The Employment Consequences of Wrongful-Discharge Laws: Large, Small, or None at All?

Abstract

Uniquely in the industrialized world, the United States has long had the presumption that employers may legally fire workers “at will,” that is, “for good cause, bad cause, or no cause at all.” During the 1970’s and 1980’s, this presumption eroded rapidly: most U.S. state courts created three classes of common-law restrictions that limited employers’ ability to fire. These exceptions garnered media headlines, created costly litigation, and perhaps as importantly, generated substantial uncertainty among employers about when they could terminate workers with impunity. We refer to these common-law exceptions as wrongful-discharge laws. Briefly summarized: the “public policy” exception prevents employee discharges that would thwart an important public policy, for example, performing jury duty, filing a worker’s compensation claim, reporting an employer’s wrongdoing, or refusing to commit perjury. The “good faith” exception prohibits employers from firing workers to deprive them of earned benefits, such as sales commissions or pension bonuses. The “implied contract” exception makes informal employer assurances of ongoing employment, such as those found in personnel manuals or promotion letters, legally enforceable. Under the implied-contract exception, an employer implicitly offering ongoing employment can only terminate a worker for good cause. Understanding the economic consequences of these doctrines is essential to an evaluation of the costs of using litigation to protect “employment rights.” Fortunately for empirical analysis, states vary greatly in the timing and extent of adoption of wrongful-discharge laws. Most state courts have adopted at least one wrongfuldischarge law in the last three decades. Three states (Florida, Georgia, and Rhode Island) have never adopted an exception, while 10 states recognize all three exceptions. One may potentially use this cross-state, over-time variation to analyze how wrongful-discharge laws affected employment and earnings in state labor markets. We are not the first authors to recognize this opportunity. In an influential paper, James N. Dertouzos and Lynn A. Karoly (1992; DK hereafter) estimated that the adoption of wrongfuldischarge laws was economically equivalent to a 10-percent employer-side tax on wages, leading to a 3-percent reduction in aggregate employment, in states that allow workers to sue for punitive (“tort”) damages for wrongful discharge, as is typically true under the good-faith and public-policy exceptions. Moreover, DK found that states that adopted a doctrine under which plaintiffs may sue only for economic (“contract”) losses (typically the implied-contract † Discussants: Henry Farber, Princeton University; Joshua Angrist, Massachusetts Institute of Technology; Richard Thaler, University of Chicago.