Not All Employees Are ‘At-Will’ Employees

A. Introduction to Ohio “At-Will” Employment Laws

“You’re fired!” a statement that no one wants to say or hear, but nevertheless it remains a fundamental facet to the operation of a business. Whether you are an employer or an employee, it is important to understand your respective rights under Ohio employment law. Employer and employees alike may find themselves asking, “Can I fire someone simply because I don’t like him?” or “I was fired for no reason! Is this legal?” Like many legal questions, the answers depend on the facts of the situation.

Every state has the authority to establish employment practices within its respective jurisdiction. The State of Ohio has adopted the doctrine of “at-will” employment, which has been upheld through decades of court cases. Ohio, as an “at-will” employment state, permits an employer, absent an employment contract to the contrary, to terminate an employee for no reason or any reason at all, so long as the reason does not violate Ohio or federal law.[1] That is, the employer may terminate an employee at any time and for any reason without incurring liability, so long as the reason is not against state or federal law. On the other hand, just as the employer may end employment, employees in an “at-will” employment setting are also free to resign at any time, for any or no reason without incurring liability to the employer. There are, however, some restrictions on the ability to terminate employment under Ohio’s “at-will” doctrine.

B. Statutory Restrictions

Notwithstanding the “terminable at-will” approach to employment in Ohio, statutory limitations may alter the “at-will” relationship. Termination under the “at-will” doctrine cannot be wrongful. Termination can be wrongful if it contravenes federal or state law on the basis of discrimination. Title VII of the Civil Rights Act prohibits all private employers who are engaged in interstate commerce from discriminating on the basis of race, color, gender, national origin, or religion.[2] Additional federal laws offer protections on the basis of age, pregnancy, disability and veteran status.

Ohio statutory law prohibits discrimination on the basis of race, color, religion, sex, national origin, age or disability.[3] However, both federal and state laws allow discrimination within certain protected classes if the business can show that the discriminatory practice is reasonably necessary as a “bona fide occupational qualification” (“BFOQ”). A popular example of a BFOQ based on gender is the requirement that an employee be a in order to be hired as a “Hooter’s Girl” at Hooter’s Restaurants.

C. Employment Contract

An employer and employee may agree to an employment agreement to override the “at-will” relationship. For example, if an employer hires someone under an employment contract, which specifies the duration and terms of employment, then both parties are held to such terms. Termination by the employer or resignation by the employee prior to the agreed term may constitute a breach of the contract, thereby exposing the breaching party to liability for damages. In addition, a contract may include negotiated reasons for termination or resignation, in which case the parties must abide by these limitations or face liability for breaching the contract.

D. Minority Shareholder Exception

Another important exception to Ohio’s “at-will” employment doctrine, which is frequently overlooked, is grounded in the relationship between majority and minority shareholders in a close corporation. As mentioned throughout this article, “at-will” employment provides freedom to an employer or employee to terminate the employment relationship for any or no reason within the boundaries of the law. However, majority shareholders in a close corporation setting must tread carefully when terminating a shareholder-employee.

In Crosby v. Beam, the Ohio Supreme Court defined a close corporation as “a corporation with few shareholders whose corporate shares are not generally traded on a securities market.”[4] The court held that majority shareholders in a closely held corporation owe a heightened fiduciary duty to minority shareholders, similar to the duty owed by partners in a partnership.[5] Moreover, minority shareholders are particularly vulnerable because they are small in number and cannot easily protect their financial interests since there is not a readily available market for their shares.[6] In Crosby, the court permitted minority shareholders to bring an action against the majority shareholders for a breach of fiduciary duty by utilizing their majority control of the corporation to their own advantage without a legitimate business purpose.[7]

More importantly, Ohio courts have used the holding in Crosby to extend this fiduciary duty to interrupt an “at-will” employment relationship in the context of a close corporation. In Gigax v. Repka, the Ohio Court of Appeals for the Second District concluded that the freedom to terminate an employee for any or no reason runs squarely into the fiduciary obligations afforded to a minority shareholder in a close corporation.[8] Therefore, a minority shareholder employee in a close corporation is not an “at-will” employee that can be terminated at any time for any or no reason. Instead, the fiduciary duty requires that any removal of such employee be based upon a legitimate business reason, even though no employment agreement exists between the parties.

The “legitimate business reason” requirement balances both the need to protect minority shareholder-employees and the need of a close corporation to remove unproductive or troublesome employees. Ohio courts frequently find fault with an “at-will” approach to employment in a close corporation mainly because it arms majority shareholders with a tool to eliminate minority shareholders without reason, thereby undermining the fiduciary duty owed towards minority shareholders.

Permitting an “at-will” employment relationship in a close corporation would allow majority shareholders to circumvent their fiduciary obligations by freely terminating a minority shareholder-employee under Ohio’s “at-will” doctrine. For example, majority shareholders could easily “squeeze out” employee minority shareholders[9] by simply terminating them for no reason. Thus, in order to prevent this “back-door violation” of a fiduciary duty in the close corporation shareholder-employee context, Ohio courts have required that a minority shareholder-employee, without a contract stating otherwise, can only be terminated upon a legitimate business reason.

E. Conclusion

In Ohio, employers and employees are free to terminate the employment relationship for any or no reason, so long that the reason is not in violation of state or federal law. Ohio’s well-established rule of “at-will” employment does not apply to an employment relationship bound by an employment agreement, which specifies certain conditions of termination and duration of employment.

Furthermore, a minority shareholder-employee in a close corporation is not an “at-will” employee and can only be terminated with a legitimate business reason. Termination for any or no reason of such an employee would be a breach of fiduciary duty and would deprive the shareholder-employee of an expected return on his or her investment.

See Gigax, at Ohio App. 3d 615; 615 N.E.2d 644 (Ohio Ct. App 2nd Dist 1992). This breach of the fiduciary duty between a majority and minority shareholder in a close corporation is commonly known as a “freeze-out” or a “squeeze out” and it is defined as a manipulative use of corporate control to eliminate minority shareholders or otherwise unfairly deprive them of advantages or opportunities to which they are entitled.

1 Gigax v. Repka, 83 Ohio App. 3d 615; 615 N.E.2d 644 (Ohio Ct. App 2nd Dist 1992).

2 42 U.S.C. 2000(e).

3 See Ohio Rev. Code § 4112 et al. (2004).

4 47 Ohio St. 3d 105, 107, 548 N.E.2d 217 (Ohio Sup. Ct. 1989).

5 See id.

6 See id.

7 See id.

8 See Gigax, at Ohio App. 3d 615; 615 N.E.2d 644 (Ohio Ct. App 2nd Dist 1992).

9 This breach of the fiduciary duty between a majority and minority shareholder in a close corporation is commonly known as a “freeze-out” or a “squeeze out” and it is defined as a manipulative use of corporate control to eliminate minority shareholders or otherwise unfairly deprive them of advantages or opportunities to which they are entitled.