What is Good Cause for Termination

In many wrongful termination cases, the plaintiff claims that he or she was protected from the dismissal at will normally permissible under Labor Code Section 2922 by a contract or covenant (express or implied) requiring that there be good cause for termination.

Good cause for termination may be spelled out in an employment contract or may appear in written or unwritten company policies.

What is the definition of “Good Cause?”

The terms just cause and good cause mean a fair and honest cause or reason, regulated by good faith on the part of the party exercising the power.

Courts have generally taken care not to interfere with the legitimate exercise of a business’s managerial discretion. Where the employee occupies a sensitive managerial or confidential position, the employer must of necessity be allowed substantial scope for the exercise of subjective judgment.[1]

What constitutes good cause in the discharge of an employee?

Generally, there is good cause for termination when an employee is guilty of wrongdoing. Three factual determinations relevant to the question of employer liability for wrongful discharge of an employee charged with misconduct are:

Whether good cause exists is dependent upon the particular circumstances of each case. In deciding whether good cause exists, there must be a balance between the employer’s interest in operating its business efficiently and profitably and the employee’s interest in continued employment.

Care must be exercised so as not to interfere with the employer’s legitimate exercise of managerial discretion. While the scope of such discretion is substantial, it is not unrestricted.

What constitute good cause for termination when there is no employee misconduct?

In the published cases to date, employers have prevailed by showing good cause for termination in two ways. In one type of case, the termination was prompted by legitimate business reasons that had nothing to do with the employee’s job performance.[3] 

In the other line of cases, the employer acted in good faith by terminating an employee whom it reasonably believed had violated company policy.[4]

Business Judgment Rule

An employer must have wide latitude in making independent, good faith judgments about high-ranking employees without the threat of a jury second-guessing its business judgment. Measuring the effective performance of such an employee involves the consideration of many intangible attributes such as personality, initiative, ability to function as part of the management team and to motivate subordinates, and the ability to conceptualize and effectuate management style and goals. Although the jury must assess the legitimacy of the employer’s decision to discharge, it should not be thrust into a managerial role.

Although the jury must assess the legitimacy of the employer’s decision to discharge, it should not be thrust into a managerial role.[5]

A discharge for just cause is one which is not for any arbitrary, capricious, or illegal reason and which is one based on facts (1) supported by substantial evidence and (2) reasonably believed by the employer to be true.[6]

Termination Because of Layoffs

In the circumstances of a particular case the depressed condition of the employer’s business and its business decision to reduce its staff with the result that the employee’s services are no longer needed can be good cause for discharging the employee and can also support an inference of good faith, and of the absence of an improper motive, in the discharge decision. [7]

 

Termination Because of Business Divesture

Coca Cola sold its coffee business to another corporation. After the sale plaintiff former employees, who worked for the coffee business, were leased to the new owner for 60 days. At the end of the 60-day term, defendant terminated plaintiffs’ employment and plaintiffs then became employees of the new owner.

Coca-Cola made a “business judgment” to sell the coffee portion of its business, eliminating the need for plaintiffs’ services. Plaintiffs have made no showing “that this reason was pretextual or that [defendant] acted in bad faith toward them.”

Thus, even if the court assume that plaintiffs created an issue of fact as to the existence of this implied-in-fact employment contract, Coca-Cola’s divestiture of its coffee business constitutes the requisite “good cause.”[8]

 

Termination for Workforce Reduction

Qualcomm reduced its workforce. Plaintiff Tomlinson sued QUALCOMM for among other things wrongful termination in violation of public policy. The court held that persons who are on family leave authorized by the Family Rights Act are not immunized from layoff during the leave, since a valid regulation adopted to implement the act provides that the act’s guaranty of reinstatement after such leave does not preclude an employer from terminating the employee from employment as part of a work force reduction.[9]

Termination for Employee’s Breach of Loyalty

During the term of employment, an employer is entitled to its employees’ undivided loyalty. While employed by employer Dole Nut, plaintiff employees began taking steps to start a similar business by meeting with local agency representatives, arranging for loans and grants, purchasing land, and finding a product source.

Upon learning of plaintiffs’ plans, Dole Nut terminated plaintiffs, believing that plaintiffs could not remain employees of the company at the same time that they were in competition with the company, and also because plaintiffs had access to confidential company information, including production plans, profit goals, and operating problems and strategies.

After abandoning their business plans, plaintiffs brought suit against Dole Nut for breach of employment contract and breach of the covenant of good faith and fair dealing. The trial court held that Dole Nut had good cause to terminate plaintiffs’ employment.[10]