Every organization must have an employee handbook. Depending on the
contents, an employee handbook could protect the organization or could
become a damaging liability. The primary purpose of this article is to
inform entrepreneurs about the significance of employee handbooks. To
accomplish this purpose, we discuss a number of key elements including
the benefits of handbooks, contents of a typical handbook, the effective
use of clauses and disclaimers, concerns with on-line handbooks, and
issues that pertain to revisions or additions to handbooks. Knowledge of
these key elements and the practical advice we offer will help
entrepreneurs develop employee handbooks that contain legally defensible
and effective mechanisms for managing employees as well as for
protecting their organizations against legal challenges.
Managing human resources is just as important to a small business
as it is to a large organization. The threat of allegations of
discrimination poses a significant challenge particularly for smaller
organizations that do not have the resources to employ specialists, such
as human resources or risk management professionals. Instead, the small
business owner or entrepreneur has to deal with human resource-related
activities, in addition to managing business-related activities. For
instance, a small business owner must engage in several human resources
activities, such as hiring employees, administering compensation and
benefits, promoting employees, resolving conflict among co-workers,
disciplining employees, and terminating employees.
Mistakes made in performing any of these activities will expose the
small business to potential lawsuits. For instance, disciplining
employees in an inappropriate manner or terminating employees in an
insensitive manner could result in a discrimination lawsuit or charges
of wrongful termination against the small business owner. These types of
lawsuits could ruin a small business. For instance, the median
compensatory award for a wrongful termination case is more than
$200,000. And, since 1992, the number of civil rights employment cases
filed in federal courts has more than doubled (Levin, 1998). According
to the Equal Employment Opportunity Commission, in 2001 alone,
businesses paid over 725 million dollars to plaintiffs who were
successful in alleging discrimination.
Given the substantial awards and the litigious business
environment, small and big businesses should do everything possible to
avoid lawsuits. Avoiding lawsuits is particularly critical for small
businesses because a single lawsuit could easily bankrupt a small
business. In this regard, employee handbooks are invaluable to small
businesses. Employee handbooks not only serve as a deterrent to lawsuits
but a well-designed employee handbook could be used to successfully
defend a lawsuit.
This article is organized into six sections. In the first section,
the benefits of employee handbooks to small businesses are described. In
the second section, the contents of a typical employee handbook are
noted. Third, the different types of clauses are described and their
effective application is discussed. Fourth, suggestions for the
effective use of disclaimers in handbooks are provided. Fifth, issues
relevant to on-line handbooks are discussed. Finally, the major issues
to consider when revising and/or updating employee handbooks are
BENEFITS OF EMPLOYEE HANDBOOKS
Employee handbooks are invaluable to small businesses.
Unfortunately, many small business owners/entrepreneurs do not believe
that employee handbooks are valuable, or even necessary. We conducted
informal telephone interviews with 30 entrepreneurs. The size of their
organization varied from 7 employees to 61 employees. Eighteen
entrepreneurs (60%) indicated that they did not have an employee
handbook in their organizations. To our surprise, sixteen entrepreneurs
(53%) indicated that they do not see the need for a handbook. Eight
entrepreneurs mentioned that they would like to have a handbook but
noted that they have not had time to create one yet. If our sample were
to be representative of the "small business
owner/entrepreneur" population, then the results are very
troubling. They are troubling because results indicate that most small
businesses do not have a handbook, and worse yet, about 53% of small
business owners/entrepreneurs do not see a need for, or benefit of an
It is apparent that small business owners/entrepreneurs do not
realize that a well-designed employee handbook can help accomplish
several objectives and goals that are crucial for any small business to
succeed. These goals and how employee handbooks help accomplish those
goals are briefly discussed next.
Share Core Values
It is important to all organizations, large and small, to share
their core values with employees. An employee handbook is an important
vehicle for small business owners to share their core values,
philosophy, and organization's mission with employees.
Employee handbooks that clearly communicate expectations, and
convey that policies and procedures will be applied consistently are
likely to improve employee morale. In many small businesses, a few
employees are likely to develop close ties with the small business owner
or entrepreneur giving other employees the perception that their
employer favors some employees over others. Handbooks that indicate that
all employees will be treated consistently will allay the fears of
employees who are not in the "inner circle" of the
entrepreneur. Of course, actions of entrepreneurs should be consistent
with stated policies and procedures. When employees believe that they
will be treated in a fair and consistent manner, employee morale is
likely to be very high. When morale is high, employees are likely to act
in ways that would benefit the company, which is exactly what small
business owners and entrepreneurs desire from every employee.
Free up Business Owner's Time
Most, if not all small business owners and entrepreneurs work very
long hours. Time, therefore, is a precious commodity. Most entrepreneurs
cannot work any harder but they can work smarter. They need to find ways
to free up time to focus on key business activities and engage in
planning to ensure continued success of the organization. Thus, they
should look for ways to reduce time spent on activities that do not
directly contribute to the growth of business. An employee handbook can
help in this regard. When policies, procedures, and expectations are in
writing, employees can look up the number of sick days, or vacation days
and other such benefits available to them in the employee handbook.
Business owners can then spend more time focusing on business issues
rather than having to respond to questions, answers to which can be
easily found in the employee handbook.
Lawsuits are a nightmare for every organization, particularly for a
small business. A lawsuit can quickly drain the resources of a small
business. In addition to financial resources, lawsuits will force the
entrepreneur to direct attention away from managing the business to
fighting the lawsuit. Obviously, every entrepreneur would like to avoid
lawsuits. Can a handbook help in this regard? The answer is a resounding
yes! Research shows that handbooks reduce the risk of being sued by an
employee. An attorney of a disgruntled employee will request the
employee handbook during discovery phase of building a case against the
employer (Milligan, 1999). The attorney will be reluctant to file a
lawsuit if rules, policies and procedures are clearly articulated in the
organization's employee handbook (Farr, 1999).
Defend Against Lawsuits
Obviously a goal of a small business should be to avoid any
lawsuits. But, if an employee files a lawsuit, can a handbook help?
Again, the answer is yes. Consider this: if an employee who was fired
for violating company policy alleges discrimination, the burden of proof
shifts to the employer, and the employer has to show that the employee
was terminated for a legitimate business/job-related reason (Gatewood
& Feild, 2001). Employee handbooks that clearly state the policies
and procedures are the best place to start for building a successful
defense against such legal challenges (Milligan, 1999). Thus, an
employee handbook becomes an important document that could be
effectively used by a small business owner to defend against many types
of discrimination charges. Small businesses that do not have a handbook
with written policies and procedures will most likely not be able to put
forth a strong defense. The fact that a single lawsuit could severely
debilitate a small business underscores the importance of a
well-designed employee handbook.
Because of the pervasive threat of lawsuits, it makes good business
sense for small businesses to purchase employment practices liability
insurance (EPLI) and limit liability. According to Noreen Graham,
Assistant Vice President for Becher & Carlson Risk Management Inc.,
most insurers are unlikely to even give a price quote for such coverage
to businesses that do not have an employee handbook. In fact, EPLI
applications of all insurers who offer such coverage request details
about, and a copy of, the employee handbook (Howard & Jawahar,
2002). In addition, one of the factors influencing the premium for such
coverage is the quality of the contents of the employee handbook (Howard
& Jawahar, 2002; Levin, 1998).
CONTENTS OF A TYPICAL EMPLOYEE HANDBOOK
In the previous section, we discussed the significance of employee
handbooks to small businesses. Every small business must have an
employee handbook. Typically, handbooks contain three broad sections:
Information about the company, policies and procedures, and employee
benefits. Contents of each section are described next. Small business
owners should consider including information about their company,
policies and procedures, and employee benefits in their handbooks but
must customize the information to fit the needs of their organizations.
Information about the company is usually included at the beginning
of the employee handbook. Typically, a welcome letter from the
owner/entrepreneur should be included. The letter is usually followed by
a brief description of the history of the company. Next, a discussion of
the company's mission, goals, and expectations should be included.
The company information section should be attractive and should be
written to create a positive impression about the company. It should
contain sufficient information to socialize a new employee to the
company and its environment. Like other sections, this section should be
updated as necessary.
Policies and Procedures
Policies outline the rules and expectations of the company. Many
states legally require companies to include drug/alcohol, harassment,
and equal employment opportunity policies in their handbooks. Some
states also require nondiscrimination policies. It is important that
small business owners include what is legally required as a starting
point. Otherwise there is an opening for any employee, union
representative, or even government regulator to press charges against
the company. Small businesses could also include policies that address
smoking, prohibited conduct, right to intellectual material, right to
privacy, arbitration, solicitation, and dress code in the employee
Procedures outline steps or actions that could be taken if any of
the policies or rules is not followed. Procedures could deal with a
number of issues including safety, employee discipline, harassment, and
discrimination. For instance, procedures could delineate the steps to
follow if harassment or discrimination is alleged, describe the process
to file a grievance, or describe actions to be taken in case of
Mistakes to Avoid When Writing Policies and Procedures
It is important for small business owners/entrepreneurs to avoid
including unrealistic or insincere policies. According to Dean Reynolds,
Director of Risk Management and Human Resources at Nissan North America
Inc., "failure to follow your own policy can be worse than not
having a policy" (Milligan, 1999). If a small business owner does
not follow a policy as stated in the employee handbook, it will not only
discredit the business to employees but will also open the business to
lawsuits. In addition, if owner/company suddenly decides to enforce a
policy contained in the handbook, employees may have good grounds to sue
the company because they had no reason to believe any of the policies
would actually be enforced.
In the employee handbook, small business owners/entrepreneurs must
include a clear and specific procedure that will be followed in cases of
harassment. Why? The reason is simple. Courts including the United
States Supreme Court have consistently favored companies in cases where
a strong policy is in place and strictly followed (London, 1999). The
policy should include a broad definition of harassment, lines of
authority where complaints may be taken, and a clear indication of what
will follow after a complaint has been lodged. Consistently following
through with every complaint is the most important defense with a
harassment policy. Just saying it exists is not enough; it must be
followed precisely. In a national survey conducted in 1997, the median
award in harassment and discrimination cases had risen nearly 300
percent to $250,000 (McAndrew, 1999). By having a good non-harassment
policy, educating employees about the policy, treating each complaint
seriously and taking appropriate action, small business can
substantially limit liability.
Policies and procedures are critical for directing behavior of
employees toward organizational goals. Companies, both big and small,
rely heavily on policies and procedures to manage employees. In
addition, most lawsuits either allege that the company violated its own
policies or procedures or challenge the legality of the company's
policies and procedures. Therefore, small business owners/entrepreneurs
should consult an attorney, preferably one who has experience in either
corporate law or in human resource management and compliance, review
policies and procedures before publishing them in the handbook.
Some benefits, such as social security, unemployment insurance, and
workers compensation, are legally required and must be included in
employee handbooks. Other benefits, such as life insurance, health
insurance, time off from work, and designated parking spaces may be
offered to all employees, or they may be available only to select
workers. Each benefit offered should be described to highlight the
advantages for the employees. Employers who contribute toward retirement
benefits should also include the proportion of the contribution made to
the retirement accounts of employees. In general, a benefit will have
more value to employees if they are able to see how much the employer
actually spends to provide that benefit. An awareness of how expensive
benefits are to employers is likely to build commitment and loyalty.
Commitment and loyalty of employees are key ingredients for the success
of any small business.
Mistakes to Avoid When Describing Benefits
Although employers should communicate the costs of providing
benefits to employees, we advice small business owners and entrepreneurs
to not include specific numbers or amounts in the employee handbook.
Each employee's cost and benefit amount, especially for different
types of insurance, will vary. This is especially true when employees
are allowed to choose among different options or coverage, and when they
are able to enroll their families. Only state that the benefit may be
available and who to contact with questions about cost or coverage.
Some benefits, such as social security, unemployment insurance, and
workers compensation apply to all employees but other benefits, such as
unpaid leave under Family Medical Leave Act (FMLA) do not. For instance,
FMLA allows an employee up to 12 weeks of unpaid leave for the birth of
a child, adoption of a child, or to care for a family member who is ill.
However, only employers who have 50 or more employees employed within a
75-mile radius are required to comply with FMLA. So, if at one location
(e.g., branch office), there are fewer than 50 employees, the company is
not legally required to offer FMLA benefits to employees at that
location. However, if the same employee handbook is given to employees
at all locations and it lists FMLA as a benefit, then even if there are
fewer than 50 people employed at a particular location, the company will
have to provide FMLA benefits to employees at that location (Flynn,
In a recent case (Thomas v. Pearle Vision, Inc., 2001), the 7th
Circuit court of Appeals ruled Pearle Vision to provide FMLA benefits to
the plaintiff even though the plaintiff was employed at a location where
Pearle Vision had fewer than 50 employees. Pearle Vision had listed FMLA
as a benefit in their employee handbook but had not specified the
criteria for eligibility. Therefore, it is very important for small
businesses to clearly state in the handbook to whom each benefit applies
and what criteria will be used to determine eligibility.
EFFECTIVE USE OF CLAUSES IN HANDBOOKS
Clauses are statements in the employee handbook or contract that
either allow or prohibit specific behaviors. Small business owners
should seriously consider the use of clauses in their company handbook.
Some of the most important clauses include the at-will employment
clause, non-compete clause, confidentiality clause, no-solicitation
clause, and arbitration clause. If used effectively, these clauses will
protect the interests of the small business owner/entrepreneur. In some
states, an agreement must be signed to document that the employee has
read and understood the clause. Effective use of the aforementioned
clauses is described next.
At-will Employment Clause
At-will employment is an employment relationship that allows either
the employer or an employee to discontinue the employment relationship
at any time, with or without reason. In this relationship, no contract
exists. At-will clauses must be included in the employee handbook.
In small businesses, many employees are likely to develop close
ties with the owner/entrepreneur and come to take the employment
relationship for granted. During tough times, if they are asked to leave
the organization, they could protest or threaten a lawsuit alleging
violation of an "implied" employment relationship. Therefore,
including the at-will employment clause in the handbook will be a
tremendous asset for a small business owner/entrepreneur.
How to Phrase an At-Will Clause
The most effective way to phrase an at-will clause is to simply
state "this employment relationship is at-will." The
straightforward wording will clearly convey a desire for an at-will
relationship, but it will still need to be backed up by the rest of the
handbook and the actions of the small business owner. Simple and
straightforward wording of the at-will employment clause will minimize
confusion and help avoid complications in the future. For example, some
employers add that nothing verbal will alter the at-will employment
relationship in any way. However, such additions enable employers to
imply contracts they do not intend to complete. Because adding
statements such as, "nothing verbal will alter the at-will
employment relationship in any way," could be misinterpreted, such
additions are unlikely to protect the employer. On the other hand, it
may harm the employer by creating a warning flag to courts that the
employer may have had the intention to use it to mislead employees. This
is particularly applicable to small businesses because of the close ties
employees have with owners and the prevalence of family atmosphere in
small businesses. So, do not include such additions or modifications.
Instead, to reinforce the at-will employment relationship, owners
and entrepreneurs should add the following statements to the statement
that "this employment relationship is at-will."
To make the handbook more consistent with an employment at-will
clause, do not refer to full-time employees as "permanent
employees" because it could be assumed that all full-time employees
are permanent and, therefore, are not employed under the at-will clause.
Such misuse has been known to smudge the intent of at-will employment.
In contradictory cases where interpretation of the handbook conflicts
with interpretation of the at-will clause, the courts will decide if the
employee was hired at-will or not, and the courts are not known to be
business-friendly. So do not include fuzzy language that could void the
The at-will clause should be included in the handbook. Employees
should be asked to sign and date a form to acknowledge the at-will
employment relationship. This form should become a part of the
employee's personnel record. Traditionally, employers have asked
that new employees sign an agreement that states they have received the
manual and accept the terms within it. The signed at-will acceptance
form does not replace this form. Both forms must be signed and dated and
placed into the employee's file.
According to Levin (1998), in 1996, cases of wrongful termination
brought a median award of $200,000 per person. The $200,000 award amount
does not include the cost of rehiring and retraining the person(s) or
the costs of the time and effort involved in litigation. Thus, having a
clearly written at-will clause that makes employees aware that their
employment is strictly at-will can save the small business owner
hundreds of thousands of dollars, even if it only discourages one case
from going to court.
The purpose of the non-compete clause is to keep employees from
competing directly with the company by starting their own business or
working for a direct competitor, for a specific duration. The
non-compete clause is usually included in an employee contract, but if
it is relevant to all employees and/or there is no written contract, it
could be included in the handbook. The clause acknowledges that the
employee may leave the company at some point in time and prohibits the
employee from going to work for the company's competition. Whenever
possible, the specific companies that the employee cannot work for after
leaving an employer should be identified. The intent of the non-compete
clause is to prevent an employee from learning trade secrets, then
selling them to the competition or using them to secure a better job
with the competition. In addition, it prevents the employee from taking
the knowledge and using it to create a new business that directly
competes with the former employer.
When using a non-compete clause, state exactly who it includes and
for what period of time. According to Retkwa (2001), these clauses are
not favored in courts, and anything deemed unreasonable tends to be
discarded. In 2001, PaineWebber lost two cases against employees who
violated PaineWebber's non-compete clause. The court ruled the
clause to be "void and unenforceable" because it required the
employees not to work in an entire industry for one year after leaving
PaineWebber. It is always better to identify companies for whom the
employees should not work than to state that employees should not work
for any company in an industry. If an employee is knowledgeable about
just one industry, the clause will drastically impair his/her ability to
find work, creating a significant disadvantage for the employee and
his/her family. If this happens, like in the PaineWebber case, the
clause will likely be thrown out. Because PaineWebber's
non-complete clause was very restrictive (and void), the court also
ruled that PaineWebber would not be allowed to collect back pay from the
plaintiffs, which added up to over $800,000 for only one of the
plaintiffs. Thus, a poorly written clause will not only be ineffective
at protecting the company but will actually protect the employees.
A well-written clause will specify: (1) the companies for which
employees should not work, (2) the geographical areas in which employees
should not compete with the company, and (3) the time period for which
an employee is not allowed to compete directly with the company for
business. As a general rule, a non-compete clause should not prevent
competition for extended periods of time. A reasonable time period will
vary depending on the business and the nature and depth of the
competition being included, but six months to one year is typical. If
many companies are included as competitors to avoid, then the time
period must be relatively short to compensate for the employee giving up
more employment opportunities. On the other hand, if the non-compete
clause only lists the two top-most competitors in an industry with many
companies, the time period may be longer because the employee will still
be able to find a suitable job in the industry.
Why is the non-compete clause important for a small business?
Consider the following scenario. You are an entrepreneur operating a
specialty store in a small town. You have a half-a-dozen employees who
have been with you for many years. One of them is very familiar with
your business: knows the vendors, suppliers, your cost structure, and
profit margin. Would you like for this person to quit your company and
start his/her own company across the street? A non-compete clause that
specifies the geographical area within which the former employee cannot
compete with the company could prevent this from happening. If this were
a larger town with another competitor, you could specify that a former
employee cannot work for the competitor upon leaving the organization
for a specified period of time. Thus, the non-compete clause, when
effectively incorporated in an employee handbook, will provide peace of
mind for the small business owner.
A confidentiality clause specifies the topics an employee may
discuss with certain people or, conversely, topics that should not be
discussed. In jobs that involve knowledge of trade secrets and recent
developments, confidentiality clauses can be used to prevent word from
leaking out of the department or, worse yet, the company. It is best to
let employees know that there will be negative consequences if they ask
for or attempt to share confidential information.
When including confidentiality clauses, be specific about the types
of information that can or cannot be discussed. If a clause could be
interpreted as prohibiting the freedom of employees to talk about wages,
benefits or work conditions, it is unconstitutional and, therefore,
invalid. For instance, Sodexho Marriott Services' handbook implied
that no confidential information could be discussed among workers. The
Hotel Employees and Restaurant Employees International Union was upset
because the clause did not specify what the company considered
"confidential." The union was concerned that some employees
could interpret the clause to mean that they could not discuss wages,
benefits or working conditions. In response to the union's concern,
Sodexho chose to modify the clause rather than risk their day in court.
They chose to include exceptions that were not prohibited (King, 2000).
Alternatively, a company could list subjects that are confidential and
prohibit employees from discussing those subjects.
The confidentiality clause is particularly relevant to small
businesses involved in research and development activities, such as
developing new software, biotechnology, or prototypes for clients. If a
key employee shares confidential information with competitors, the
results can be devastating for a small business. Thus, if the nature of
the business activity involves research and development activities,
small business owners should seriously consider incorporating a
confidentiality clause in the employee handbook.
A solicitation (or no-solicitation) clause defines who can and
cannot solicit coworkers to support a cause, buy something, or join an
organization. Generally this clause is only included when solicitation
is prohibited. Legally, the clause must be all or nothing because
solicitation is a method of free speech. Companies have the right to
prohibit solicitation because they are paying their employees to work,
not socialize or solicit their coworkers' support for a cause. On
the other hand, if solicitation is prohibited, it includes selling Girls
Scout cookies or collecting donations for the Red Cross. These causes
are dear to the hearts of employees, and the company's support for
these types of causes can help enhance employees' satisfaction with
the company. Employers, who are forced to take action against employees
for doing a good deed or helping a good cause, will obviously look bad.
The reason why employers use a no-solicitation clause in spite of
the negative consequences is to prevent union representatives or company
employees from handing out or collecting petitions to organize a union
in the workplace. While the employer can express antiunion sentiments
and give support for those feelings, they cannot exclusively prevent the
solicitation of unions. All solicitation must be prohibited.
Therefore, only include a no-solicitation clause if you intend to
eliminate all forms of solicitation. Entrepreneurs who operate
businesses that are engaged in manufacturing products, fabrication, or
otherwise employ individuals in "trade" jobs (e.g., carpenter,
plumber, electrician) should seriously consider incorporating a
no-solicitation clause in their handbooks for two reasons. First, these
jobs/industries are heavily unionized, thus increasing the chance of
unionization at the small business. Second, wages of unionized employees
are at least 15 to 30% higher than wages of non-union employees. The
increase in labor costs will significantly reduce the profit margin,
and, if the small business tries to pass on the increased cost to the
customer, it will place the small business at a competitive
disadvantage. For these reasons, entrepreneurs should use the
no-solicitation clause if there is a chance that employees might
The purpose of the arbitration clause is to clearly communicate
that any disagreements between employees and the management of the
organization will be subject to arbitration by an in-house or a
third-party arbitrator. The employer should obtain a signed acceptance
of this clause upon hiring a new employee. Courtroom litigation costs
are exorbitant. In contrast, arbitration costs are relatively modest.
Companies that use arbitration could save a significant amount of money
relative to companies that settle disputes in a court of law. If
arbitration is used, companies are able to pay more in whatever
settlement is reached and still realize cost savings. Realizing the
potential to limit costs, companies even offer incentives to employees
who agree to settle disputes through arbitration. It is not uncommon for
companies to add a set amount, for example 10%, to the settlement if the
employee agrees to use the arbitrator. Use of both in-house and outside
arbitrators have advantages, so companies must research to find the best
solution for them. Then they need to implement it and make it known that
arbitration is their chosen method for finding common ground and
The arbitration clause should be displayed conspicuously in the
handbook. In other words, bring special attention to the arbitration
clause. That special attention can be achieved by having a signed form
to indicate acceptance of the arbitration agreement (Perkins &
Terman, 1999). Given the exorbitant costs associated with litigation
(entrepreneur's time and money), we suggest small business owners
and entrepreneurs seriously consider including an arbitration clause in
their employee handbook.
Disclaimers are a special category of clauses. Traditionally, they
were placed at the beginning of the handbook and contained "nothing
in this handbook is contractual" or an equivalent phrase. This is a
generic disclaimer, and it could mean bad news for a company because its
purpose is unclear. It is a disclaimer of everything included in the
handbook and makes everything eligible for change, from insurance
benefits to the mission statement to the disciplinary procedures. The
problem is that some things, such as the legally mandated benefits, are
undoubtedly contractual--that is, not subject to negotiations.
How to Use Disclaimers in an Effective Manner
Only place disclaimers where needed
In Secretary of State for Employment vs. Aslef, the court of
appeals stated that some parts of the handbook would always be enforced,
making them contractual, such as benefits required by law (Aikin, 1998).
So a generic disclaimer that says nothing in the handbook is contractual
would be inaccurate and, therefore, void. Procedures must be clearly
labeled as contractual or not, or their meaning will be decided by the
court that decides the case. So the disclaimer must be placed in the
section to which it pertains and must clearly state that its validity is
for that specific section only.
Use disclaimers consistently
In the case of Leahy vs. Starflo Corp. (see Martucci & Smith,
1997), the disclaimer included in Starflo's handbook was deemed
inappropriate because it was not published in the "disciplinary
procedure" section of the handbook and because the company
privately stated that the disciplinary steps should be followed by all
supervisors. If supervisors are told to follow every step of the
procedure every time, then the procedure, not the disclaimer, is relied
upon and followed, making the disclaimer false. The disclaimer must be
followed and supported by all actions to be credible and upheld in a
court of law.
Almost every employer is confronted with situations that require
invoking disciplinary procedures. Because of their widespread use and
the significance of using disclaimers in an effective manner, we discuss
how to describe disciplinary procedures in the handbook and at the same
time avoid any liability by incorporating disclaimers in an effective
Disciplinary procedures should be outlined in the handbook, but not
in great detail and never as progressive steps that will be followed
every time. If the disciplinary procedure is described as a series of
progressive steps, then the employment will not be at-will, and
termination of an employee for a first but serious offense will become
extremely difficult. The employee could argue that the company failed to
afford him/her due process--that is, did not use the step-by-step
disciplinary procedure before terminating him/her.
Every handbook should contain a section on disciplinary procedures.
To preserve the at-will employment relationship and at the same time
have an effective and legally sound disciplinary procedure,
organizations should follow the suggestions offered below.
Never list disciplinary procedures as a series of progressive steps
(e.g., verbal warning, written warning, suspension, termination). Doing
so implies that every step will be followed. Not every violation is
going to get a simple verbal warning. For example, assault of a coworker
is going to receive a harsher punishment than arriving five minutes late
on one morning. The discipline section needs to make this point clear so
people know what to expect. Make it clear that the consequences for
infractions will depend on the nature of the infractions and are
completely and entirely at the discretion of management. If on the other
hand, the steps are described as progressive, employees will expect
every step to be followed before they are terminated. If the employer
does not follow the steps in the sequence listed in the handbook but
terminates an employee for gross misconduct, then the employee could
have a strong case against the employer for breach of contract.
The best alternative to listing disciplinary procedures as a series
of progressive steps is to describe and depict the process as a cycle of
possible actions. According to Falcone (1999), California courts have
ruled that if the handbook implies there are specific steps in due
process, the employment is no longer at-will, meaning a terminated
employee can sue because a step in the list was skipped. If the
procedure is created as a cycle, it may start at any point and progress
to any other point. This representation helps when explaining that every
step may not be followed and the inclusion of a step is only to show
that it exists and is available for the management's use. To
accomplish this, place all the options for discipline around the edge of
a circle. Do not include a start or end point. They should not be placed
in any specific order, as that would imply a steady progression. Then
use the circle to decide which option would best fit each
When describing and depicting the disciplinary process as a cycle
of possible actions, be sure to include an "other" category as
a possible action. Including such a category will be particularly
important if the organization believes in adjusting the penalty to fit
the crime. For example, if an employee walks out of the office with a
company pen every day, the penalty could be to require the employee to
bring in a new box of pens once a week. Although it may seem childish,
adapting penalties to fit the misconduct can actually be an effective
deterrent. This method works well with minor infractions that create an
annoyance but are not yet problematic. It also is useful because it
affords the small business owner the flexibility necessary to handle
situations on an individual basis. Since it is impossible to foresee all
possible infractions, providing the small business owner some discretion
by leaving an "other" category of discipline makes sense.
Employers often list actions that would prompt disciplinary
proceedings. If you list actions that will result in disciplinary
proceedings, state very clearly that the list is illustrative and not
exhaustive. That is, the list only contains a few of the possible
actions that will be punished and the company reserves the right to
punish any and all indecent and inappropriate behavior. This disclaimer
is necessary to protect the company in cases where an employee engages
in an inappropriate behavior that is not contained in the list. Using
such a disclaimer is important because it is impossible to include every
possible inappropriate behavior/action, and it protects a company's
right to take action against employees who engage in inappropriate
behaviors not included in the list of punishable behaviors and actions.
Why is use of disclaimers in the handbook important for small
businesses? Consider the following scenario. As the owner of a small
business you fire an employee because you suspect the employee is
stealing money from the cash register. If you don't have an
employee handbook and cannot document the theft, you are likely to have
difficulty mounting a strong defense if the former employee alleges
wrongful termination. If you had an employee handbook but had listed the
disciplinary procedure in a step-by-step fashion (e.g., verbal warning,
written warning), you could lose the case, especially if this were the
former employee's first offense. On the other hand, if you had
described the disciplinary procedure as a cycle of possible actions
including termination, you are likely to have a much stronger case
against the former employee. Thus, it makes sense for small businesses
to use disclaimers. We urge small businesses to follow the
recommendations we have offered on how to describe the disciplinary
process and also list possible actions against infractions of
company's policies and procedures.
ON-LINE EMPLOYEE HANDBOOKS
The increase in the availability and ease-of-use of new technology
has resulted in many employers posting their handbook on the
company's intranet or in a storage area on the internet.
Organizations, particularly small businesses, must consider a number of
issues before resorting to posting employee handbooks on-line. A few of
the more important issues are discussed next.
First, employers, especially small business owners, have to realize
that on-line handbooks may not be accessible to employees who do not
have access to computers and/or the internet. Many employees do not use
computers often enough to warrant purchasing one, so they would still
need a written handbook to be provided. In addition, if the handbook is
on the intranet, employees will not be able to access it from outside
the company, so everyone will also need a written handbook. Employees
who travel frequently may not have access so they would need a physical
handbook. Basically, a physical handbook would have to be provided in
addition to the net link. So, in most cases, it will not be possible for
employers to only have an on-line version. Since hard copies may also be
required, posting handbooks on-line does very little to eliminate the
publishing and printing costs associated with the traditional (paper)
Second, changes employers make to a virtual handbook can be very
hard to document. All employees need to somehow be notified that a
change has been made and must somehow give their consent to the change.
Documentation is important because a physical signed consent is easier
to uphold in court than a reply to a mass email. In addition, if
employees also have a printed version, updated sections must still be
sent out to replace the old sections in the printed handbook because
every employee cannot be expected to manually change the handbook. And
if the change is not made and employees continue to use the printed
handbook, they could be looking at outdated and invalid information. In
the end, they could blame the employer for not providing the change in
the handbook. Also, whenever changes are made, employers have to print
the changes, affix a date to the changed material and store it. Because
adjusting a virtual handbook is so easy, there is a chance the change
would not be printed out, dated, and kept. That chance is risky because
without the physical proof that a change had been implemented on a
specific day, the employer could be required to follow the unchanged
Third, employers should be concerned with the security and
integrity of the virtual handbook. Anyone can browse and read material
on the internet. A password could be issued to access the handbook, but
if someone wants to access it, they could figure out the password. If
employees are allowed to print the on-line handbook, then the employer
has no way of controlling who has that information about the company and
cannot prevent an employee from taking that information with him/her
after the employment relationship has ended. Also there is a chance of
someone breaking through the security restrictions and making
unauthorized changes to the handbook. If those changes are not caught
right away, employees could follow them, possibly with disastrous
results. Thus, the disadvantages far outweigh the advantages of using
virtual handbooks, especially for small businesses. For these reasons,
we strongly urge small business owners and entrepreneurs to not use
REVISING/UPDATING EMPLOYEE HANDBOOKS
Employers should periodically review the contents of the employee
handbook. At a minimum, handbooks should be reviewed at least once a
year. From time to time, it may become necessary to revise, update or
add new policies, procedures and benefits. When making changes to the
employee handbook, employers should engage in two very important
First, they should print the section or sections that were revised,
record the date the changes will go into effect, and make sure that
every employee receives a hardcopy of the changes in a timely manner. It
is always a good idea to require employees to read the revised sections
and endorse their signature to acknowledge receipt and awareness of the
changes made to the handbook.
Second, employers should provide "consideration" when
substantive changes are made to existing policies or when a new policy
is added to the handbook. Consideration must be given to employees in
return for their signature of acceptance of a new handbook.
Historically, courts have treated "continuing to work" as
"acceptance" of the policy, but in a recent case, Doyle vs.
Holy Cross Hospital, this precedent was reversed. The hospital had added
a unilateral at-will doctrine to the handbook. When the plaintiffs were
dismissed without a reasonable cause, they claimed they had never agreed
to the at-will statement in the updated handbook. The court found for
the plaintiffs, stating that they did not receive anything in return for
giving up something. Therefore, a contractual agreement had not been
made, and the plaintiffs were still employed under the old handbook
(Jenero & Schreiber, 2000).
Thus, it is important for every business to periodically review the
handbook, consider if updates or revisions are necessary, and evaluate
if the changes merit use of "consideration." These issues are
relevant to small businesses also because just like larger businesses,
small businesses also grow in terms of number of employees and diversity
of their operations. Such changes may require changes or revisions to
the employee handbook.
Every organization must have an employee handbook. Employee
handbooks are particularly valuable to small business owners. Small
business owners can use the handbook to share core values with
employees, improve morale, and negotiate affordable premiums for EPLI
coverage. In addition, a well-designed handbook will most likely deter
frivolous lawsuits; at the very least, it will serve as the first line
of defense against lawsuits. Alternatively, not having a handbook or
having a poorly designed handbook will become a damaging liability for a
small business. In 1995, $35 billion was spent on litigation costs and
rulings (Slate, 1995). A national survey conducted in 1997 found the
median award in wrongful termination and discharge cases to be $162,500.
The mean, which may be skewed by unusually high awards, was $461,745.
These figures do not include attorney fees, which could be as high as
$200,000. Punitive damages are awarded to over a third of discrimination
and harassment claimants, and the amount of awards has been steadily
increasing (McAndrew, 1999). By following the suggestions offered in
this article, small business owners can develop an effective and legally
sound employee handbook.
No handbook will be completely foolproof. However, the goal should
be to foresee and eliminate as many potential problems as possible
before they arise. In addition to following our suggestions, small
business owners are advised to have an attorney check the handbook
before it is published to catch legal errors and disputable areas. Such
mistakes could present openings to employees to sue the company for
creating false expectations, breach of contract, or wrongful
termination. Legal advice will help avoid any problems that may have
occurred unknowingly in the handbook making process. The farther a
problem goes, the more costly it gets. In litigation, a company is lucky
to get off with a warning and court costs. Most often, in addition to
court costs, companies end up providing back pay and benefits, rehiring
wrongful terminations, and paying punitive damages or corporate fines.
One simple error could mean hundreds of thousands of dollars in
legal fees and litigation or arbitration. If a complaint makes it to
court, the employee has more than a fifty-percent chance of winning. A
single lawsuit could threaten survival of a small business. Remember: an
ounce of prevention is worth a pound of cure. Prevent employee
complaints by using suggestions offered in this article and by obtaining
legal advice before publishing an employee handbook because, as stated
above, the cure can be very expensive.
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I.M. Jawahar, Illinois State University
Stacy Gavin, Illinois State University
Nothing in this employee handbook represents a guarantee of
employment for any length of time.
The employer reserves the right to change, add, or delete information
included in the employee handbook, and those changes will apply to
all current and future employees.
All changes will be in writing.