Limiting exposure to fraudulent inducement and negligent misrepresentation claims.

Darcy Brookes is a graphic designer who lived in Boston and freelanced over a two year period for a marketing firm based in New Jersey. (Darcy's story is described in detail in Peck v. Imedia, Inc., 293 N.J. 151 (App. Div. 1996)). Desperate for a skilled graphic artist, the marketing firm made Darcy a written job offer for a full time position. The offer letter specified a starting salary, job description and benefits. It failed, however, to indicate whether the employment relationship was for a set term, was terminable for cause or was at will.

Darcy accepted the offer, closed shop in Boston, uprooted her family and relocated to New Jersey. When she arrived, Darcy learned that her employer no longer needed her services.

Matt Alleck was faced with a similar predicament. (Matt's story is based on a matter the authors recently litigated in the U.S. District Court for the District of New Jersey.) He was an executive at a large semi conductor firm when a smaller high tech startup company, New Co., contacted him through a headhunter and made him a written job offer for a position as "Director of the Northeast Region." The job, as described, would require him to hire and supervise his own sales force and obtain accounts in the region, including the lucrative territories of New York City and Boston. The job offered a slightly lower base salary, but the potential commissions and stock options made the offer very attractive.

Matt accepted the offer and joined New Co. He was not given an employment agreement. Shortly after commencing employment, Matt learned that, despite New Co.'s representations during the hiring process, he was not authorized to hire any salespeople. In fact, two months after he commenced employment, New Co. informed Matt that he would not be in charge of the Northeast sales region, would not supervise anyone and would only be employed as a salesperson covering the New Jersey market. These changes dramatically reduced Matt's potential for earning commissions. Had Matt known he would not be receiving a managerial position and only a sales job covering New Jersey, he would have rejected the job offer.

Darcy's and Matt's situations are becoming more common. During the recent period of unprecedented economic growth with a shrinking number of qualified job applicants, employers, anxious to recruit new talent, have been known to make representations about job duties and responsibilities that turn out to be untrue. What claims do these employees have? What potential liability do employers have and how can these employers limit their exposure?

At Will Employment

Employment at will refers to the right of an employer to terminate an employee, who is not protected by an employment contract or a collective bargaining agreement, without cause or notice as well as the right of the employee to leave at any time. Some of the more well known exceptions to the at will doctrine include the claim of wrongful discharge in violation of public policy and a breach of contract claim based on an employee manual. Recently, case law has broadened common law claims such as fraudulent inducement, negligent misrepresentation, promissory estoppel and breach of the implied covenant of good faith and fair dealing to further erode the at will doctrine.

Circumventing At Will

The strongest cause of action that plaintiffs like Darcy and Matt have is to allege that their employers fraudulently induced them to accept the job. In both cases, it appears that the employers made intentional misrepresentations or, at a minimum, that they knowingly failed to disclose material facts.

A misrepresentation or omission of a material fact to a prospective employee could constitute either fraudulent inducement or negligent misrepresentation. To prove fraudulent inducement, the plaintiff must prove (1) a material misrepresentation or omission of a presently existing or past fact was made to the employee; (2) the employer was aware of the omission or false statement; (3) the employer intended for the employee to rely on the omission or false statement; (4) the employee did reasonably rely on the omission or false statement; and (5) the employee suffered damages as a result of the reliance. See Kaufman v. I Stat Corp., 165 N.J. 94 (2000); Gennari v Weichert Co. Realtors, 146 N.J. 582 (1997); Kuhnel v CNA Ins. Co., 322 N.J. Super. 568 (App. Div. 1999).

It is often difficult for a plaintiff to prove fraudulent misrepresentation because the plaintiff is required to prove that the defendant acted intentionally when making the misrepresentation. The obvious advantage in pursuing such a claim is that the employee could potentially be awarded the benefits he expected to receive from the new employer and could also be awarded punitive damages.

A close cousin to the fraudulent inducement claim is negligent misrepresentation. Under New Jersey law, when alleging a cause of action for negligent misrepresentation it is not necessary to show that the employer intended to deceive the employee. Rather, the employee needs to establish that the employer owed a duty of care to the employee and that he relied on the employer's misrepresentations, or failures to disclose, to his detriment.

In contrast to the damages awarded for fraudulent inducement, the measure of damages for negligent misrepresentation is limited to "recovery of actual losses due to reliance on the mistatement." Karu v Feldman, 119 N.J. 135, 147 (1990). In other words, the employee's recovery would be what he lost by giving up the old job rather than what he expected to gain in the new job.

Under New Jersey law, at will employees are also entitled to proceed under the theory of promissory estoppel in cases where they detrimentally relied on an employer's promise. An equitable claim of promissory estoppel, although intellectually distinguishable from negligent misrepresentation, yields the same result. In general, the theory of promissory estoppel implies a contract in law where none exists in fact. The plaintiff need only prove that he relied on the employer's promise and was harmed. There is no need to prove that the employer intended any harm or owed a duty of care to the prospective employee.

The theory of promissory estoppel also gives at will employees the ability to allege a cause of action for having been deprived of a reasonable opportunity to perform in a new job even if there is no contractual obligation on the part of employer to retain the employee for any period of time.

Although the standard is less rigorous than that for proving fraudulent inducement or negligent misrepresentation, the damages that would be awarded for prevailing under the theory of promissory estoppel are the same as those awarded for a successful negligent misrepresentation claim. (The measure of damages based on a negligent misrepresentation theory or a promissory estoppel theory may not yield a particularly fruitful result for a plaintiff in a situation like Matt's, where the new job had a large potential upside as a result of commissions and stock options.)

In addition to having potential causes of action for fraudulent inducement, negligent misrepresentation and promissory estoppel, plaintiffs like Matt and Darcy may also claim that their employers breached the implied covenant of good faith and fair dealing. This claim exists only if the employee has a contract or an enforceable employee manual.

In every contract there exists an implied covenant of good faith and fair dealing that neither party shall do anything that will have the effect of injuring the right of the other party to receive the benefits of the contract. A cause of action for breach of the implied covenant of good faith in the employment context exists where the employer attempts to deprive the employee of the benefits of the employment agreement without an honest belief that good cause for discharge is present. Should either Matt or Darcy prevail under the theory that the employer breached the implied covenant of good faith and fair dealing, they would be awarded their expectation damages, including lost profits. In other words, the employee would be entitled to the benefit of their bargain.

Impressive Titles

In Matt's case, New Co. gave him a supervisory job title but later told him he would not be receiving any supervisory responsibilities. Although it might be common practice in certain industries to assign managerial titles to what are essentially sales positions in order to boost sales, if this is done with the intent to get potential employees to join its work force, a company is exposing itself to a lawsuit for breach of contract and fraud.

In Kass v. Brown Boveri Corp., 190 N.J. Super 42 (App. Div. 1985), the court held "sticking the title 'supervisor' on a job where one has no employees under him does not make the job 'supervisory' in fact. You cannot make a lion into a chicken by calling him one."

In a situation like Matt's, where the employer intends to give the employee a managerial title in name, it is wise to include a description of what the title means. If the job description is a sales position, Matt cannot later claim that he was misled by the managerial title.

Avoiding Liability

Employers should be honest and fairly represent the job responsibilities, title and earnings potential for each position they are trying to fill. While employers are allowed to "sell" positions to prospective employees, they should be careful not to make any misrepresentations.

Employers should also send each prospective employee a formal offer letter that confirms the at will relationship and clearly explains what this means. The letter should make it clear that the stated terms in the letter constitute the entire agreement between the parties, supersede all previous agreements or representations and that, by accepting the offer, the employee understands that no additional agreements exist with the employer.

It is rare these days for an employee to join a company right after graduation and stay until retirement. Today, most employees are aware of the availability of other job opportunities and look to move up the ladder more quickly by switching jobs. As employees grow more aware of their legal rights it is easy to understand why employment litigation is such a growing field. With this in mind, a descriptive job offer letter containing appropriate disclaimers can help to fend off potential claims.

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This article is reprinted with permission from the March 26, 2001 issue of the New Jersey Law Journal.  ©2001 NLP IP Company.