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Comparative Labor Law & Policy Journal

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covenant of good faith and fair dealing, contracts


The covenant of good faith and fair dealing ("the covenant" or "Good Faith") is now an accepted feature of contractual relations in the United States. Essentially undeveloped until the 1960s, the obligation to act in good faith during contract performance and enforcement gained traction once it was written into the Uniform Commercial Code (UCC) and adopted by state legislatures. The covenant achieved broader recognition when included in 1981 as a new section in the Restatement (Second) of Contracts ("Restatement"). In the employment setting, however, the covenant has not fared nearly so well. The majority of states have declined to apply Good Faith at all when reviewing disputes between employers and individual employees. Moreover, although state courts have embraced an assortment of other contract-based or tort-based theories as departures from the basic American rule of employment-at-will, a mere handful of jurisdictions have accepted the covenant in at-will settings. Such judicial reluctance contrasts notably with the position of labor arbitrators, who regularly incorporate the covenant when construing the disputed terms of collective bargaining agreements. Even among states that have applied Good Faith to individual employment disputes, several have circumscribed the covenant's impact in what amount to expressions of judicial remorse. This article examines the limited reach of the covenant in American employment law. Section II begins with a brief overview of how Good Faith has operated in the general contract setting. It then relies on judicial examples to discuss in detail how the covenant is defined and applied in the employment context by states that recognize its validity, as well as why so many states resist its application. Section II also describes a diminished commitment to Good Faith following the set of initial decisions that applied the doctrine to employment contracts. Finally, Section II discusses cases alleging employer deceit or misrepresentation at the hiring stage. State courts are considerably more likely to enforce norms of good faith and fair treatment during this contract-formation period than they have been to impose the covenant as an implied condition of contract performance. Section III maintains that the courts' reserved stance toward Good Faith is grounded in the robust persistence of the employment-at-will doctrine. The concept of employment-at-will emerged in the United States as a complement to laissez-faire capitalism. During the nineteenth century, an increase in nonagricultural work and transient employment relationships was accompanied by a shift away from master-servant legal norms toward more open-textured contractual relations. By the late 1800s, at-will had replaced the traditional presumption-that hirings for an indefinite term were meant to last a full year-with the individualist conception that indefinite hirings are terminable at the discretion of either party.'o The enduring common law presumption that employment contracts involve parties with equal information and bargaining power contrasts markedly with the recognition in other legal systems that the employment relationship is essentially one of subordination. Section III observes that Congress and the Supreme Court have imposed significant federal regulatory limits on the reach of employmentat-will by prohibiting firings based on a range of specific employer motivations. Still, neither Congress nor forty-nine of the fifty states require that decisions to terminate individual employees be justified based on good cause or any comparable grounds. Absent affirmative statutory protection for job security, employment-at-will remains the pervasive default rule. Moreover, this default rule continues to exert a subtle yet significant constraining influence on the development of major federal statutes regulating the workplace.13 It is not surprising that state courts are reluctant to impose norms of fairness on job security arrangements when employers' residual authority to act in summary, arbitrary, or malicious fashion toward their employees remains legislatively undisturbed.