At-Will States: Employer Rights, Termination Laws, and Compliance

At-will employment is the default employment relationship in 49 out of 50 US States, meaning that an employer can terminate an employee at any time, without cause or notice. Montana is the single state where employers must provide “good cause” for termination.

But even in states where this doctrine applies, there are significant exceptions, as we’ll explore below. Understanding these exceptions is critical for companies hoping to avoid termination claims, as well as for employees seeking reparations if they feel they have been unfairly let go.

Why do these exceptions matter?

Whether you are a US-based employer or an international company hiring US employees, at-will employment has significant implications for your HR and payroll compliance. Failing to comply with state-specific laws and exemptions can expose your business to legal risks and financial penalties.

As well as the exceptions we’ll discuss below, protections exist against wrongful termination for discriminatory or illegal reasons. You’ll need to navigate these specific requirements too.

History and evolution of at-will employment

At-will employment contrasts dramatically with worker protections in other countries, including the UK and Canada, where reasonable notice of termination is required. To understand why the US adopted this principle, let’s briefly look at its origins and development.

A brief history of at-will employment

The concept of at-will employment developed in late 19th-century US law, originally aimed at giving both employers and employees flexibility. It was first mentioned in a paper by legal scholar Horace C. Wood, entitled Treatise on the Law of Master and Servant (1886). In his treatise, Wood wrote: “With us the rule is inflexible, that a general or indefinite hiring is prima facie hiring at-will.”

This legal theory established that either party could end the employment relationship for any reason, although in subsequent decades, several statutory exceptions were proposed and put into effect.

Legal precedents:

Several legal cases have shaped the doctrine over time, adding layers of complexity and introducing exceptions to protect employees.

Key cases, such as Toussaint v. Blue Cross & Blue Shield of Michigan, highlighted the role of implied contracts and good faith covenants, challenging the absolute nature of at-will employment.

Claimants Charles Toussaint and Walter Ebling stated that when employed they were clearly told that, so long as they were performing their role at the health insurance nonprofit, they would remain in employment. Toussaint cited a written policy document in support of his claim. They won their case and set a legal precedent.

This lawsuit established that an employer's written policies and statements can create an implied contract of employment, overriding at-will employment. The court ruled that employees could not be terminated without good cause if company policies suggest job security, even in the absence of formal contracts.

The key takeaway was that at-will employment only applies in the absence of a written or otherwise implied contract.

At-will employment by state: How do states follow the doctrine?

As mentioned, only one state (Montana) has replaced the law with its own employment legislation. Most US states, including California, Texas, and New York, follow the at-will employment doctrine, allowing employers to terminate employees without cause.

In Montana, termination is only allowed for "good cause" after the stated probationary period has ended.

This good cause must be legitimate and non-discriminatory, and examples might include failure to satisfactorily perform duties, violating written policy, or bringing the employer into disrepute. However the cause is defined, a reason for termination must be given.

Exceptions to at-will employment

Some states provide additional protections beyond the federal baseline, especially around wrongful termination related to discrimination, jury duty, or reporting illegal activities.

For example, in Maryland, Virginia, and the District of Columbia, an employee cannot be terminated for serving on a jury in federal court. It’s essential to know the nuances in each state where your employees are based.

In all states, Federal Equal Opportunity (EEO) Laws apply, which protect workers from discrimination on the basis of race, color, place of origin, sex, religion, disability, age, and other components of employee identity. These laws include provisions aimed at preventing prejudicial dismissal.

The US Equal Employment Opportunity Commission hears complaints about discriminatory employment policies and acts under these laws.

Further protection is provided to employees who act as whistleblowers reporting corporate legal violations. The US Department of Labor states that “an employer cannot retaliate against you for exercising your rights under the Department of Labor’s whistleblower protection laws. Retaliation includes such actions as firing or laying off, demoting, denying overtime or promotion, or reducing pay or hours.”

Five federal agencies and offices provide protections for specific sectors with regard to whistleblowing. These are:

• Occupational Safety and Health Administration (OSHA)
• Mine Safety and Health Administration (MSHA)
• Office of Federal Contract Compliance Programs (OFCCP)
• Wage and Hour Division (WHD)
• Veterans’ Employment and Training Service (VETS)

The first two protect whistleblowers from reporting potentially dangerous or illegal working practices. The OFCCP focuses on discrimination, while the WHD monitors working hours legislation. As its name suggests, VETS is concerned with offering protections for American servicepersons and veterans.

Employee rights and employer responsibilities under at-will employment

Given the almost universal applicability of at-will employment, it’s worth looking into employer and employee rights a little more deeply. Let’s begin with the protections that pertain to employees.

Employee rights

In at-will states, employees retain the right to leave a job at any time without penalty. They don’t need to give notice, unless they have an employment contract which specifies such.

Employees are further protected against termination for reasons that contravene public policy, such as refusing to violate state or federal laws or reporting illegal activities in the workplace.

Employer rights

Employers can fire an employee for any lawful reason, including performance issues or restructuring. However, they cannot terminate an employee for discriminatory reasons or if it violates a public policy exception.

Contracts and agreements

Even in at-will states, employment contracts, implied contracts, and collective bargaining agreements can override the at-will nature of employment. These agreements might set specific conditions for terminating an employee or require a notice period.

Employment contracts: A formal employment contract between the employer and employee can specify terms that contradict the at-will doctrine, such as requiring "just cause" for termination or setting a fixed employment duration.

These contracts may include clauses outlining the specific reasons for which an employee can be fired, the process for doing so, or provisions like severance packages and notice periods. Employers must follow the terms of these agreements to avoid wrongful termination claims.

Implied contracts: Even without a written agreement, implied contracts can arise from employer conduct, verbal assurances, or written policies in employee handbooks.

For example, if an employer repeatedly tells an employee their job is secure or they’ll only be fired for specific reasons, this could be interpreted as an implied promise, potentially voiding the at-will nature of the employment relationship.

Courts often look at the employer's actions, policies, and statements when determining if an implied contract exists.

Collective bargaining agreements: For unionized employees, collective bargaining agreements (CBAs) negotiated between the employer and the union provide additional protections.

These agreements often specify that employees can only be fired for cause and outline grievance procedures for disputes related to termination. CBAs override at-will employment terms, making it essential for employers to follow them carefully.

In all cases, employers should ensure their employment contracts and company policies are clear. They should avoid making statements that could be interpreted as creating implied contracts if they wish to maintain an at-will employment structure.

Exceptions to at-will employment: Understanding the limits

Here are the common exceptions to at-will employment:

• Legal exemptions: Federal and state laws protect employees from termination based on race, gender, religion, and other protected classes. Employers cannot terminate an employee for participating in legally protected activities, such as jury duty
• Public policy exceptions: If an employee refuses to engage in illegal activities or reports a violation, they are protected from termination under public policy exceptions. Employers cannot fire an employee for exercising their legal rights or reporting unethical behavior
• Implied contracts: Even without a formal employment contract, verbal promises or implied agreements may exist, especially if the employer has made repeated assurances about job security. Courts may recognize implied contracts and void at-will employment in these cases

Covenant of good faith and fair dealing

In some states, courts may require employers to act in good faith, preventing termination based on malicious intent. This doctrine limits an employer’s ability to fire an employee without reasonable justification.

Here are some examples of where this principle has been applied to protect employees:

• California: In Foley v. Interactive Data Corp. (1988), the California Supreme Court ruled that although California is an at-will state, employers must act in good faith when dealing with employees. In this case, the court recognized that employers cannot terminate employees in bad faith, such as firing them to avoid paying earned bonuses or other benefits
• Massachusetts: In Fortune v. National Cash Register Co. (1977), the court found that an employer acted in bad faith by terminating an employee just before they were due to receive a significant sales commission. The ruling established that an employer cannot fire someone with the sole purpose of denying them earned compensation
• New Jersey: Courts in New Jersey recognize the good faith and fair dealing exception, particularly in cases where an employer fires an employee to avoid paying commissions or benefits. In Wade v. Kessler Institute (2002), an employee was fired just before reaching eligibility for a pension plan, and the court ruled that the termination was in bad faith

In short, employers open themselves up to the risk of similar lawsuits if it can be argued that they act in bad faith, particularly by attempting to reduce financial outlay.

How at-will employment impacts HR and payroll processes

HR teams must ensure job offer letters, employee handbooks, and onboarding materials clearly state the at-will nature of employment. Further, to avoid wrongful termination claims, proper documentation of performance issues is crucial.

When terminating an employee in an at-will state, employers must follow specific rules for final paycheck timelines, severance, and benefits. Last paycheck laws vary by state, and companies should clearly follow state guidelines to avoid legal pitfalls.

As described above, there is a legal risk if employers act in bad faith by structuring final payments to minimize due compensation.

International employers: What you need to know about hiring in at-will states

At-will employment in the US contrasts sharply with employment contracts in many other countries, where employers must provide just cause for termination. International employers must adapt to this flexibility while navigating state-specific laws.

To avoid legal pitfalls, international companies hiring in the US should invest in legal support and an HR information system (HRIS) that enables compliance with local regulations, including last paycheck timelines and termination procedures.

Common errors include not understanding the above public policy exceptions, failing to document performance issues, or offering verbal assurances that create implied contracts. Proper legal and HR guidance can help mitigate these risks.

Five best practices for navigating at-will employment

• Clear communication: Specify the at-will status of employment in all documentation and communications, from the offer letter to the employee handbook
• Documentation: Maintain records of performance issues, reasons for termination, and any verbal or written warnings to defend against wrongful termination claims
• Severance and benefits considerations: Offering severance packages can help ease transitions and reduce legal risk, even in at-will states
• Consulting legal experts: HR and payroll professionals should regularly consult legal experts to ensure compliance with both federal and state laws
• Compliance with federal and state laws: Stay updated on key regulations like the Fair Labor Standards Act (establishing fair working conditions), WARN Act (governing mass layoffs), and COBRA compliance (concerning statutory health insurance plans)

Ensuring compliance and fairness in at-will employment states

At-will employment offers flexibility for both employers and employees but brings with it risks, particularly concerning potentially wrongful termination.

However, by understanding state-specific laws, keeping clear records, and seeking legal counsel, when necessary, HR professionals can navigate such complexities with ease.

For international employers, Deel PEO can simplify hiring and ensure compliance across all US states. Request a demo today to learn how Deel can support your HR team.