As reported in a prior blog “Utah Court of Appeals Holds that Following the Letter of Your Employees’ Employment Agreements May Not Be Enough” a little over a year ago, the Utah Court of Appeals held in Vander Veur v. Groove Entertainment Technologies (2018 UT App 148) that “breach of the implied covenant of good faith and fair dealing may be asserted for the limited purpose of protecting from opportunistic interference an employee’s justified expectations in receiving the fruits of a compensation agreement attendant to the at-will employment relationship after that relationship has been terminated.” ¶ 26.
On October 29, 2019, in Vander Veur v. Groove Entertainment Technologies (2019 UT 64), the Utah Supreme Court reversed the Utah Court of Appeals’ earlier decision in that case, holding that the Court of Appeals’ application of the covenant of good faith and fair dealing was inconsistent with the express terms of the employment agreement.
To recap, Vander Veur was employed by Groove to sell television services to hotels and other large buyers on a commission basis. Under his compensation agreement, his entitlement to commissions accrued when the television services were installed at a customer’s location. In 2013, Vander Veur arranged for the sale of television services to six commercial customers. However, before any installations took place, Groove terminated Vander Veur and refused to provide any portion of the commissions to which he would have been entitled if he had been employed when the installations occurred.
Vander Veur sued Groove on several grounds, including for breach of the implied covenant of good faith and fair dealing. The district court granted summary judgment to Groove on this claim on the grounds that Groove had specifically limited his compensation entitlement to accounts that were installed during his employment.
The Utah Supreme Court held that summary judgment was proper because the contract provided (when various definitions and other provisions are read together) that Vander Veur had to be employed when the installations took place in order to receive commissions on those sales. Thus, the covenant of good faith and fair dealing could not be invoked to alter this express provision or to add inconsistent requirements to the agreement.
In dissent, Justice Pearce expressed concern that this holding would “practically eliminate” the covenant of good faith and fair dealing in the context of employment agreements. ¶ 23. Justice Pearce concluded that “[t]he parties’ compensation agreement speaks only loosely to the relevant question: how Vander Veur’s compensation agreement interacts with his status as an at-will employee.” ¶ 33. Because this issue was not expressly addressed, he reasoned, it was appropriate for the Court of Appeals to apply the covenant of good faith and fair dealing to ensure that neither party acted opportunistically to deny the other party the benefit their bargain.
Justice Pearce provided examples of ways in which employers could opportunistically terminate an at-will employee and deny them the benefit of their bargain under the Court’s new holding:
1. “[A] summer sales employer could offer a longevity bonus for any employee who works for the company through August 31, and then terminate all employees at 11:59 p.m. on August 30 simply to avoid paying the bonus.”
2. “[A] company could terminate an employee the day before her stock options vest just to prevent her from obtaining an ownership interest in the enterprise.”
These opportunistic actions would likely not lead to any legal liability under the Utah Supreme Court’s new holding, provided that the contracts were drafted carefully. Of course, there are many other business and ethical reasons to treat employees fairly (and at some point the question of unconscionability would arise). But Utah courts will not use the covenant of good faith and fair dealing in the at-will employment context “to achieve an outcome in harmony with the court’s sense of justice but inconsistent with the express terms of the applicable contract.” ¶ 10.
If you have questions about this Utah Supreme Court opinion or any other employment law matter, please contact Shaunda L. McNeill at slm@clydesnow.com or any of the attorneys in Clyde Snow’s Labor & Employment Group at Clyde Snow at 801.322.2516.