Iowa Supreme Court Decision May Open Door for Juries to Sit as Super-Personnel Departments

Although the Eighth Circuit admonishes that courts should not "sit as super-personnel departments to second-guess the business decisions of employers," the Iowa Supreme Court's recent decision in Kern v. Palmer College of Chiropractic suggests they should under some circumstances.

Kern v. Palmer College of Chiropractic

In Kern, a case involving a written employment agreement that defined specific grounds as cause for termination, the Iowa Supreme Court adopted the minority standard for judicial review of an employer's finding of cause for termination. Rather than follow the majority of courts that defer to the employer's determination of cause in termination decisions, the Iowa Supreme Court held that juries (or judicial fact-finders) should conduct an independent review to determine whether employers had sufficient cause for terminations.

The court reversed entry of summary judgment for the employer, and a jury will decide whether the college had good cause to terminate plaintiff Gregory Kern.

Palmer College employed Kern as an assistant professor pursuant to a written employment agreement for a five-year period. The employment contract incorporated Palmer College's faculty handbook, which contained a provision defining specific grounds for termination.

Kern did not follow his supervisor's requests for drafting examination questions and submitting an appropriate statement of his professional goals. The college subsequently terminated Kern's employment for willful failure to perform the duties of his position and/or willful performance of duty below accepted standards, both grounds for termination for cause as listed in the handbook. Kern appealed his dismissal to the faculty judiciary committee as authorized by the handbook. Although the committee recommended rescission of the dismissal, the president disagreed and issued a written decision finding that Kern was correctly terminated for cause.

Kern sued for breach of contract and asserted other claims against the college. The district court granted summary judgment in favor of the college and its agents on all claims.

In its ruling issued on November 21, 2008, the Iowa Supreme Court disagreed with the district court's selected standard of review, adopted and applied a different standard of review, and found factual issues as to whether the college had cause to terminate Kern sufficient to warrant reversal of the district court on the breach of contract claim.

In a majority opinion written by Justice Daryl L. Hecht, the Iowa Supreme Court acknowledged that the majority of courts review employers' "cause" termination decisions for "objective reasonableness," that is, whether the employer's finding of cause was in "good faith," "supported by substantial evidence and reasonably believed by the employer to be true," and "not for any arbitrary, capricious, or illegal reason." It recognized courts support this approach because "the practical considerations of running a business overwhelmingly favor a legal presumption that an employer retains the fact-finding prerogative underlying the decision to terminate employment."

Nevertheless, the court decided instead to follow the minority rule, which provides greater protection to employees and requires the jury (or judicial fact-finder) to determine whether the employer actually had "good cause" to support its termination decision. The court stressed that its decision was influenced by the fact that the parties' definition of "good cause" in the employment agreement in this case was sufficiently definite to allow the court to determine whether "good cause" existed.

Two justices wrote colorful concurring opinions agreeing that summary judgment was not appropriate in this case, but disagreeing about the adoption of the minority rule for judicial review of employers' "cause" determinations. Justice Brent R. Appel agreed with the majority's decision, but wrote separately to further underscore the importance of interpreting employment contracts as any other contract and enforcing them by their express terms. By contrast, Justice Mark S. Cady warned that the decision is "a turn in the wrong direction for employees and employers and, in particular, strips employers of an aspect of discretion essential to the operation of a business."

Implications of Kern

Kern likely will have far-reaching implications for Iowa employers, not only in the context of litigation, but also in day-to-day decision making. Notably, this case continues the trend of Iowa courts becoming more plaintiff friendly, moving away from granting summary judgment for employers, and thus allowing more cases to proceed to jury trials.

Additionally, the court's refusal to allow any deference to an employer's determination of cause for termination will allow juries to make independent termination decisions based on their own assessment of evidence presented. Interestingly, Kern also directly contradicts a general principle in employment discrimination law that, in reviewing employers' termination decisions, courts should not second-guess employers' business judgment.

Further, as Justice Appel pointed out, the evidence presented in court is necessarily less than the complete information an employer utilizes to make an employment decision due to evidentiary rules.

While Kern involved contract interpretation, its implications may erode the weight given to business judgment in discrimination and corporate law cases. For example in discrimination cases, the court's role is simply to determine if an employer's decision was based on a legitimate, non-discriminatory reason. Indeed, even an employment decision based on poor business judgment is sufficient if it is not discriminatory. This deferential approach to an employers' decision-making authority is widely supported by federal courts, including the Eight Circuit, which frequently caution lower courts to refrain from acting as "super-personnel departments" in reviewing employers' business decisions.

It is unclear whether Kern could undercut employers' decisions to terminate at-will employees. Although the Kern decision involved an employment contract, which outlined particular grounds for termination, broad policy language in the ruling stressing employees' substantial interests in job protection and a jury's role to review employment decisions independently could be applied to an at-will termination. However, given that the Kern court expressly limited its ruling to cases involving employment contracts that define "cause" for termination, this ruling may not change review of terminations of at-will employment.

Suggestions for Employers in Light of Kern

Modify Contract Language

The majority opinion, as well as Justice Appel's concurrence, implied that the Kern decision might have been different if the employment contract reflected the parties' intention to allow the employer discretion to make employment decisions. Justice Appel suggested alternative language for employment contracts providing employers broad discretion in making dismissal decisions and stating that an employer's for cause determinations should be measured against an "objectively reasonable" standard.

Based on the court's discussion of the importance of affording parties the freedom to select such standards of review, employers would have more protection if they include express language in the "cause" provisions of employment agreements granting the employer sole and absolute discretion in interpreting the meaning of "cause" under the agreement and determining whether cause exists to terminate employment. The effect would be to require courts and juries to review employer cause determinations under an abuse of discretion standard.

Cases interpreting the Employee Retirement Income Security Act (ERISA) also support such an approach. Indeed, courts in ERISA plan determination cases look to the specific language in the benefit plan to decide which standard of judicial review to apply and the amount of deference to afford administrators' benefit determinations. When a benefit plan expressly gives an administrator discretionary authority to determine benefit eligibility or interpret the plan, a court will only review the administrator's decision for abuse of discretion (similar to the "reasonableness" review that the Kern court chose not to apply).

Consider Use of Arbitration Clauses

Employers may also reconsider using arbitration clauses in handbooks and employment agreements. A carefully drafted arbitration clause can foreclose an employee's ability to bring certain claims before a court or jury, and federal and state courts generally enforce such clauses, especially as to contract interpretation issues.

Seek Assistance From Legal Counsel

In light of the Kern decision, employers are advised to take a risk-averse approach to drafting employment contract language and executing related termination decisions. To help identify and avoid potential contract interpretation problems, employers may wish to seek assistance from legal counsel when drafting or revising for-cause and/or arbitration provisions in handbooks and employment agreements.