Business Judgment Rule

The business judgment rule and at-will employment are pivotal concepts in the context of wrongful termination and employment law in California. Understanding their interplay and the legal consequences they entail is crucial. Here’s a detailed overview:

Business Judgment Rule

1. Definition: The business judgment rule is a legal principle that shields corporate directors and officers from liability for decisions made in good faith, with reasonable care, and in the best interest of the corporation. It presumes that management’s decisions are informed, well-intentioned, and in the company’s best interest.
2. Application in Employment Law: In wrongful termination cases, this rule can be invoked if the decision to terminate an employee is challenged. It can protect employers from liability if they can demonstrate that the termination decision was a business judgment made in good faith.

At-Will Employment

1. Definition: At-will employment means that either the employer or the employee can end the employment relationship at any time, with or without cause, and with or without notice.
2. California Law: California strongly adheres to the at-will employment doctrine, but with significant exceptions, particularly those related to discrimination, retaliation, or violation of public policy.

Legal Consequences

1. For Employers: While at-will employment allows flexibility in making personnel decisions, invoking the business judgment rule can be challenging. Employers must demonstrate that decisions were made in good faith and not as a pretext for illegal actions like discrimination.
2. For Employees: Employees can challenge terminations that they believe were made for unlawful reasons. However, overcoming the presumptions of at-will employment and the business judgment rule requires substantial evidence.

Problems and Challenges

1. Distinguishing Legitimate Business Decisions: It can be challenging to distinguish between legitimate business decisions and those made with unlawful motives, especially in at-will employment scenarios.
2. Proving Bad Faith or Discrimination: Employees face the challenge of proving that the termination was not a business judgment but rather due to unlawful reasons.
3. Documenting Decision-Making Processes: Employers need to meticulously document their decision-making processes to defend against wrongful termination claims under the business judgment rule.
4. Public Policy Exceptions: Navigating the exceptions to at-will employment, like terminations violating public policy, adds complexity for both employers and employees.

Examples

1. Business Judgment Rule Example: A company lays off several employees due to economic downturn, including a recent hire. If challenged, the company could invoke the business judgment rule, showing the decision was based on financial necessity, not individual employee performance or characteristics.
2. At-Will Employment Challenge: An employee is terminated without cause. While this is generally permissible under at-will employment, if the employee can prove the termination was due to discrimination, it would violate FEHA and constitute wrongful termination.

Conclusion

In California, the interplay of the business judgment rule and at-will employment doctrine forms a complex backdrop for wrongful termination cases. Employers often have broad leeway in making employment decisions, but these decisions can be scrutinized, especially if there’s evidence of unlawful motives. Employees challenging terminations must navigate these legal principles to establish that their dismissal was not just a business decision or a lawful exercise of at-will employment, but rather an illegal action. Due to the complexities involved, both employers and employees often require legal guidance in these matters.

Call 310-312-1100 Now to schedule a time to discuss your matter with Attorney John Michael Jensen.

2513. Business Judgment

In California, employment is presumed to be “at will.” That means that an employer may [discharge/[other adverse action]] an employee for no reason, or for a good, bad, mistaken, unwise, or even unfair reason, as long as its action is not for a [discriminatory/retaliatory] reason.

New December 2013

Directions for Use

Give this instruction to advise the jury that the employer’s adverse action is not illegal just because it is ill-advised. It has been held to be error not to give this instruction. (See Veronese v. Lucasfilm Ltd. (2012) 212 Cal.App.4th 1, 20–24 [151

Cal.Rptr.3d 41].)

Sources and Authority

• At-Will Employment. Labor Code section 2922.
• “[A] plaintiff in a discrimination case must show discrimination, not just that the employer’s decision was wrong, mistaken, or unwise……………………………………….. ‘ “The employer may

fire an employee for a good reason, a bad reason, a reason based on erroneous facts, or for no reason at all, as long as its action is not for a discriminatory reason.    ‘While an employer’s judgment or course of action may seem poor

or erroneous to outsiders, the relevant question is…….. whether the given reason

was a pretext for illegal discrimination. The employer’s stated legitimate reason

. . . does not have to be a reason that the judge or jurors would act on or approve.’ ” ’ ” (Veronese, supra, 212 Cal.App.4th at p. 21, internal citation omitted.)

• “[I]f nondiscriminatory, [defendant]’s true reasons need not necessarily have been wise or correct. While the objective soundness of an employer’s proffered reasons supports their credibility  , the ultimate issue is simply whether the

employer acted with a motive to discriminate illegally. Thus, ‘legitimate’ reasons in this context are reasons that are facially unrelated to prohibited bias, and which, if true, would thus preclude a finding of discrimination.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 358 [100 Cal.Rptr.2d 352, 8 P.3d 1089], original italics, internal citations omitted.)

• “[U]nder the law [defendant] was entitled to exercise her business judgment, without second guessing. But [the court] refused to tell the jury that. That was error.” (Veronese, supra, 212 Cal.App.4th at p. 24.)
• “An employment decision based on political concerns, even if otherwise unfair, is not actionable under section 12940 so long as the employee’s race or other protected status is not a substantial factor in the decision.” (Diego v. City of Los Angeles (2017) 15 Cal.App.5th 338, 355 [223 Cal.Rptr.3d 173].)

• “What constitutes satisfactory performance is of course a question ordinarily vested in the employer’s sole discretion. An employer is free to set standards that might appear unreasonable to outside observers, and to discipline employees who fail to meet those standards, so long as the standards are applied evenhandedly. But that does not mean that an employer conclusively establishes the governing standard of competence in an employment discrimination action merely by asserting that the plaintiff’s performance was less than satisfactory. Evidence of the employer’s policies and practices, including its treatment of other employees, may support a contention, and an eventual finding, that the plaintiff’s job performance did in fact satisfy the employer’s own norms.” (Cheal

v. El Camino Hospital (2014) 223 Cal.App.4th 736, 742–743 [167 Cal.Rptr.3d

485].)

• “The central issue is and should remain whether the evidence as a whole supports a reasoned inference that the challenged action was the product of discriminatory or retaliatory animus. The employer’s mere articulation of a legitimate reason for the action cannot answer this question; it can only dispel the presumption of improper motive that would otherwise entitle the employee to a judgment in his favor.” (Cheal, supra, 223 Cal.App.4th at p. 755.)

Secondary Sources

3 Witkin, Summary of California Law (11th ed. 2017) Agency and Employment,

§ 244 et seq.

8 Witkin, Summary of California Law (11th ed. 2017) Constitutional Law,

§§ 1017–1021

Chin et al., California Practice Guide: Employment Litigation, Ch. 4-A, Employment Presumed At Will, ¶ 4:25 (The Rutter Group)

Chin et al., California Practice Guide: Employment Litigation, Ch. 7-A, Title VII And The California Fair Employment And Housing Act, ¶¶ 7:194, 7:200–7:201, 7:356, 7:391–7:392, 7:530, 7:531, 7:535 (The Rutter Group)

4 Wilcox, California Employment Law, Ch. 60, Liability for Wrongful Termination and Discipline, § 60.01 et seq. (Matthew Bender)

21 California Forms of Pleading and Practice, Ch. 249, Employment Law: Termination and Discipline, § 249.11 (Matthew Bender) 10 California Points and Authorities, Ch. 100, Employer and Employee: Wrongful Termination and Discipline, § 100.23 (Matthew Bender)

Call 310-312-1100 Now to schedule a time to discuss your matter with Attorney John Michael Jensen.