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The California Supreme Court handed down a landmark decision on October 5, 2000, in a case that had been dubbed by commentators as "the most important employment decision" in the state in more than a decade. Guz v. Bechtel National Inc., 2000 Daily Journal D.A.R. 10929 (2000).

The Supreme Court ruled unanimously that the length and merit of an employee's work for a company does not establish an implied contract restricting the company from eliminating his work unit and terminating his at-will employment. The result will make it easier for employers to defend lawsuits brought by employees who are disadvantaged by organizational changes made by companies adapting to new economic circumstances. The Supreme Court's decision reinstated a summary judgment awarded to Bechtel.

The Facts

Bechtel hired the plaintiff, John Guz, as an administrative assistant in 1971. Receiving generally favorable reviews throughout his employment, Guz worked in various departments at the company, ultimately working for Bechtel's in-house management information unit from 1986 until his job was eliminated in 1992.

In October 1994, Guz filed suit in California state court, alleging breach of an implied employment contract to be terminated only for good cause, breach of an implied covenant of good faith and fair dealing, and age discrimination under the California Fair Employment and Housing Act ("FEHA").

The Superior Court in San Francisco granted Bechtel's motion for summary judgment, holding that Guz was an at-will employee, that he failed to present a prima facie case of age discrimination and that he was unable to rebut the employer's legitimate, nondiscriminatory business reason for his discharge. In a divided opinion, the California Court of Appeal overturned that decision, holding that Guz's length of service, promotions, raises and favorable performance reviews, combined with his employer's progressive discipline policy, raised a triable issue of fact over whether Guz had an implied-in-fact contract to be dismissed only for good cause. The divided appellate panel also held that a triable issue existed on the age discrimination claim because Guz had presented evidence questioning the legitimacy of the reason for his discharge.

The Supreme Court's Decision

Relying on factors initially outlined by the Supreme Court in Foley v. Interactive Data Corp., 47 Cal.3d 654 (1988), Guz argued that he had an implied-in-fact contract permitting termination only for good cause based on: (1) his nearly 20 years of service; (2) "assurances" of continued employment in the form of raises, promotions and good performance reviews; (3) the company's written policy suggesting that discharge for poor performance would be preceded by progressive discipline and that "layoffs during work force reduction would be based on objective criteria;" and (4) the testimony of a company executive stating that its practice was to terminate for good reason and, when possible, to reassign satisfactorily performing laid-off employees.

The Supreme Court found that although evidence existed that Bechtel's policies created implied contractual limits on how Guz and others would be terminated, it did not find triable evidence of an implied agreement on "additional, different, or broader terms of employment security." In other words, the Supreme Court agreed with the employer that its personnel policies did not restrict management's right to reorganize and consolidate its workforce for whatever reasons it wished. The Supreme Court found that Bechtel "had an absolute right to eliminate Guz's work unit and to transfer the unit's responsibilities to another company entity," and this right was not limited even if evidence was put forth that the employee was entitled to progressive discipline procedures before being fired for poor performance.

In rejecting Guz's argument, the Supreme Court also distinguished him from the plaintiff in Foley because, unlike Guz, the Foley plaintiff alleged repeated oral assurances of job security. Notably, the court also found that lengthy employment, standing alone, does not demonstrate an implied-in-fact contract right not to be terminated at will.

A unanimous Supreme Court also rejected Guz's claim that his termination breached an implied covenant of good faith and fair dealing. The court found that Guz was trying to impose on the contract "substantive terms and conditions beyond those to which the contract parties actually agreed" and that such reasoning "directly contradicts our conclusions in Foley." The covenant merely prevents "one contracting party from unfairly frustrating the other party's right to receive the benefits of the agreement actually made." The court also stressed that the breach of an implied covenant cannot logically be based on a claim that the discharge of an at-will employee was made without good cause.

The Supreme Court decided 6 to 1 that Bechtel was entitled to summary judgment on Guz's FEHA age discrimination claim, finding that Guz could not even establish a prima facie case of discrimination because the bulk of his work was transferred to an older employer. In addition, the court agreed that Guz had failed to rebut the employer's legitimate business reason for terminating him -- a business reorganization resulting in a reduction-in-force -- by offering sufficient evidence that this reason was a pretext for age discrimination. Adopting the U.S. Supreme Court's recent discrimination formula in Reeves v. Sanderson Plumbing Products, Inc., 120 S.Ct. 2097 (2000), the majority found that Guz's evidence of age discrimination was "too weak to raise a rational inference that discrimination occurred."

Implications and Applications of the Decision

The decision should make it more likely that trial courts will dismiss before trial claims brought by employees terminated in a reduction-in-force. Frequently, employees terminated in a reduction-in-force argue that they had an implied contract right not to be terminated except for good cause, relying on their lengthy employment history, with concomitant raises, promotions and positive performance reviews. The Supreme Court made it clear that the employee needs considerably more evidence (e.g., actual promises by management of long-term employment) before he or she can reach a jury on the issue. The decision also raises the bar for employees to prove that an adverse employment action was the result of discrimination. Now an employee will avoid summary judgment only if he or she presents strong, credible evidence of actual discrimination sufficient to overcome a legitimate explanation for the decision.

This decision underscores how important it is for employers to re-examine their written employment policies to ensure that they do not inadvertently grant employees contractual rights that later will impair the employer's ability to manage or reorganize its workforce. In addition, the policies should clearly articulate the procedures for raising claims of discrimination, and managers should be trained to implement these policies in a lawful and effective manner.

(Thelen Reid & Priest LLP, a predecessor to Thelen LLP, represented Bechtel in this matter.)


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For more information about the issues covered in this report, please contact Linda S. Husar in our Los Angeles office at 213-576-8017 or at lshusar@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2000 Thelen LLP