It Doesn't Work

Your state supreme court has just ruled that by giving employees a policy manual specifying certain acts that could get them fired, employers have implicitly entered into a contract that allows them to fire people only for those actions. Anyone fired for reasons not spelled out in the policy manual may sue for wrongful termination.

This ruling is good for workers in your state, right? Maybe not.

Over the last decade, state courts have increasingly restricted employers' ability to fire workers. Many have even adopted the policy-manual-as-contract approach described above. But these decisions are inflicting substantial costs on the economy and costing workers jobs. That's the conclusion of a study by James N. Dertouzos and Lynn A. Karoly of the Rand Corp.'s Institute for Civil Justice, "Labor Market Responses to Employer Liability."

Under common law, both employers and employees have been free to terminate their relationship at will in the absence of a contract that states otherwise. But throughout the 1980s, state legislatures and, more important, state courts chipped away at that right, restricting employers' ability to fire workers.

The result is more wrongful-termination suits. Such suits were almost unheard of before 1980, but today, the study reports, there are more than 20,000 wrongful-termination suits on state-court dockets.

The costs of such suits can be high. In California, the state with the most complete data, the study found that jury awards average $700,000, and for those suits that make it to trial, plaintiffs win 70 percent of the time. In total, the direct cost to California employers is $50 million annually.

But the indirect costs of such suits are even higher. Firms become more reluctant to fire workers who are unproductive. They put potential employees through a longer and more rigorous screening process. In short, restricting an employer's ability to fire makes employment more expensive. The study contends that the indirect costs may be 100 times greater than the direct costs.

These higher costs translate into lower employment. "In a nutshell, the efforts of the state judiciaries to protect workers' job security are altering employers' hiring and firing practices. And one of the results is less hiring," write Dertouzos and Karoly. The decline in employment may be as high as 7 percent in states that have most restricted employers' right to fire at will.