost entitlement.

"It holds an employer to a handbook that was published 30 years ago when there were different methods of production, different rules of competition and different wasy of doing busines," Doran said. "And the only way to change it is to engage in one-on-one with each employee in the company."

Justice Frederick Martone, a dissenter, added the ruling "will create havoc with employer-employee relations" by subjecting employers to different obligations to different employees and by setting up potential conflicts between employees covered by different versions of a handbook. Not all handbook provisions can be considered binding as contract terms, Levine added.

"It's got to be something that would make the reasonable person rely on it," he said.

Justices Stanley Feldman, Thomas Zlaket and James Moeler (now retired) supported the decision with Charles Jones and Martone dissenting.

(Reported in The Arizona Republic, May 27, 1999 by Max Jarman, with contributions by The Associated Press)