The Employment Contract

This article is an edited transcript of a lecture on the Employment Contract presented to a conference of state law judges. Part I introduces a model of a well-functioning labor market, which provides all employee benefits, and only those employee benefits, that employees value more than it costs employers to provide. Part II articulates ways in which labor markets might fail to provide such cost-justified benefits. Market failures can arise from asymmetric information, asymmetric performance, or collective goods. Such failures can justify legal intervention, although policymakers must worry about the cure being worse than the disease. Additionally, even without market failure policymakers might intervene for paternalistic or distributive reasons. Part III separates out "unequal bargaining power" as an argument for legal intervention, and argues it does not describe a market failure and is generally an incoherent justification for legal intervention. Part IV applies this framework to evaluate legal erosions of the employment-at-will doctrine. Many courts have upheld claims that a termination breached an implied-in-fact promise not to dismiss a worker without cause. Sometimes, these claims can be justified as correcting problems of opportunism arising from asymmetric performance, problems that vary during the life cycle of a career employee. Contract protections generally are default rules, in that parties can reject them through explicit clauses in a contract. The article articulates the basic theories of default rules, which include mimic-the-market rules and penalty defaults. Other courts have recognized the tort of wrongful discharge in violation of public policy. This tort can be justified as an effort to have employers internalize third-party effects of discharges.