CPA Firm Personnel Policies and Procedures: Ramifications of Wrongful Discharge Litigation

Three CPA firm quality control elements focus on human resource management--hiring, advancement, and professional development. These elements are critical to a CPA firm. As competition for new entrants into the profession intensified beginning in the 1970s, firms adopted more professional personnel management techniques; and many developed personnel manuals for professional employees.

Many firms preparing for peer review documented their personnel policies and procedures, and with the forthcoming implementation of the AICPA's practice monitoring program, even more firms will do so. When inadequate attention is paid to the legal effects of this documentation on employee rights, unforeseen litigation may result. The law has changed with respect to the termination of employees. Courts try more civil cases against former employers on the grounds of wrongful discharge. Often, documented personnel policies and procedures are used in formulating a case against an employer.

Background

Throughout most of American legal history an "at-will" employee (i.e., non-union, private sector) could be terminated with or without cause in the absence of an express employment contract or protective legislation. Virtually all CPA firms view employees as being at-will. Today, there is a growing body of law granting new common law rights to some terminated at-will employees. The legal theories conferring these rights are generally called actions for "wrongful discharge" (termination) or "unjust dismissal." The most prominent cause of this change has been the sudden surge in judicial decisions recognizing wrongful discharge or unjust dismissal.

In recent years, this new theory has developed into a recognized cause of action; it is rapidly growing and gaining strength.

Judicial Erosion

Recent cases have sent a clear message to employers that dismissal for illegal demands on employees or demands on employees to do illegal acts can lead to a successful wrongful discharge litigation.

Verdicts against employers have been based upon a clear public policy being violated by the employee's termination. In earlier cases, the public policy was clear and explicit, e.g., perjury. More recently, courts have become more expansive in their finding of public policy violations. In Kalmon v. Grand Union Co., an employee was fired for refusing to open the store's pharmacy without first having a licensed pharmacist on duty. This case, focused on two important issues: 1) state law requiring a licensed pharmacist's to be on duty; and 2) the pharmacist's professional code of ethics, which also required the presence of a licensed pharmacist.

Employee Contracts

At-will status is defined in the absence of an expressed promise of employment for a specific term. Courts have begun to look at other evidence of a contract beyond a written document between employer and employee. Contractual claims have been made by at-will employees based upon publications, representations, and/or actions by management. In 1984, of the 229 state and federal decisions on the "at-will" doctrine, 110 included an employee's claim that an implied-in-fact employment contract had been created by the employer's handbook, manual, policies, procedures or statements. Further, some courts permit a contractual claim by recognizing an implied covenant of good faith and fair dealing as part of the employment relationship.

Employee manuals and handbooks are the ripest area to discover grounds for alleging breach of employment contract. It may be a critical area for CPA firms. The accounting literature on CPA firm employee manuals generally focuses on developing policies that promote both professionalism of the employee and consistency of personnel management procedures. Scant attention is paid to legal considerations. Possible pitfalls are suggested by two following cases cited.

Consider Toussaint v. Blue Cross and Blue Shield of Michigan. While being recruited, Toussaint inquired about job security and was told he would be with the company "as long as I did my job." Toussaint was handed a manual of Blue Cross personnel policies which reinforced the oral assurance of job security. It stated that it was the policy of the company to release non-probationary employees "for just cause only." In affirming a jury verdict, the court held that: "1) a provision of an employment contract providing that an employee should not be discharged except for cause is legally enforceable although the contract is not for a definite term ...; and 2) such a provision may become party of the contract either by express agreement, oral or written, or as a result of an employee's legitimate expectations grounded in an employer's policy statements.

The recent case of Woolley v. Hoffman-LaRoche, Inc., may indicate the future trend in litigation. A civil engineering group leader of nine years service was discharged. The stated cause was the loss of confidence in him by his supervisors. The employment manual provided that discharges due to poor performance or discipline were regulated by detailed procedures. Since these procedures were not followed, Woolley claimed a breach of contract. The New Jersey Supreme Court held that such termination clauses were enforceable.

Future Trends

In the last 15 years, wrongful discharge cases have increased by approximately 800%. This trend will probably continue as more states recognize exceptions to the employment-at-will doctrine.

There are still major differences between states--even neighboring states. For example, a Pennsylvania court held that just cause and disciplinary provisions in an employee handbook do not alter the at-will relationship unless such intent is truly indicated by the employer. The neighboring state of New Jersey, however, holds a contrary opinion as articulated in the Woolley case. Even if a CPA firm operates in a state in which courts have rendered decisions more favorable to the at-will doctrine, this significant trend cannot be ignored.

Quality Control System Design

Trends in wrongful discharge have implications for the quality control system of CPA firms. Quality Control Standard No. 1 specifies and describes nine elements of quality control. Two elements have potential wrongful discharge implications--hiring and advancement. They specify that a CPA firm's quality control system should contain a clear definition of operational responsibilities for management personnel, professional personnel, and non-professionals. The policies and procedures should be documented, and there should be adequate methods for their communication. Additionally, there should be a monitoring of compliance.

Cost-Benefit Considerations

There is no single "right way" of designing a quality control system. The authoritative literature recognizes that firms should weigh costs versus benefits in considering system design options. This cost-benefit analysis applies to the detail of design. For example, a firm needs to weigh whether its employee manual should simply state, "be professional" or whether it should contain a detailed 20 pages on what being professional means in various situations.

A few factors need to be considered. First, the high success rate of plaintiffs in wrongful discharge cases. A 1984 study of California wrongful discharge verdicts revealed a 91% success rate for employees with an average jury award of $400,000. Second, employers must be realistic in that wrongful discharge cases will be tried before a jury composed mostly of employees. Third, wrongful discharge cases can be brought by either professional or non-professional employees. Since the courts increasingly have decided in favor of employees based on an implied-in-fact contract created by employer custom practice, policy, or publications, CPA firms must be careful to make clear any distinctions between the professional and non-professional employees.

Hiring

A CPA firms' objective in hiring is to maintain a program designed to obtain qualified personnel to meet its needs. Qualifications must be set, and guidelines for evaluating potential hirees at each professional level must be established. These objectives should be pursued so the firm can maintain the employment relationship on an at-will basis. Careful scrutiny must be given to printed recruiting materials and care taken by recruiters in oral statements to candidates.

To preserve the at-will employment relationship, the following initiatives are available:

. Recruiting material should be reviewed for language that could be construed as a promise of continued employment.

. Recruiting material should not contain statements that might imply that a just cause is required before dismissal.

. Recruiters should receive training focusing on the legal problems that can arise from casual statements to recruits.

. Recruiting efforts should focus on the growth potential of being associated with the CPA firm, as opposed to job security.

Thus, recruiting efforts should make it clear that an at-will employment relationship does exist, and no promise of job security is being made. At the same time, the firm should communicate a clear understanding that it would like its professional people to grow with it. Forms used to guide interviewers should be reviewed and modified to reflect the firm's intentions.

While applicants are being informed of the firm's relevant policies and procedures a more detailed effort is needed for new hirees. Many CPA firms have a formalized orientation program. During orientation, a CPA firm wants to convey a feeling of optimism to the new employee; yet common sense would dictate that statements like "you are on your way to partner!" should be avoided. A jury may interpret this as a promise of permanency in subsequent litigation.

Firms should consider playing devil's advocate in reviewing their orientation checklists and materials. Materials should be reviewed as if the at-will relationship has been questioned. Printed materials used in the orientation process can be modified to remind those conducting the orientation that no unauthorized assurances or representations be made. It should be clearly stated to those responsible for orientation that even informal oral assurances made by managers during this time can be risky. Firms should consider asking new employees, as a condition of employment, to sing an express statement that employment is for no definite time and can be terminated at any time by the employee or by the firm. The use of a carefully worded "sign-off sheet" in a consistently at-will environment should survive judicial scrutiny. The following disclaimer has been upheld by several courts:

"I agree to conform to the rules

and regulations of (company), and

my employment and compensation

can be terminated, with or without

cause, and with or without notice

at any time at the option of either

the company or myself. I understand

that no manager or representative

of (company), other than

the President or Vice President of

the company, has any authority to

enter into any agreement for employment

for a specific period of

time, or to make any agreement

contrary to the foregoing."

The personnel manual should also be reviewed for possible misinterpretation. The firm should consider the language in the Woolley case that"... our courts will not allow an employer to offer attractive inducements and benefits to the workforce and then withdraw them when it chooses, no matter how sincere its belief that they are not enforceable."

Advancement

The CPA firm's policies and procedures for advancement should establish qualifications deemed necessary for various levels of responsibility. By so doing the firm stresses that personnel must acquire certain skills and capabilities to advance. The firm should communicate the normal time frame for advancement. It should make clear that such advancement is a condition for continued employment.

By formalizing staff positions with titles and specifying the criteria and timeframe for reaching each level within the firm, the at-will relationship is emphasized. The language used in defining these levels should stress the competitive nature of achieving such levels and the personal growth required. Whether these levels are identified in the firm's quality control document or its personnel manual, it should be made clear that the firm has the right to unilaterally change the qualifications and definitions of levels.

A second advancement objective is to evaluate the performance of personnel and to periodically advise them of their progress. Making honest and straightforward personnel evaluations is not easy. Firms should carefully review evaluation forms used. They should provide enough guidance to the evaluator so that the critical aspects of the employee's performance are considered. For the professional employee, the process should be aimed at determining whether the employee has gained the skills and knowledge necessary for his/her current position and the next one that he/she is striving for. A candid evaluation benefits both the employer and the employee.

Some evaluators have a difficult time giving a candid evaluation. There may be a tendency to be less than candid in the written evaluation and falsely indicate satisfactory performance which can backfire when future termination for substandard performance is answered by a law suit. This caveat applies to both professional and non-professional employees. In another case, the court held that it was a breach of duty and unreasonable not to tell an employee that discharge was possible without a change in job performance. In spite of a finding of 83% contributory negligence (poor performance), the case resulted in an award to the employee.

Personnel evaluation forms can document the fact that evaluation was performed and the results clearly communicated to the employee. One procedure is to have the employee initial or sign the completed evaluation form. This form should state that the employee has had an opportunity to express his or her point of view and is aware of the firm's advancement policies and procedures.

It is advisable to have these advancement policies and procedures contain a provision for resolving conflicting evaluations, which may arise from differences in opinions about performance on specific engagements. Another option is to give the employee a copy of the evaluation. This evidences openness and shows that the employee can challenge the evaluation.

If termination is a possibility, there should be a place for specific deficiencies to be documented. The evaluation should state why there is a problem, what the employee has to do to change and resolve the problem, and the potential consequences if improvements are not made. Such documentation will protect the firm from the accusation that arbitrary decisions were made about the employee's employment.

Responsibilities for making advancement decisions must be clearly defined. An administrative partner or a committee chairperson might be designated for making these decisions. A formalized process should be specified and followed. If procedures change, their documentation should change. The greatest care should be given to termination procedures. These should be clearly documented and it is advisable to have an internal review process which affords both management and the employee a second look at the decision. For example, a second partner not involved with the termination recommendation could review the employee's evaluations and make an investigation of any uncertainties. This at least presents the appearance of procedural fairness. Again, it is important to note that 1) the jury is likely to be composed of employees, and 2) the trend in judicial decisions is adverse to employers who fail to follow their own review procedures. In more difficult cases, firms should consider the use of mediation services or outside consultants. These can be useful for resolving a dispute because they are non-binding and not adversarial.