by Jeffrey T. LaRosa

This article was published in
Commerce Magazine,
a publication of the Commerce and Industry Association of New Jersey
April 2002

You are the Director of Human Resources for a New Jersey company. On behalf of the company, and after several rounds of interviews, you offer a job to a prospective employee, with a start date two months away. The employee accepts. Soon thereafter, the company changes its mind, either because it finds a better candidate or because the company hits some hard times and no longer needs the prospective employee’s services. Can you rescind the offer without any consequences? Probably not.

In New Jersey, employment is considered “at-will,” which means that the employer is entitled to fire an employee for no reason or any reason that is not discriminatory and that does not violate public policy. As a result, an employer is generally entitled to fire an employee a week, or even a day, into the employment, even though the employee may have given up other work and relocated in order to accept the position.

Unfortunately, the law in this state is not as settled when it comes to an employee who has been offered a position, but who has not yet started work (the “prospective employee”). Where an employer hires a prospective employee and then rescinds that offer after the prospective employee has taken steps in reliance upon that offer, the employer may be legally responsible to pay damages to the employee. This apparent loophole in the employment at will doctrine may have significant implications as the economy continues to show signs of a deepening recession and employers are forced to find ways to cut the bottom line.

The legal theory that supports the prospective employee’s claim is called “detrimental reliance.” Pared to its core, the detrimental reliance theory permits a person to file suit for a “broken promise” in certain circumstances. Under this theory, an injured party can assert a claim where (1) a promise was “clear and definite;” (2) it was made with the expectation that the promisee would rely upon it; (3) the promisee relies upon the promise; and (4) the promisee is injured as a result. The detrimental reliance theory is not limited to the employment context, and has been invoked in a wide array of settings, typically when the necessary elements for a binding contract do not exist.

Only one case in New Jersey has applied the detrimental reliance theory to an employer’s withdrawal of a job offer to a prospective employee. In that case, Peck v. Imedia, Inc., Ms. Peck was performing freelance work for Imedia, Inc., when she was offered a full time job by Imedia. At the time she was performing the freelance work, Ms. Peck was living in Boston. Imedia was located in Morristown, New Jersey. After some misgivings about moving from Boston to New Jersey, Ms. Peck accepted Imedia’s offer and was to start work approximately one month later. In the meantime, she continued to perform freelance work for Imedia. Imedia’s offer and Ms. Peck’s acceptance were never confirmed in writing.

After Ms. Peck accepted the offer, but before she started work, Imedia rescinded the offer because it “did not think she would be a good addition to the staff.” Apparently, Imedia was not impressed with the quality of Ms. Peck’s freelance work.

Ms. Peck claimed that she had taken several steps in reliance upon the Imedia job offer. Specifically she had already rented out her apartment in Boston, found an apartment in New Jersey, arranged for movers and, perhaps most importantly, had given up her desktop publishing clients in Boston. She subsequently sued.

The Court first addressed and rejected Ms. Peck’s argument that her moving from Boston to New Jersey was sufficient “consideration” to alter her employment from “at-will” to “for cause,” which would mean that Imedia could only fire Ms. Peck if her conduct warranted termination.

Importantly, however, the Court permitted her to pursue a “detrimental reliance” claim. It noted that a number of states do not permit detrimental reliance claims in an employment at will setting because the employment is terminable at anytime by the employer. Choosing not to follow those jurisdictions, the Peck Court ruled that Ms. Peck was entitled to pursue her claim for damages suffered in reliance upon the job offer. The Court held that “reliance on the at-will employment contract relationship gives rise to a cause of action for damages flowing from plaintiff’s losses based on her reasonable reliance on full time employment.” The Court did issue a caveat that Ms. Peck would not be entitled to pursue this detrimental reliance claim if her “post-acceptance conduct … justified” the decision to rescind the offer. Presumably, this meant that her employment could be terminated for poor performance, insubordination and the like.

As to the type of damages that are permitted, the Peck Court explained that Ms. Peck was entitled to recoup any “losses incident to the reliance upon the job offer itself, even though the employer can terminate the relationship at any time.” The Court attempted to draw a distinction between the benefits that would have accrued from the new position as compared to the losses suffered in giving up a prior job and/or moving. Thus, Ms. Peck was not entitled to seek damages for the salary she would have received at Imedia, but she was entitled to pursue a claim for other damages, such as the fact that Ms. Peck gave up her business and clients in Boston and incurred expenses in moving to New Jersey.

The Peck decision is a significant erosion of the “at-will” doctrine, at least up through the point that the employee commences employment. It means that an employer is permitted to rescind an offer prior to the first day of work only upon a showing akin to “just cause,” even though the subsequent employment is to be at-will. The court’s rationale for this seemingly inconsistent result is unpersuasive, and its cryptic statements as to the types of damages allowable do little to clarify the issue for future litigants.

The Peck decision raises a host of questions.

• Are moving expenses and other “out of pocket” expenses recoverable in a prospective employee’s suit for detrimental reliance? Apparently so.

• Is the prospective employee’s anticipated salary a recoverable expense in such a suit? Probably not as to the salary at the new position, because that position was “at-will” and could be terminated at any time. However, a prospective employee who gave up another position to accept an offer may be entitled to seek lost wages at the prior job’s salary, notwithstanding the fact that that job was “at-will” as well. The Peck Court did not state whether there was a date after which the claim for lost wages for the prior job would be unreasonable. Particularly where the prior job was “at-will,” a prospective employee should not be entitled to lost wages at the prior job for an indefinite period. Unfortunately, Peck left this issue open. Similarly, the terminated employee may be entitled to compensation for other benefits that were part of the package at the prior employer, including health insurance, severance packages, car allowances and the like.

• If a prospective employee does not have another job offer and does not resign a prior job to accept the new position, can that prospective employee sue for lost wages? It would appear not, in view of the fact that the Peck Court made it clear that the wages for the “new” position are not part of a detrimental reliance damage claim and the employee did not give up another position to take the job. Thus, if the employer did not “woo” the prospective employee away from another job, the employee can’t sue for lost wages. The employee would still have a claim for moving expenses and other “out of pocket” expenses.

• Does a business downturn or recession justify the withdrawal of a job offer? Probably not under Peck. Peck provides an exception for instances where the employee’s post-offer conduct “justifies” the withdrawal of the offer, but it does not suggest that any other business motives justify the withdrawal of the offer.

• Can an employer protect itself from the Peck decision? Yes.
  • One option would be for the employer to require all interviewees to sign a “Terms of Interview” letter by which the interviewee agrees that (1) an offer must be in writing; (2) the employment is at-will; and (3) the employer is entitled to withdraw or rescind the offer at any time prior to the commencement of work. Because the candidate must “reasonably rely” upon the offer, it is important for the employer to notify the candidate that the offer is subject to withdrawal at any time. If this information is conveyed to the candidate, any subsequent reliance would not be reasonable. However, such a letter may well have a chilling effect upon the relationship and lead the prospective employee to distrust the offer and, perhaps, the employer.

  • Another option would be to hire the individual and terminate the employment after one week. However, while this tactic has never been addressed by New Jersey Courts, other states have held that this practice may subject the employer to a detrimental reliance claim, notwithstanding the employment at will doctrine.

  • A third means by which an employer could protect itself from such claims would be to proceed conservatively in hiring during uncertain economic times, thereby reducing the possibility that the company will have to rescind job offers to prospective candidates for economic reasons. Obviously, projecting future downturns in the economy is easier said than done, but it should be a consideration in determining hiring needs.

Conclusion