Leasing Human Capital: Toward a New Foundation for Employment Termination Law

Abstract

This article sets forth a third way solution to the question of what legal rule should govern employment termination in the absence of a durational-term contract. The traditional employment at will rule allows employers to fire employees without warning and without being required to justify the firing. Most opponents of the at-will rule have advocated replacing it with a good cause or just cause requirement. Legislatures and courts appear to be uncomfortable with the harshness of the at-will rule, yet they are unwilling to embrace good cause. Instead, they have established a growing number of exceptions to the at-will rule, resulting in a confused situation that forces employers to engage in costly efforts to protect themselves from potential lawsuits and yet continues to leave employees extremely vulnerable. No one is satisfied. As an alternative to this split-the-difference compromise, I propose a principled third way that maximizes the gains and minimizes the costs to both employers and employees. Based on analogizing the employment relationship to a - specifically, a by the employer of the employee's human capital or labor-generating potential - I propose introducing into the employment relationship a duty of ordinary care that would require an employer to care for an employee's human capital as if it were the employer's own. When an employer fires an employee, which is likely to stigmatize her as a poor employee and make it more difficult for her to lease her human capital to someone else, the employer generally should be required to do so in a way that minimizes the damage. My proposal retains the basic employment at will rule but requires employers to give about-to-be-fired employees enough pretermination notice to enable them to find new jobs before losing the old ones.