Employee Handbook Does Not Constitute a Contract

Indiana continues to stand firmly by the traditional rule that an employee handbook is not a contract.  In Orr v. Westminster Village North, Inc., 689 N.E.2d 712 (Ind. 1997), the plaintiffs were terminated over an incident involving an unproved suspicion that they were smoking marijuana at work.  Plaintiffs contended that they were wrongfully discharged, because their employer did not follow the disciplinary procedures laid out in the employee handbook.  Id. At 714.

In Orr, the Supreme Court reaffirmed the validity of the employment at-will doctrine and the general rule that adequate independent consideration is necessary to convert an at-will relationship into an employment relationship requiring an employer to discharge an employee for good cause.  Id. At 719 – 720.  No unilateral contract could be construed through an employee handbook.  Id.  at 720.

The Supreme Court carefully considered the now infamous Illinois Supreme Court decision in Duldulao v. Saint Mary of Nazareth Hosp. Center, 505 N.E.2d 314, 318 (Ill. 1987).  According to Duldulao:

An employee handbook may constitute a unilateral contract and bind the employer if the following three criteria are met: (1) the language of the employee handbook must contain “a promise clear enough that an employee would reasonably believe that an offer had been made;” (2)  the employee handbook must be disseminated to the employee in such a manner that the employee is aware of its contents and reasonably believes it to be an offer; and (3)  the employee must accept the offer by commencing or continuing the work after learning of the terms of the employee handbook. Id. at 318.

The Orr court did not adopt the Duldulao rule, but instead, observed that, if it did adopt the rule, the Duldulao analysis when applied to the employment handbooks at issue in both cases failed to create a “clear promise” which the plaintiffs could have reasonably believed constituted an “offer”.  Orr, 689 N.E.2d at 720 – 721.  Furthermore, even under the Duldulao rule, an employee handbook bearing or accompanied by a disclaimer of a contractual relationship, particularly when the employee signs one of the disclaimers, as a matter of law, does not create a unilateral contract.  Id. at 721.

Recent Indiana cases apply Orr to uphold the wide definition of at-will employment .  In McCalment v. Eli Lilly & Co., 860 N.E.2d 884 (Ind.Ct.App. 2007), the Plaintiff sued for breach of written contract, based on Lilly’s refusal to consider its grievance procedures laid out in its employee handbook.  The court held, based on the Supreme Court reaffirming of the validity of the at will doctrine in Orr and the disclaimer in the Lilly handbook, it could not say that the handbook contained a promise clear enough that an employee would reasonably believe that an offer of other than at will employment had been made.

Importantly, Duldulao has not been adopted by an Indiana court, despite the attention it receives in at-will employment cases.  In Hayes v. Trustees of Indiana Univ., 902 N.E.2d 303 (Ind.Ct.App. 2009), an employee of IU filed a complaint against the university alleging breach of contract for failing to give her thirty-days notice that her employment was being terminated;  failing to honor her “seniority status” in terminating her employment;  and failing to follow the established grievance procedure.  These alleged breaches were based on the procedures set forth the IU’s Human Resources Manual.  Id. at 306.

Noting the Supreme Court’s holding in Orr, the court of Appeals declined to find that the Human Resources Manual constituted a contract under which the plaintiff could maintain a breach of contract claim.  Id. at 312.  Additionally, the plaintiff admitted that she “did not have a signed contract” with the University and agreed that she was an “employee at will”.  Id.  Importantly, the Court of Appeals clarified that the plaintiff could not rely on Duldulao to make her case.  Id.  The court held:

Our Supreme Court, however, refused to recognize an exception to the rule that an employee handbook does not constitute a unilateral contract.  Rather, it only determined “even if [it] were to conclude that an employee handbook, under some circumstances, can constitute a valid unilateral contract in the absence of adequate independent consideration,” the employee handbook in question did not.

Id.  Thus, the employee handbook did not create a contract and the plaintiff’s action for breach of contract failed.  Id. at 313.

Even under the Duldulao rule an employee handbook is only a contract where there is an unambiguous promise made that constitutes an offer.  In the absence of Duldulao, an employee handbook simply is not a contract.  Hayes clarifies that, despite the Indiana Courts’ lengthy discussions of Duldulao, the case has not been adopted in Indiana law.