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A Growing Majority Of Courts Says Yes

Tuesday, Oct. 22, 2002

Over the past five years, several federal courts of appeals have struggled with an important question concerning the rights of at-will employees, who comprise a significant majority of all American workers. At-will employees are so called because they generally can be fired for any reason the employer chooses. But what if the reason is their race?

The Pennsylvania court extended the law's protection to at-will employees. A growing majority of federal courts have reached the same conclusion. However, the Pennsylvania court stands alone in crafting an opinion that gets to that conclusion by the correct path.

Why Title VII Fails to Offer Antidiscrimination Protections to Many Workers

Another federal antidiscrimination statute, Title VII, is better known than Section 1981, and like Section 1981, Title VII also protects against race discrimination in employment. More specifically, both statutes prohibit an employer from taking any racially motivated employment action, including a refusal to hire, demotion, or termination.

For this reason, readers may question why Section 1981 is even at issue here. The answer is that for millions of workers who are not able to make use of Title VII's protections, Section 1981 provides their only chance to sue for race discrimination.

Twenty percent of the American workforce works for employers small enough to be exempt from Title VII. And other workers cannot invoke Title VII because they have failed to comply with its procedural prerequisites.

One of these requirements is "administrative exhaustion," meaning that one must go to the EEOC or a similar agency before one goes to court. Another is a relatively short statute of limitations that means suits that are not brought quickly cannot be brought at all. Section 1981, in contrast, has no exhaustion requirement, and a longer statute of limitations.

For workers who cannot sue under Title VII, for whatever reason, and who believe they have suffered discrimination based on race, Section 1981 may be the only law available. The statute prohibits race discrimination in contracting generally, and it has specifically been applied to employment contracts. Indeed, it is used more often in that context than any other.

Finally, even workers who can pursue Title VII remedies may also want to sue under Section 1981 as well. Pursuant to the Civil Rights Act of 1991, damages awarded in Title VII claims are capped based on the size of the employer—$300,000 is the largest potential award. Backpay is also limited under Title VII to two years. There are no similar limits on damages under Section 1981.

Does Section 1981 Protect At-Will Employees From Race Discrimination?

As mentioned above, Section 1981 applies only to "contracts." That raises the following question: Do at-will employees -- who work with no formal contract -- nevertheless have a sufficiently contract-like relationship with their employers to fall with Section 1981?

Prior to McClease, six federal courts of appeals had addressed the question. Five said yes. The sixth -- the U.S. Court of Appeals for the Seventh Circuit -- said no. (However, it did so in "dicta": reasoning that does not determine the result, and need not be followed as precedent by later courts.)

Is An Employment Contract the Kind of "Contract" Section 1981 Envisions?

What does the word "contracts" mean, as used in section 1981? The meagerly drafted statute provides no definition. Indeed, it says very little beyond guaranteeing that individuals of all races will have equal rights "to make and enforce contracts."

Without guidance from the statute, most courts have looked to relevant contract law in the state where the suit was brought. Courts ask whether, under that state's contract law, at-will employees are treated as if they have a contract.

Decisions helpful to the at-will employee might, for instance, allow suits for tortious interference with at-will employment in the same way suits for tortious interference with contract can be brought. The question is whether an at-will employment relationship functions more or less like a contract in various legal contexts.

Most states treat at-will employment as contractual, so in most states, Section 1981 will apply to at-will employees. But a few states do not.

That may lead us to ask: Does the state-law approach make sense in the first place, given that it leaves some employees out in the cold solely due to the idiosyncrasies of their states' contract laws? Isn't the protection of a federal statute supposed to be uniform, and national?

Yes, and that is why looking at federal common law, rather than state law, is the right approach to deciding whether an at-will employment relationship is sufficiently similar to a contract to come within Section 1981's protections. Terms used in federal statutes are typically defined by looking to federal common law, and the term "contracts" in Section 1981 should be no different.

McClease broke new ground by taking this approach, but the court was absolutely correct to do so. It was also right to conclude that federal common law dictates that Section 1981 be interpreted to apply to at-will employment.

Federal common law treats the at-will employment relationship as a unilateral (that is, one-sided) contract. It is unilateral because the employer offers to pay the employee a particular, guaranteed salary if the employee works, but the employee promises nothing in return. This type of arrangement, under federal common law, is a valid contract even if its duration is not specified.

Looking to federal common law, and not state law is also consistent with the legislative history of Section 1981. As the McClease court points out, Section 1981 was specifically enacted as an antidote to state laws -- specifically, the Black Codes of the southern states, which had been designed to prevent newly freed slaves from realizing their rights.

Thus, using state law to interpret this anti-state-law statute would have been ironic, to say the least. Moreover, Congress's distrust of state governance with respect to issues of race, during that period, also suggests it would have been unlikely to want Section 1981's interpretation to depend on state law.

The Supreme Court's own precedents with respect to at-will employees' claims also support the McClease court's interpretation of section 1981. A 1989 case, Patterson v. McLean Credit Union, applied Section 1981 to claims by an at-will employee without discussing the issue. And in interpreting a similar federal statute in 1998, in Haddle v. Garrison, the Court held that at-will employees possess a valuable right in their employment relationship -- hinting that the underlying relationship might be contractual in nature.

Section 1988 Is Irrelevant Here

Some will object that this analysis does not take sufficient note of an antiquated federal statute, Section 1988. Section 1988 directs courts to look to state law to fill in gaps created by deficiencies in federal civil rights laws. However, Section 1988 does not apply here -- for two independent reasons.

First, an undefined term, such as Section 1981's term "contracts," is not a "deficiency" subject to Section 1988. Many laws do not define their every operative word, yet are not thought to be deficient. Providing definitions is what federal common law is for.

Moreover, Section 1988 only directs courts to use state law when doing so would not be inconsistent with federal law. Here, doing so would be inconsistent. In some states, at-will relationships can never count as contracts. Under federal common law, in contrast, they always do.

Making a Federal Case Out of It: Section 1981 and At-Will Employment." Grossman's other articles on discrimination law may be found in the archive of her pieces on this site.

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