Give Employees a Chance to Explain Before Terminating Them

As regular readers of this blog know, a day that is scheduled to be filled with relatively routine and non-controversial matters can get turned upside and require immediate action without any advance notice. One such situation occurs when information comes to light that an employee is unfit to continue in his or her current position and should be terminated. Even if in-house counsel and the business decision-makers have complete confidence that the information justifies termination, however, there is a risk associated with not giving the employee a chance to at least explain his or her actions.

Manning v. Healthx, Inc. highlights that risk. Mark Manning was the VP of sales for Pegasystems, Inc. in 2013 when Healthx began recruiting him to become its CEO. Pegasystems eventually made Manning an offer, stipulating that if he ever was terminated without cause he would receive six months of severance. If his termination was for cause, however, Manning would receive no severance. Manning accepted that offer.

Shortly after Manning began working for Healthx, the company received a communication from Pegasystems claiming that Manning had a contractual obligation that barred him from working for Healthx. After receiving this communication, and without giving Manning a chance to explain why Pegasystems might not be correct in its position, Healthx terminated Manning’s employment. Further, Healthx took the position that such termination was for cause, i.e., Manning’s failure to disclose his contractual obligation to Pegasystems prior to Healthx hiring him, and, therefore, refused to pay Manning any severance.

Manning sued Healthx on several theories of liability, including one asserting a breach of the covenant of good faith and fair dealing, alleging that he was:

 [T]erminat[ed] … based upon representations made by Pegasystems without conducting appropriate due diligence to determine whether [he] was subject to any enforceable obligation that prevented him from working at Healthx, and by failing to provide [him] with an opportunity to respond to Pegasytsem’s allegations.

While Healthx argued that such allegations, even if true, were insufficient to prove bad faith (which is an essential element of a claim for breach of the covenant of good faith and fair dealing), the District Court Judge disagreed, noting that the refusal to give Manning the severance payments without giving him an opportunity to respond to the allegations made by Pegasystems could be construed by a jury as bad faith.

So the next time you or your company wants to fire an employee based on information provided by a third-party, be sure to take the extra time to confront the employee and give him/her a chance to explain. Failing to do so can expose the business to additional liability.

Clarification

After posting this last week, counsel for Healthx and Pegasystems asked me to make a few clarifications. First, because the decision was in response to a Motion to Dismiss, the facts were based on allegations in the Complaint that the district court Judge assumed were true, even though at least some, apparently, have been disputed. For instance, Healthx’s counsel represented to me that his client has disputed the allegation that Manning was not given a chance to explain why Pegasystems might not be correct in the position it asserted in its letter to Healthx. Second, the third sentence of the second paragraph mistakenly says that Pegasystems, instead of Healthx, offered severance. Third, Pegasystems’ counsel has represented to me that his client’s letter to Healthx claimed that Manning was bound by non-dislcosure and employee non-solicit obligations, as opposed to a non-compete obligation.  I urge anyone who would like to understand any of the underlying facts of this case better to click here and read the decision.