employment as a relational contract - university of pennsylvania

EMPLOYMENT AS A RELATIONAL CONTRACT

Robert C. Bird*

A contract is not just a piece of paper. Just as a single word isthe skin of a living thought, so is a contract evidence of a vital,ongoing relationship between human beings. An at-willemployee ... is not merely performing an existing contract; sheis constantly remaking that contract.'

I. INTRODUCTION

Employment scholarship focuses too much on laws and not enough onnorms. 2 Yet employment norms3 capture the complete terms of employ-

4ment better than legal contracts ever can. First, employment norms are

* Assistant Professor, University of Connecticut. I appreciate comments and support

from attendees of the Seton Hall University Research Seminar Series, at which I presentedan earlier version of this Article. My thanks also extend to members of the 2004 NorthAtlantic Regional Business Law Association annual conference. I also would also like tothank Kevin Lun for his helpful research. I also appreciate comments from Kurt Saunders,Dan Cahoy, Joshua Newberg, Toni Lester, Charles Sullivan, and Rachel Arnow-Richman.All errors and omissions are my own.

1. Patterson v. McLean Credit Union, 491 U.S. 164, 221 (1989) (Stevens, J.,concurring in the judgment in part and dissenting in part).

2. Compare Edward B. Rock & Michael L. Wachter, The Enforceability of Norms andthe Employment Relationship, 144 U. PA. L. REv. 1913, 1930-38 (1996) (discussing therelationship between norms and law in employment and concluding that norms shouldremain unenforceable), with Cynthia L. Estlund, How Wrong Are Employees About TheirRights, and Why Does It Matter?, 77 N.Y.U. L. REv. 6, 17 (2002) (questioning whetherthese conclusions are verifiable), and Cass R. Sunstein, Social Norms and Social Roles, 96COLUM. L. REv. 903, 907 (1996) (noting that human "behavior is pervasively a function ofnorms" and that managing norms can accomplish legal objectives).

3. Jesse Rudy, What They Don't Know Won't Hurt Them: Defending Employment-at-Will in Light of Findings that Employees Believe They Possess Just Cause Protection, 23BERKELEY J. EMp. & LAB. L. 307, 343-44 (2002) (defining norms in the employmentcontext as "'rules or standards enforced solely by private (that is non-state) actors,' [that]develop informally, through repeated interactions over time, eventually becoming standardsor rules that govern relationships between people" (quoting Rock & Wachter, supra note 2,at 1914 n.1)).

4. See generally Devon W. Carbado & Mitu Gulati, Working Identity, 85 CORNELL L.REv. 1259 (2000) (describing how employers continuously provide incentives to promote

150 U. PA. JOURNAL OF LABOR AND EMPLOYMENT LAW [Vol. 8:1

more prevalent. While one-third of employees work without a contract

referencing discharge laws,5 work norms influence virtually all employees

present in a workplace.6 Second, employment norms are perceived as law

more than laws are. Empirical studies reveal that most employees rely

upon norms, not laws, to define workplace rules.7 Third, employment

norms embrace what legal agreements cannot. Virtually every aspect of

the employment relation that falls outside the treatment by contract

lawyers-corporate culture, office politics, future planning, and the

complex social matrix of organizational life-is the exclusive domain of

norms. Finally, parties remake employment norms continuously and

without cost as workplace practices develop. A legal contract can only

freeze party intentions at a single moment in time. Bundled together, work

norms form a contract, a relational contract, which is more important to the

parties in most situations than any formal written agreement.

In spite of this, employment scholarship almost always focuses on

laws. Whereas scholars have frequently examined legal aspects of employ-8ment contracts, employment at will,9 and wrongful discharge,' ° little

certain workplace norms and employees signal adherence to employer norms through theactive negotiation of their identities).

5. See J. Hoult Verkerke, An Empirical Perspective on Indefinite Term EmploymentContracts: Resolving the Just Cause Debate, 1995 Wis. L. REv. 837, 867 ("About one-third(33%) [of employers] use no documents that specify the terms governing discharge.").

6. See JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER 121-22(1989) (describing evidence that the workplace is a "hotbed" of social norms impactingworker behavior); Cynthia L. Estlund, Working Together: The Workplace, Civil Society,and the Law, 89 GEO. L.J. 1, 94-95 (2000) (noting critical role of workplace norms in theformation of broad social cooperation, increased civil duty, and the enrichment of publicdiscourse).

7. See Pauline T. Kim, Bargaining with Imperfect Information: A Study of WorkerPerceptions of Legal Protection in an At-Will World, 83 CORNELL. L. REv. 105, 134 tbl.1(1997) (reporting survey results showing that employees misunderstand legal rulesgoverning discharge).

8. See, e.g., Rachel Arnow-Richman, Foreword: The Role of Contract in the ModernEmployment Relationship, 10 TEX. WESLEYAN L. REv. 1 (2003) (introducing articles thataddress the interaction of employment law and contract law and their influence on oneanother); Edward Brunet, Seeking Optimal Dispute Resolution Clauses in High StakesEmployment Contracts, 23 BERKELEY J. EMP. & LAB. L. 107 (2002) (analyzing the use ofmediation and arbitration clauses in employment contracts); Aditi Bagchi, Note, Unions andthe Duty of Good Faith in Employment Contracts, 112 YALE L.J. 1881 (2003) (discussingenforcement of the contractual duty of good faith in the context of employmentrelationships).

9. See, e.g., Frank J. Cavico, Private Sector Whistleblowing and the Employment-at-Will Doctrine: A Comparative Legal, Ethical, and Pragmatic Analysis, 45 S. TEX. L. REv.543 (2004) (analyzing legal protections for whistleblowers in the context of employment atwill); Ann C. McGinley, Rethinking Civil Rights and Employment-at-Will: Toward aCoherent National Discharge Policy, 57 OHIO ST. L.J. 1443 (1996) (examining anti-discrimination laws and employment at will and proposing a federal wrongful dischargestatute); Frank Vickory, The Erosion of the Employment-at- Will Doctrine and the Statute of


attention has been paid to systematically developing an enforceable theoryof employment norms. This Article fills this scholarly gap by definingemployment as a relational contract forged by the behavior of the parties.Part II of this Article defines employment as a relational contract. Part IIIestablishes the sources of relational contract at work. Part IV presents twocase studies that show that maintenance of relational contract is essentialfor any successful organization. Part V devises an opportunism-basedenforceable theory of relational contract in the employment context.

II. THE EMPLOYMENT RELATIONSHIP AS A RELATIONAL AGREEMENT

A. The Relational Theory of Contract

Popularized by noted scholar Ian Macneil, 1 relational contract theoryholds that agreements are not always transactional occasions wherebyparties exchange only value. Relational contract theorizes that parties tocontracts develop a relationship between one another that incorporatesplanning, trust, and solidarity that far exceed the terms of the originaldocument. 2 Relational contract theory emphasizes the importance of terms

Frauds: Time to Amend the Statute, 30 AM. Bus. L.J. 97 (1992) (arguing for a change in thestatute of frauds to preserve employment at will doctrine).

10. See, e.g., Lisa J. Bernt, Wrongful Discharge of Independent Contractors: A Source-Derivative Approach to Deciding Who May Bring a Claim for Violation of Public Policy, 19YALE L. & POL'Y REV. 39 (2000) (arguing that courts evaluating claims of wrongfuldischarge in violation of public policy should look at the source of public policy instead ofrelying solely on employment status); Robert C. Bird, Rethinking Wrongful Discharge: AContinuum Approach, 73 U. CIN. L. REV. 517 (2004) (advocating the use of a multi-tierframework and a continuum approach to understand and resolve conflicts in wrongfuldischarge law); Michael D. Moberly, The Discoverability of Severance Agreements inWrongful Discharge Litigation, 20 HOFSTRA LAB. & EMP. L.J. 1 (2002) (examining theconfidentiality of agreements in which employers exchange severance pay and benefits foremployees' release of wrongful discharge claims); David Benjamin Oppenheimer, VerdictsMatter: An Empirical Study of California Employment Discrimination and WrongfulDischarge Jury Verdicts Reveals Low Success Rates for Women and Minorities, 37 U.C.DAVIS L. REV. 511 (2003) (studying jury verdicts in California employment law cases,including wrongful discharge cases and employment discrimination cases).

11. Ian Macneil, a John Henry Wigmore Professor of Law at Northwestern University,has been actively publishing on relational theory for decades. A thoughtful summary andanalysis of his work may be found at David Campbell, Ian Macneil and the RelationalTheory of Contract, in IAN MACNEIL, THE RELATIONAL THEORY OF CONTRACT: SELECTED

WORKS OF IAN MACNEIL 3 (David Campbell ed., 2001) [hereinafter MACNEIL, THERELATIONAL THEORY] (describing the history and development of Macneil's work). Seealso Paul J. Gudel, Relational Contract Theory and the Concept of Exchange, 46 BUFF. L.REV. 763, 764 (1998) (citing various works by Ian Macneil).

12. In 2000, the Northwestern University Law Review dedicated an entire segment ofits annual publication to relational contract articles. Symposium, Relational ContractTheory: Unanswered Questions, 94 Nw. U. L. REv. 737 (2000).

2005]


outside of the written document that may arise through interpersonalrelationships between the parties.13 Originally arising as a tool for betterunderstanding commercial contracts, relational contract theory hasinfluenced law and society, law and economics, libertarian, and liberalcommunitarian thinking.14

Certain characteristics distinguish a relational contract from a merelytransactional one.'5 A transactional contract typically has a short duration,precise measure of money and goods, little or no future cooperation, no

altruism, and no friendship.16 A visit to a gas station while traveling onvacation is an example of a transactional contract. 7 This is a one-time

exchange of an easily commoditized good for cash. No significantrelationships existed in the past nor is there a chance for one to occur in the

future. The purely transactional agreement is short-term and requires no

personal interaction.8

A relational contract is far different. First, the relationship of

exchange continues over a significant period of time and is not a "spot"market deal like a transaction for securities or commodity futures.' 9 Long-

term supply contracts or even marriages are examples of long-term

relational arrangements.20 Second, relational contracts contain significant

open terms and reserved discretion for the parties,2' in part because the

extended duration of relational contracts prevents the parties from calcu-

13. James W. Fox, Jr., Relational Contract Theory and Democratic Citizenship, 54CASE W. RES. L. REv. 1, 5 (2003).

14. Id. at4-5.15. Not all of these characteristics need be present to confer relational status upon a

contract. For example, a long-term lease arrangement whereby the tenant is responsible formaintenance of the property does not necessarily create a close relational bond between thelandlord and tenant. Melvin A. Eisenberg, Why There Is No Law of Relational Contracts,94 Nw. U. L. REv. 805, 814 (2000). Rather, these characteristics appear to representguideposts for placing a given contract on a continuum between a purely transactionalcontract and a wholly relational agreement.

16. Timothy L. Fort, Trust and Law's Facilitating Role, 34 AM. Bus. L.J. 205, 211(1996).

17. Ian R. Macneil, Contracts: Adjustment of Long-Term Economic Relations UnderClassical, Neoclassical, and Relational Contract Law, 72 Nw. U. L. REv. 854, 857 (1978).

18. Id. at 856-57. Macneil explains that even this highly discrete transaction can bedeeply embedded with relational elements. Even gas purchases are rooted in highlycomplex property and social relations. Custom indicates that the property owner allows thecustomer to enter his property to obtain the gas, certain types of gas are expected, andcommunication is possible between customer and attendant through a common language.Id. at 857 n.10.

19. Richard E. Speidel, The Characteristics and Challenges of Relational Contracts, 94Nw. U. L. REv. 823, 823, 828 (2000); see also Ian R. Macneil, Reflections on the RelationalTheory, in MACNEIL, THE RELATIONAL THEORY, supra note 11, at 291, 311-14 (setting forth"the essential elements of relational contract theory").

20. Speidel, supra note 19, at 823.21. Id. at 828.


lating the full value of the exchange.22 Parties plan for the future andexpect that new opportunities and challenges will arise from the changingcircumstances that discretion inevitably brings.23 Third, relationalcontractors expect future cooperative behavior and facilitate thatarrangement through agreed upon governance mechanisms. 24 Parties notonly expect changing needs, but expect those needs to be accommodatedwithin the terms of the contract. For example, if a plant mishap prevents aseller from providing a contracted-for part, the buyer might accept analternative good and even adjust production until the seller can restartoperations and re-supply the part once again. Fourth, benefits and burdensare shared, not divided.25 For example, questions involving terms thatdictate flexibility in price and output requirements are resolved bycooperative behavior instead of self-interest and opportunism. 26 Fifth,parties may make capital investments specifically for the needs of the

27contract. For example, a mine supplying a utility invests in specialequipment to produce the specific coal for that utility. 28 Sixth, personalrelationships between the parties arise from the contract, forging bonds offriendship, interdependence, and altruism. 29 Seventh, the parties expecttrouble as a matter of course.3° Dispute resolution arrangements areprearranged in the event a problem arises that cannot be resolvedinformally.3' Eighth, the relationship gains independent value apart fromthe exchange.32 Contracting parties meet not only to exchange goods, butto maintain friendships, share experiences, and communicate about issuesin the industry. In short, relational contracting signifies a commitment tocooperate in far more depth than a mere bargained-for allocation of risk.33

Employment relationships (the focus of this Article) are well suited

22. Id at 823.23. Id. at 823, 828-29. See generally Ian R. Macneil, A Primer of Contract Planning,

48 S. CAL. L. REv. 627 (1975) (summarizing and explaining the planning of contractualtransactions and relations).

24. Speidel, supra note 19, at 829.25. Id.26. Id. at 829-30.27. Id. at 830.28. Id.29. Id; see also Fort, supra note 16, at 211 ("[Relational] contracts involve the

expectation of future cooperation and relations of friendship. There is significant pressurefor virtues such as truth-telling, promise-keeping, commitment to quality, altruism, andgroup solidarity because the long-term interests of the parties require mutual support.").

30. Speidel, supra note 19, at 830 n.31.31. Id. at 829.32. Id. at 830 n.31.33. Robert W. Gordon, Macaulay, Macneil, and the Discovery of Solidarity and Power

in Contract Law, 1985 Wis. L. REv. 565, 570. For a thoughtful examination of a highlyrelational contract, see Richard E. Speidel's discussion of Oglebay Norton Co. v. Armco,Inc., 556 N.E.2d 515 (Ohio 1990), in his article, supra note 19, at 831-37.

2005]

U. PA. JOURNAL OF LABOR AND EMPLOYMENT LAW

for relational contract theory because they contain strong relationalelements.34 Employment relationships, with the exception of contingentwork and independent contractor arrangements, are rarely short in durationand typically have no finite end. Most employment relationships permitthe employee at least some discretion in performing tasks. It is also quitecommon for the employer and employee to cooperate and enrich anemployee's contractual duties over time through promotions and lateralposition changes. Such career development promotes higher productivity,increases job satisfaction, and primes an organization for continuouschange.35

Furthermore, cooperation between the parties in an employmentarrangement is an integral part of the relationship. Each party makessignificant transaction-specific investments even in the early stages of therelationship. Employers provide on the job training, negotiate and draftcustomized agreements, and deposit funds in an employee's benefit plan.Employees often leave a prior job or uproot family to a different city inorder to form or maintain a relationship with an employer. Internal disputeresolution mechanisms for sexual harassment problems, disciplinaryviolations, and grievances are common within a company hierarchy.Employees find satisfaction from not just wages, but the sociability,security, dignity, self-respect, and meaningfulness that gainful employmentbrings.36 Employers may treat their workforce as not just a means to anend, but an end in itself.37

Labor economists and other scholars have developed a four-phase

34. See, e.g., IAN R. MACNEIL, CONTRACTS: EXCHANGE TRANSACTIONS AND RELATIONS10-21 (2d ed. 1978); Speidel, supra note 19, at 826; Gudel, supra note 11, at 771-72.

35. See generally PEGGY SIMONSEN, PROMOTING A DEVELOPMENT CULTURE IN YOUR

ORGANIZATION: USING CAREER DEVELOPMENT AS A CHANGE AGENT (1997) (discussingbenefits of creating a career development system within an organization); Philip H. Mirvis& Douglas T. Hall, Psychological Success and the Boundaryless Career, 15 J. ORG. BEHAV.365 (1994) (discussing the psychological impact of career progress as definitions of workchange).

36. Estlund, supra note 2, at 34.37. See, e.g., Carol Hazard, Printer Business in Richmond, Va., Puts Employees First,

Wins Integrity Award, KNIGHT RIDDER/TRIB. Bus. NEWS, May 2, 2003 (quoting FreddyCobb, owner of Cobb Technologies and recent winner of a marketplace integrity award, asstating in response to the adage that the customer comes first, "No they don't; the employeedoes"). However, this may not be a widespread U.S. business practice. See Edson W.Spencer, Capital-Gains Shift Could Curb LBO Break-Ups, WALL ST. J., Jan. 27, 1989, atA14.

Ask a Japanese CEO to rate his stakeholders and he will put his employees first,his customers second and his shareholders third. In contrast, U.S. takeover lawsays that if a business is to be sold, the board's job is to get the highest price,regardless of the effect on employees and customers, or on the communitiesaffected by the sale of a company.

[Vol. 8:1


model of career wage relationships that explicitly explains a labor cost andbenefit balance and implicitly explains how relational norms in employ-ment change over time.38 In phase one, a new employee receives wagesequal to or slightly in excess of her value to the firm.39 Both parties at thispoint make transaction-specific investments in both firm-specific and non-firm-specific skills.40 Even at this early stage, relational aspects arepresent. The new worker wants to learn the proverbial ropes of thecompany in hopes of continued work and also to offer her "best face" to thefirm. The excitement of a new job generates enthusiasm and loyalty. Theemployee is eager to show that the employer has hired the right person forthe job and that she may be trusted.

Over time, the employee learns new skills and increases the value ofher marginal product beyond the value of both her wage and heropportunity for wages elsewhere. This is considered to be phase two of themodel. 4' Although it may be economically maximizing for the employee toleave at this point (better opportunities exist elsewhere), according to themodel she will stay with the current firm. She expects that the job will nowremain steady and that her salary will rise throughout her career.According to the model, she defers higher immediate compensation atanother firm for expected long-term increases in pay and steady work at hercurrent employer.42 In relational terms, the employee relies upon futurecooperative behavior from the employer in the form of higher benefits inexchange for lower compensation now.

At this point, new relational terms replace earlier ones. The employeeembeds in the current employment "contract" a long-term relationshipbetween her and her employer. Future opportunities for promotion, careerdevelopment, and salary increases are now part of the expected future, aslong as she performs her work as required. She may have formed friend-ships with co-workers, forged a romantic relationship, and joined activities

38. Katherine V.W. Stone, The New Psychological Contract: Implications of theChanging Workplace for Labor and Employment Law, 48 UCLA L. REv. 519, 535 (2001);see also Michael L. Wachter & George M. Cohen, The Law and Economics of CollectiveBargaining: An Introduction and Application to the Problems of Subcontracting, PartialDisclosure, and Relocation, 136 U. PA. L. REv. 1349, 1362-64 (1988). This model wasoriginally developed in Edward P. Lazear, Why Is There Mandatory Retirement?, 87 J. POL.ECON. 1261, 1265 (1979). The purpose of the paper was to explain what he called the"particular, somewhat puzzling institution" of mandatory retirement, which was still legal inthe United States and elsewhere at that time. Edward P. Lazear, Personnel Economics:Past Lessons and Future Directions, 17 J. LAB. ECON. 199, 202 (1999) (explaining his initial1979 foray into labor economics).

39. Stone, supra note 38, at 536.40. Id.41. Id.42. Id. at 537.

20051


such as company prayer groups43 and quality circle committees. 44 She mayhave befriended management and been promised consideration formanagerial work or other leadership tracks. In relational language, she hasformed a close personal relationship that is independent of contractualobligations and characterized by friendship, reputation, interdependence,and altruism. 45 By now, the employee has adopted company culture andtraditions, and the skills not used for her employer fade from her skill set.46

The employee's firm-specific investment of her human capital leadsher to phase three.47 The employee is now worth much "more to heremployer than she is to other employers."' S She will be paid more than thevalue of her opportunity wage,49 which might be considered to be the valueof her marginal product minus her firm-specific investments andtransactional costs. However, she is still paid less than the value of hermarginal product.5 ° Finally, phase four arrives late in her career. At thispoint, her productivity decelerates. However, pay does not dropaccordingly because of customs, norms, or pre-set pay ladders.5 Shereceives more pay than both her marginal product value and heropportunity wage. This may be seen as a recoupment stage where theemployee reaps the benefits of long term firm-specific training and

43. See generally Lewis D. Solomon, Reflections on the Future of BusinessOrganizations, 20 CARDOZO L. REV. 1213, 1221-22 (1999) (describing importance ofprayer circles and spirituality generally in organizations, noting that "proponents ofencouraging spirituality in business organizations recognize that the workplace providesemployees with more than a source of income").

44. See generally Christine M. Riordan & Elizabeth W. Weatherly, From QualityCircles to Self-Managed Work Teams: Are Employee Teams Legal in the United States?, 12EMP. RESt. & RTS. J. 121 (2000) (describing quality circles and questioning their legalityunder certain labor laws).

45. Speidel, supra note 19, at 830; see also JAY M. FEINMAN, ECONOMIC NEGLIGENCE:

LIABILITY OF PROFESSIONALS AND BUSINESSES TO THIRD PARTIES FOR ECONOMIC Loss §7.3.1, at 193 (1995) (noting that "the complex entanglements of reputation, interdependence,morality, altruism, friendship, and self-interest are integral parts of the relation"); Joshua P.Rubin, Note, Take the Money and Stay: Industrial Location Incentives and RelationalContracting, 70 N.Y.U. L. REv. 1277, 1294 (1995) (discussing these characteristics in thecontext of plant closings).

46. The process by which an employee understands and adopts the attitudes, values,beliefs, and behaviors of a firm is known as organizational socialization. See, e.g., Robert J.Taormina & Talya N. Bauer, Organizational Socialization in Two Cultures: Results fromthe United States and Hong Kong, 8 INT'L J. ORG. ANALYSIS 262, 262-64 (2000) (describingorganizational socialization as "a process of acquiring the knowledge and skills needed toperform one's job" and the characteristics that form the content of socialization (emphasisomitted)).

47. Stone, supra note 38, at 537.48. Id.49. Id.50. Id.51. Id.


deferred compensation." At this point, planning norms established early inher career come to fruition-a comfortable job with strong job security anda comfortable wage that follows the employee into retirement in the formof a pay-based pension benefit and a generous health plan.

These relational qualities are no less influential when employers severthe relationship. Stewart Schwab writes in his article, Life-Cycle Justice:Accommodating Just Cause and Employment at Will,53 that wrongfuldischarge rulings implicitly follow an employee "life-cycle" doctrine thatgives more protection to workers at certain stages of their career and lessprotection at other stages. 4 Early-career employees are vulnerable toimproper discharge because they commit far more resources to therelationship than their employer.5 For example, employees may give upfirm-specific skills when leaving a prior employer for a new position. Theemployer, having little investment in the employee in the way of jobtraining or trust, can remove that new employee with little cost to itself.5 6

Late-career workers are also vulnerable to opportunistic firing becausethese employees are paid disproportionately well compared to theirproductivity. 7 Workers hold strong interests in their future at this latestage--expecting that their post-retirement benefits will carry them throughretirement.58 Mid-career employees, Schwab concludes, require the leastlegal protection because it is at this stage that employers are mostvulnerable to shirking by the employee.5 9 The employer may be reluctantto repeat significant recruiting and training costs with a new employee.60

Why would an employee shirk in mid-career? A breach in the relationalterms of the employment arrangement may be the cause. The employeemay reach a point in the hierarchy beyond which she cannot pass, no matterhow productive her work. Career development and training opportunities

52. Id.53. Stewart J. Schwab, Life-Cycle Justice: Accommodating Just Cause and Employ-

ment at Will, 92 MICH. L. REv. 8 (1993).54. Id. at 11.55. Id. at 41.56. Id. at 39.57. See, e.g., Judith D. Fischer, Public Policy and the Tyranny of the Bottom Line in the

Termination of Older Workers, 53 S.C. L. REv. 211, 212-14 (2002) (discussing how a focuson bottom-line profitability has led to an increase in salary-based terminations of olderworkers); Gary Minda, Opportunistic Downsizing ofAging Workers: The 1990s Version ofAge and Pension Discrimination in Employment, 48 HASTINGS L.J. 511, 511-12 (1997)(discussing downsizing of older workers to reduce costs and prevent pension benefits fromvesting).

58. Cf Sharon Reece, Enron: The Final Straw and How to Build Pensions of Brick, 41DUQ. L. REv. 69, 69-70 (2002) (noting the vulnerability of older workers who are dependentupon these benefits for retirement).

59. Schwab, supra note 53, at 39.60. Id. at 47.

2005]


at the firm may be exhausted. She may have been wronged by companypolitics at some time in her career. In any event, the mid-career employeeis the one who has invested much in the firm and has not received matchingcompensation. 61 If anyone, the mid-career employee who has not receivedher perceived due relies the most on relational elements-a contractbetween herself and the firm that fair treatment will come in the future.62

Both Schwab's life-cycle theory and the four-phase model of careerrelationships reveal the strong and shifting relational elements embedded inan employer-employee relationship throughout an employee's career.

B. The Problematic Interpretation of the Employment Relationship as aPurely Neo-Classical Contract

Although employment relationships are deeply relational, employmentlaw largely ignores relational norms. One of the fundamental problems isthat much of employment law simply engrafts contract law upon theemployment relationship. Contract law, although not wholly incompatiblewith employment, does not fully account for the broad range of relationalinterests and contexts present in employment relationships.

Employment and contract are different because they have entirelyseparate histories. Early employment relationships involved dominant-subservient bonds based upon the status of the parties. In feudal times, anhomage ceremony marked the inception of the relationship with elaborateformality. 63 The vassal placed his hands inside the hands of the lorddemonstrating the lord's role as protector and the vassal's role as receiverof protection.64 The two parties exchanged the kiss of peace, symbolizingdevotion, and the vassal swore an oath of fidelity to the lord.65 The partiescould not dissolve this arrangement without demonstrable cause.66 Theseobligations were, literally, a matter of life and death.67 A summoned vassalaccompanied his lord to fight alongside him in a war, and a lord could be

61. See Stone, supra note 38, at 537 ("The model illustrates the fact that during themiddle two periods, employees have made an investment for which they have not yet beencompensated and for which they anticipate deferred compensation.").

62. See id. (noting that during the middle two periods of the four-phase model,employees' "investments in firm-specific human capital and willingness to work fordeferred compensation are made not on the basis of some explicit contractual arrangement,but rather take the form of an implicit contract").

63. Gail L. Heriot, The New Feudalism: The Unintended Destination of ContemporaryTrends in Employment Law, 28 GA. L. REv. 167, 169 (1993).

64. Id. at 169 n.7. The custom later gained religious connotations as placing one'shands together came to symbolize prayer to God. Id.

65. Id.; see also THE HISTORY OF FEUDALISM 70-71 (David Herlihy ed., 1970)(describing the ritual and the meaning behind it).

66. Heriot, supra note 63, at 169.67. See id. at 169-71 (describing the lord and vassal relationship in more detail).


called upon to sacrifice his life defending his vassal against attackers. 68

Loyalty, however, should not be confused with mobility. For mostindividuals at that time, little choice existed over the terms and conditionsof work regardless of whether a formal arrangement was formed with alord or not.69 Class and station defined employment status, and classmobility was extremely limited]. In spite of this strong stratification, bothlow and high status persons possessed obligations to the other that couldnot easily be breached. Even as late as the nineteenth century, dominant-subservient employment relationships created mutual obligations on boththe employer and employee, much as the head of the household wasobligated to support his wife and minor children, who in turn had the dutyto submit to his authority.7' In essence, employment law has its origins in amaster-servant relationship, characterized by status-based relationships ofprofound interdependence.72

In the middle of the nineteenth century, contract law and its focus ontransaction subsumed employment law and its focus on status.73 A rusticindividualism pervaded the American psyche, shedding dependencerelationships as characteristic of hereditary aristocracy and old worldbeliefs.74 Horace Gray Wood's 1877 treatise, ironically entitled Master andServant, pronounced employment at will the dominant employment law of

68. Id at 170&n.13.69. Franklin G. Snyder, The Pernicious Effect of Employment Relationships on the Law

of Contracts, 10 TEX. WESLEYAN L. REv. 33, 37 (2003).70. See id. at 36-37 (noting that for most of common law history, employment status

has been defined by class station and beyond the control of the individual).71. Id at 38.72. Id. at 39; see also Heriot, supra note 63, at 170 & n.13 (defining in detail both lord

and vassal obligations).73. See Greg T. Lembrich, Garden Leave: A Possible Solution to the Uncertain

Enforceability of Restrictive Employment Covenants, 102 COLUM. L. REv. 2291, 2306(2002).

English employment law (long known as the law of master and servant)emerged from medieval systems based on status, in which feudal lords wereable to use land ownership in order to extract labor from vassals. It has sinceevolved over the centuries and become solidly grounded in the law of contract.

Id. (footnote omitted)); see also HENRY SUMNER MAINE, ANCIENT LAW: ITS CONNECTIONWITI4 THE EARLY HISTORY OF SOCIETY, AND ITS RELATION TO MODERN IDEAS 165 (U. Aril.Press 1986) ("[T]he movement of the progressive societies has hitherto been a movementfrom Status to Contract.").

74. Snyder, supra note 69, at 42-43; see also Ken Matheny & Marion Crain, DisloyalWorkers and the "Un-American" Labor Law, 82 N.C. L. REv. 1705, 1709 (2004) ("Legalthinking in the nineteenth century was heavily influenced by economic individualism, andthe courts adopted a laissez-faire attitude toward the employment contract."); ClydeSummers, Individualism, Collectivism, and Autonomy in American Labor Law, 5 EMP. RTS.

& EMP. POL'Y J. 453, 455-56 (2001) ("Much of the law of employment contracts, however,is still shaped by the courts, and much of the economic individualism of the late 19thcentury permeates the judges' thinking.").

2005]


the land. 75 Employment at will rode on the coattails of the risingprominence of contract. By the time the freedom to contract reachedconstitutional proportions at the turn of the twentieth century,76

employment at will was well entrenched as the default employmentdischarge rule.77

Employment at will remained largely intact through much of thetwentieth century, although its harshness was tempered somewhat by thepractice of offering employees stable, secure employment with cradle-to-grave benefits.7 In the late twentieth century, that practice broke down asemployees were increasingly laid off from what employees believed werelifelong jobs. The result is today, even with the presence of numerousexceptions, employment at will leaves American workers some of the mostvulnerable to arbitrary discharge in the Western world.79

Even though the law of employment at will assumes laissez-faireconditions, equal bargaining power, and contractual freedom, 80 employ-

75. Matheny & Crain, supra note 74, at 1709-10. Interestingly, "Employment-at-willwas adopted earliest in the least industrialized states and those where the judiciary was theleast elite, and later spread into the more industrialized and class-differentiated states."Snyder, supra note 69, at 44. Snyder credits this as evidence that the rising prominence ofcontract manifested a genuine "philosophical bias in favor of freedom and not [a side effectof] industrialization or judicial class bias." Id.

76. See, e.g., Lochner v. New York, 198 U.S. 45, 64 (1905) ("[T]he freedom of masterand employ[ee] to contract with each other in relation to their employment, and in definingthe same, cannot be prohibited or interfered with, without violating the FederalConstitution."); Allgeyer v. Louisiana, 165 U.S. 578, 589 (1897) (finding that theFourteenth Amendment to the U.S. Constitution protects "the right of the citizen ... to earnhis livelihood by any lawful calling ... and for that purpose to enter into all contracts whichmay be proper, necessary and essential to his carrying out to a successful conclusion thepurposes above mentioned.").

77. See, e.g., Adair v. United States, 208 U.S. 161, 180 (1908) (upholding anemployer's ability to terminate employment at will by reversing criminal conviction forterminating employee because of union membership).

78. See generally Stephen F. Befort, Revisiting the Black Hole of WorkplaceRegulation: A Historical and Comparative Perspective of Contingent Work, 24 BERKELEYJ. EMP. & LAB. L. 153, 155-60 (2003) (describing the development of career and long-termemployment as the dominant and traditional core worker model through most of thetwentieth century).

79. See Mark V. Roehling, Legal Theory: Contemporary Contract Law Perspectivesahd Insights for Employment Relationship Theory, in THE EMPLOYMENT RELATIONSHIP:EXAMINING PSYCHOLOGICAL AND CONTEXTUAL PERSPECTIVES 65, 69-73 tbl.4.1 (JacquelineA-M. Coyle-Shapiro et al. eds., 2004) (listing various nations' employment discharge rules).See generally Robert C. Bird & Darren Charters, Good Faith and Wrongful Termination inCanada and the United States: A Comparative and Relational Inquiry, 41 AM. Bus. L.J.205 (2004) (comparing U.S. and Canadian employment termination regimes).

80. The non-regulatory approach that employment at will endorses might even offendestablished religious traditions. Cf Jim Wishloff, Catholic Social Thought and BusinessEthics: The Application of Ten Principles, 25 REv. Bus. 15, 19 (2004) ("The Catholicperspective explicitly opposes the doctrine of economic laissez faire . . . . 'Reasonableregulation of the marketplace and economic initiatives in keeping with a just hierarchy of


ment practice still retains much of its master-servant roots. The corpo-ration may be today's modem lord and the employee its vassal. Just as themedieval vassal was not dispatched from his lord's land at the firstopportunity that it was beneficial to do so, long-term employees todayexpect equitable treatment from their employers that contradicts thedraconian machinations of employment at will. 8'

Furthermore, most workers are dependent upon wages paid to them byan entity owned by another. The corporation, not the state, is the primarysource of the social safety net when individuals become unemployed.82

Companies provide health benefits, retirement payments, and workerscompensation payments to the sick, disabled, retired, or unemployed.8 3 Theworkplace is now a significant source for forming relationship networks,assigning socioeconomic class, and establishing reputation status of theindividuals that work there.8 4 Who we are, how much money we earn, andwhom we marry and socialize with all originate from our association withour employer. As one author noted even in the early 1950s, "For ourgeneration the substance of life is in another man's hands. 8 5 As anotherauthor has written, "[T]he modem employee of today, like his or hermedieval forebears, really is a servile dependent in need of protection fromthe abuse of a powerful master ... .

values and view to the common good is to be commended."' (quoting THE CATECHISM OFTHE CATHOLIC CHURCH 2425 (Image Doubleday 1994))).

81. Macneil, supra note 17, at 898. Macneil writes:

[C]onsider an employee of a small business who has been treated very decentlyby his employer for thirty years. He quite naturally comes to expect decenttreatment throughout the relation including through retirement. Moreover, herelies on that expectation; and if the expectation is not realized, the employermay very well have derived benefits from the reliance by the employee that, interms of the relational as it is existed, are unjustified. We can, and do, inferpromises in such situations, but they are far from the defined promises ofdiscrete transactions.

Id.82. Snyder, supra note 69, at 46 (citing PAUL C. WEILER, GOVERNING THE WORKPLACE:

THE FUTURE OF LABOR AND EMPLOYMENT LAW 3 (1990)).83. Id.84. See generally John J. Peregoy & Connie T. Schliebner, Long-Term Unemployment:

Effects and Counseling Interventions, 13 INT'L J. FOR ADVANCEMENT COUNSELING 193(1990).

85. FRANK TANNENBAUM, A PHILOSOPHY OF LABOR 9 (1951) (emphasis omitted).86. Snyder, supra note 69, at 46.

We have become a nation of employees. We are dependent upon others for ourmeans of livelihood, and most of our people have become completely dependentupon wages. If they lose their jobs they lose every resource except for the reliefsupplied by the various forms of social security. Such dependence of the massof the people upon others for all of their income is something new in the world.

TANNENBAUM, supra note 85, at 9; see also Lawrence E. Blades, Employment at Will Vs.

2005]


Not only are employees vulnerable to the whims of their employer,but the employer can cause enormous psychological and societal damagewhen it fires even one person. When a company fires an employee, itcondemns that person to an increased likelihood of depression, alcohol anddrug abuse, physical illness, and even suicide. 7 Profound feelings of loss,guilt, and inadequacy are common.88 For every one percent increase inunemployment, homicides rise 5.7%; suicides increase 4.1%; deaths fromheart disease, liver cirrhosis, and stress-related disorders increase by 1.9%;and 4.3% more men and 2.3% more women admit themselves to mentalhospitals. 89

The effects of joblessness reach far beyond the individual. Perhapsbecause Western society views paid employment as a social and moralduty, unemployment brings social disapproval toward the entire family. 90

Unemployed heads of household tend to isolate themselves from otherfamily members, leaving children and spouses without emotional support.91

As unemployment lengthens, spouses of unemployed workers reportgreater depression, anxiety, and interpersonal problems.92 Incidents ofdivorce more than double in families where a spouse is unemployed.93

Child abuse, physical illness, and even infant mortality are tied to highunemployment rates.94 When children see their parents without jobs, theytend to see no hope for themselves, promoting an ever worsening cycle oflow self-esteem and ambition.95 Finally, joblessness contributes to societal

Individual Freedom: On Limiting the Abusive Exercise of Employer Power, 67 COLUM. L.REv. 1404, 1404 (1967) (noting that employees are dependent upon employer for "thesubstance of life" (emphasis omitted) (quoting TANNENBAUM, supra note 85, at 9)).

87. Peregoy & Schliebner, supra note 84, at 193.88. See Connie T. Schliebner & John T. Peregoy, Unemployment Effects on the Family

and the Child: Interventions for Counselors, 72 J. COUNSELING & DEV. 368, 368 (1994)("The stresses of unemployment can manifest themselves in depression, alcohol and otherdrug abuse, suicide, physical illness, and family abuse."); Lea E. Waters & Kathleen A.Moore, Predicting Self-Esteem During Unemployment: The Effect of Gender, FinancialDeprivation, Alternate Roles, and Social Support, 39 J. EMP. COUNSELING 171, 171 (2002)(discussing the factors effecting the self-esteem of the unemployed). See generally ThomasKeefe, The Stress of Unemployment, 29 Soc. WORK 264 (1984) (examining the effects ofstress from unemployment).

89. Schliebner & Peregoy, supra note 88, at 368.90. Id. at 369.91. Id.92. Id.93. Id.94. Id.95. Vonnie C. McLoyd. Socialization and Development in a Changing Economy: The

Effects of Parental Job and Income Loss on Children, 44 AM. PSYCHOLOGIST 293, 299(1989). McLoyd reports the thoughts of an adolescent girl on her parents' joblessness:

The future stinks. You're supposed to spend your childhood preparing for thereal life of being an adult. But what if that real life is no good? What's thesense? Look at my parents. They always did everything the way you're


problems of poverty and criminal activity. 96 Few breaches of ordinarycommercial contracts trigger so many primary, secondary, and tertiaryeffects.

The neo-classical contract model upon which modem employment atwill is based fails to account for the full complexities of the employmentrelationship. The model assumes fully informed parties with equalbargaining power engaging in a transactional relationship wholly describedby the text of a contract.97 At least initially, contract law dismisses asirrelevant the parties' identities, transactionalizing the subject matter of thecontract as much as possible.98 As a result, contract law forces employmentto be interpreted as a short-term, impersonal, and commodifying event thatcontradicts most scientific, anecdotal, and analytical evidence about thenature of the employment relationship. 99

The source of this commodification originates from an emphasis ondiscreteness and presentiation in contract.100 A discrete exchange separatesthe contract from all present, past, and future relations.'0 ' Little differencein treatment exists between total strangers brought together by chance andlong-standing friends doing business for a number of years.'0 2 A barter ofgoods or services for money is the primary goal, which must happenquickly before a relationship develops that deprives the transaction of itsdiscrete nature. 03

A classical contract also maximizes presentiation, the incorporation offuture events and conditions into the present moment of contract formation.

supposed to. Now look at them-nobody will give them a job .... What's thesense of trying in school. There's no jobs for my dad or mom. Why should Ibelieve there will be jobs for me when I get out of school?

Id. (quoting Children of the Unemployed, DETROIT FREE PRESS, Mar. 8, 1983, at 3).96. Philip Harvey, Combating Joblessness: An Analysis of the Principal Strategies that

Have Influenced the Development of American Employment and Social Welfare Law Duringthe 20th Century, 20 BERKELEY J. EMP. & LAB. L. 677, 679-80 (2000).

97. Andrew P. Morriss, Specialized Labor and Employment Law Institutions in NewZealand and the United States, 28 CAL. W. INT'L L.J. 145, 153 n.39 (1997) ("[T]he neo-classical contract model inadequately describes the employment relationship. The classicalmodel is based on discrete transactions and takes insufficient account of long-term relationalcontracts." (quoting Gordon Anderson & Pat Walsh, Reshaping Labour Law: AnAlternative Industrial Relations Future, in DIVERGENT PATHS? INDUSTRIAL RELATIONS INAUSTRALIA, NEW ZEALAND AND THE ASIA-PACIFIC REGION 19 (Nagel Haworth et al. eds.,1993))).

98. Macneil, supra note 17, at 862-65.99. Id. at 863 (noting that classical contract law "turns employment into a short-term

commodity by interpreting employment contracts without express terms of duration asterminable at will").

100. Id. at 862.101. Id. at 856.102. Id.103. Id.

2005]


The contract restricts expected future effects of the relationship to onlythose that can be accounted for at the beginning of the relationship.1 °4

Presentiation enhances discreteness because it severs the obligations underthe contract from the social relations of the contracting parties. IanMacneil drives home the essence of presentiation in the following examplefrom a 1961 film:

One of the two white men [traveling] with [an Eskimo] had fallenthrough the ice in the midst of a raging blizzard, and [theEskimo] and the other had quickly pulled him out of the water.The victim was freezing to death in spite of the efforts of hisfriend to slap circulation through his body. Watching the franticefforts, [the Eskimo] said, "Your friend is dead." It was aperfectly sensible statement even though the doomed man wasstill breathing, his heart still beating, and his limbs still moving.All the events had occurred which would cause his death, andthere was not the slightest chance of avoiding that event.10 5

Some readers might condemn the Eskimo as cold or insensitive, andthis emotional reaction reveals the problem with the discrete andpresentiative norms in contracts. Eventually, containment of any contractwithin the frozen amber of discreteness and presentiation does not makesense. As Macneil writes, "Somewhere along the line of increasingduration and complexity, trying to force changes into a pattern of originalconsent becomes both too difficult and too unrewarding to justify theeffort, and the contractual relation escapes the bounds of the neo-classicalsystem. "1

06 Contractual dealings transform the parties' relationship into a

"minisociety with a vast array of norms beyond the norms centered onexchange and its immediate processes."10 7 Viewing employment as not justa contract, but a relational contract, mitigates the harmful effects of anartificially transactionalized neo-classical employment law. 0 8

104. Id. at 863; see also Campbell, supra note 11, at 39.105. Ian R. Macneil, Presentiation and Adjustment Along the Spectrum of Contracts, in

MACNEIL, THE RELATIONAL THEORY, supra note 11, at 182. This scene originated from a1961 film called THE SAVAGE INNOCENTS (Paramount Pictures 1961) in which AnthonyQuinn played the Eskimo. Id.

106. Id. at 196; see also Macneil, supra note 17, at 901.107. Macneil, supra note 17, at 901.108. See Henry H. Perritt, Implied Covenant: Anachronism or Augur?, 20 SETON HALL

L. REV. 683, 718 (1990) (explaining the benefits of viewing employment as a relationalcontract).


III. SOURCES OF RELATIONAL CONTRACT NORMS: THE PSYCHOLOGICAL

CONTRACT, COMPANY CREDO, AND ORGANIZATIONAL CULTURE

Whereas Part II of this Article established the relational nature ofemployment and the inability of employment law to incorporate relationalnorms, this Part reveals the sources of these relational norms. This Partpresents three potential sources of relational norms: the employee'spsychological contract, the employer's company codes, and the firm'sorganizational culture.

A. The Psychological Contract

A psychological contract is an employee's perception of the mutualobligations that exist between the employee and her employer.'0 9 Notcontracts in the legal sense," ° psychological contracts emerge when anemployee perceives that contributions she makes obligate her employer toreciprocal acts."' Psychological contracts result in expectations by theemployee that the employer will behave in a certain fashion based uponpromises or past practices.

The earliest foundations of psychological contract theory arose fromsocial contract theorists such as Hobbes and Locke, who described anextant "social contract" that assumes individuals living in a state of natureimpliedly consent to develop an organized society.' The social contract isa reciprocal agreement between the state and its citizens whereby citizenspay taxes, obey laws, and shoulder defense responsibilities in exchange forstate-supported services." 3 Its first application in management describedan inducement-contribution model, in which employees receive induce-ments such as pay and benefits in exchange for contributions to the firm." a

According to the model, employees will continue to contribute as long as

109. Jill Kickul & Scott W. Lester, Broken Promises: Equity Sensitivity as a ModeratorBetween Psychological Contract Breach and Employee Attitudes and Behavior, 16 J. Bus.& PSYCHOL. 191, 192 (2001).

110. See PETER CAPPELLI, THE NEW DEAL AT WORK: MANAGING THE MARKET-DRIVENWORKFORCE 21 (1999) (explaining the differences between psychological contracts andtraditional contracts).

111. Alf Crossman, Exploring the Dynamics of the Psychological Contract 2-3 (2002)(unpublished paper presented at the British Academy of Management Conference),available at http://www.som.surrey.ac.uk/directory/details.asp?id=126 (browse page 2 of"Publications"). See generally Denise M. Rousseau, Psychological and Implied Contractsin Organizations, 2 EMP. RESP. & RTs. J. 121 (1989).

112. Mark V. Roehling, The Origins and Early Development of the PsychologicalContract Construct, 3 J. MGMT. HIST. 204, 205 (1997).

113. Id.114. See generally JAMES E. MARCH & HERBERT A. SIMON, ORGANIZATIONS (1958)

(discussing the theory of formal organizations).

2005]


the benefits offered are equal or greater than the value of thecontribution." 5 At the same time as the development of the inducement-contribution model, renowned psychiatrist Karl Menninger posited thatcontracts involve the exchange of tangible items as well as reciprocalsatisfaction of parties' needs (e.g., pleasure of companionship) and afeeling that the exchange is fair." 16

In the early 1960s, scholars introduced the term "psychologicalcontract" as a means of defining the implicit understanding between laborand management." 7 In examining the relationship between workers and aforeman, one scholar observed that workers maintained high productionand low grievance in exchange for the foreman respecting informallyestablished norms of fair pay and treatment." 8 Another author interviewingemployees at a utility company discovered that workers spoke ofexpectations as having an obligatory quality "as if the company were duty-bound to fulfill them."' 19

As psychological contract literature developed, writers shifted fromdefining it as reciprocal obligations 120 to a one-sided expectation formed inthe mind of the employee. 12' Receiving scattered attention during the1970s and 1980s, 122 psychological contract theory experienced a renewedinterest in the late 1980s and 1990s as corporate restructuring, downsizing,use of contingent workers, and foreign competition threatened once stableemployment relationships. 23 Employers, once perceived by employees ascaretakers who virtually guaranteed a job until retirement in exchange forcompany loyalty, now laid off employees en masse. 24 This stands in sharpcontrast to twenty-first century workplaces where both employers andemployees have lower expectations for long-term employment. 25

115. Roehling, supra note 112, at 205. See generally CHESTER I. BARNARD, THEFUNCTIONS OF THE EXECUTIVE (1938).

116. KARL MENNINGER, THEORY OF PSYCHOANALYTIC TECHNIQUE 21 (1958).117. E.g., CHRIS ARGYRIS, UNDERSTANDING ORGANIZATIONAL BEHAVIOR 97 (1960).118. Id.119. Roehling, supra note 112, at 207 (quoting HARRY LEVINSON ET AL., MEN,

MANAGEMENT, AND MENTAL HEALTH 20 (1962)).120. See id. at 206-07.121. See Abigail Marks, Developing a Multiple Foci Conceptualization of the

Psychological Contract, 23 EM. REL. 454, 455 (2001) (noting this distinction).122. Roehling, supra note 112, at 208-12 (describing developments in psychological

contract literature at that time).123. Elizabeth Wolfe Morrison & Sandra L. Robinson, When Employees Feel Betrayed:

A Model of How Psychological Contract Violation Develops, 22 ACAD. MGMT. REV. 226,

226-27 (1997); see also Befort, supra note 78, at 155-60; Gary D. Kissler, The NewEmployment Contract, 33 HUM. RESOURCE MGMT. 335 (1994).

124. Stone, supra note 38, at 552 (quoting Marcie A. Cavanaugh & Raymond A. Noe,Antecedents and Consequences of Relational Components of the New PsychologicalContract, 20 J. ORG. BEHAV. 323, 323 (1999)).

125. Id.


Psychological contracts possess certain characteristics. First, anemployee's psychological contract with her employer may not necessarilybe shared by the organization itself' 26 Second, psychological contracts arebased upon future expectations in a relationship. Psychological contractsmay result from written promises, oral statements, company policies, orimplicit cues that trigger expectations in the mind of the employee.1 27

Third, employees' psychological contracts are perceived to be with theorganization as a whole and not with individual managers.1 28 Finally,psychological contracts change as an employee's relationship with theorganization grows over time. 29 The psychological contract is widelyaccepted to be an important part of organizational theory. 30

Although scholars research various characteristics of psychologicalcontracts, 1 the aspect most relevant to this Article is the concept of"violation." Violation occurs when employees believe that theirorganization has failed to fulfill one or more obligations that comprise theirpsychological contract. 32 Violation has been considered an importantaspect of psychological contract theory, and according to one author itdeserves a "central place" in psychological contract research.'

126. Morrison & Robinson, supra note 123, at 228.127. Id. See generally Jill Kickul & Matthew A. Liao-Troth, The Meaning Behind the

Message: Climate Perceptions and the Psychological Contract, 18 MID-AM. J. Bus. 23(2003) (examining how employees form psychological contracts through social andinformation cues in the work environment).

128. Morrison & Robinson, supra note 123, at 228. But cf Marks, supra note 121, at464 (concluding that psychological contracts are "multifarious in nature and employees holdpsychological contracts with all organizational constituents, the strength of which isdetermined by the proximity of the employee to the constituent"); Peter Herriot & CarolePemberton, Contracting Careers, 49 HUM. REL. 757, 764 (1997) (contending that multiplepotential contracts exist with various supervisors in the organization).

129. Jean M. Hiltrop, Managing the Changing Psychological Contract, 18 EMP. REL. 36(1996).

130. See, e.g., Heather Maguire, Psychological Contracts: Are They Still Relevant?, 7CAREER DEV. INT'L 167, 167 (2002) (noting the importance of psychological contracts forexamining organizational relationships); see also Roehling, supra note 112, at 204(discussing psychological contracts generally). Although psychological contract theory hasbeen lauded as a key underpinning of organizational behavior, it has been challenged aslacking the analytical rigor possessed by more enduring psychological constructs. Marks,supra note 121, at 454. The theory has also been challenged as ambiguous and overlyaccepting of questionable scholarship. Id. at 455.

131. See, e.g., David C. Thomas et al., Cultural Variation and the PsychologicalContract, 24 J. ORG. BEHAv. 451 (2003) (analyzing the influence of culture on thepsychological contract); William H. Turnley & Daniel C. Feldman, The Impact ofPsychological Contract Violations on Exit, Voice, Loyalty and Neglect, 2 HUM. REL. 895(1999) (discussing violations of employees' psychological contracts). See generallyCrossman, supra note 111.

132. Morrison & Robinson, supra note 123, at 230.133. Vincent Cassar, Violating Psychological Contract Terms Amongst Maltese Public

Service Employees: Occurrence and Relationships, 16 J. MANAGERIAL PSYCHOL. 194, 196

2005]


While some scholars conclude that an employer's affirmation thatemployment is at-will clearly expresses employment terms, 134

psychological contract research contradicts this assumption. A 1994 studysurveying 128 MBAs revealed that 54.8% of the respondents believed thattheir employer violated a promised obligation at one time or another.13 5

Respondents gave detailed accounts of the violation and described howemployers lured them with promises that employers could later not keep. 36

Some respondents gave specific examples of violation, including:

- "Sales training was promised as an integral part of marketingtraining. It never materialized."

- "Specific compensation benefits were promised and were either notgiven to me, or I had to fight for them."

- "[My] employer promised I would be working on venture capitalprojects. I was mainly writing speeches for the CEO."

0 "[I was] promised greater responsibility. More strategic"'137thinking/decision making ...

When an employee perceives a violation of a psychological contract,relational attitudes change. 38 First, the employee loses trust in her

(2001).134. See Richard A. Epstein, In Defense of the Contract At Will, 51 U. CHI. L. REv. 947,

955 (1984) ("[E]mployers and employees know the footing on which they have contracted:the phrase 'at will' is two words long and has the convenient virtue of meaning just what itsays, no more and no less."); Andrew P. Morriss, Bad Data, Bad Economics, and BadPolicy: Time to Fire Wrongful Discharge Law, 74 TEX. L. REV. 1901, 1929 (1996) ("Oneobvious characteristic of the at-will rule is that the legal responsibilities of the employer areclear-it has none. How then are employees systematically fooled?"); Stephen J. Ware,Employment Arbitration and Voluntary Consent, 25 HOFSTRA L. REV. 83, 96 n.55 (1996)("With a clear rule stating that employees can quit at any time for any reason and employerscan fire at any time for any reason, there is little room for dispute.").

135. Sandra L. Robinson & Denise M. Rousseau, Violating the Psychological Contract:Not the Exception But the Norm, 15 J. ORGANIZATIONAL BEHAV. 245, 252 (1994). Althoughincluding concerns of a more trivial nature, another study found that sixty-nine percent ofemployees believed that their employer had violated some aspect of their psychologicalcontract. Cassar, supra note 133, at 197 (citing N. Conway & R.B. Briner, The Storm in theTeacup: Qualitative Data from a Daily Diary Study of Psychological Contract Violation(1998) (unpublished paper presented at the Conference of Ocmpational Psychology,Sheffield); N. Conway et al., A Daily Diary Study of Psychological Contracts (1999)(unpublished paper presented at the Conference of Occupational Psychology, Blackpool)).

136. Robinson & Rousseau, supra note 135, at 255.137. Id. at 256.138. Cassar, supra note 133, at 197-98; see also A.R. Elangovan & Debra L. Shapiro,

Betrayal of Trust in Organizations, 23 ACAD. MGMT. REv. 547 (1998).


employer. Trust has been defined as a "state involving confident positiveexpectations about another's motives with respect to one's self in situationsentailing risk.'" 9 Trust implies that contributions will be reciprocated. 4 °

Trust increases one's vulnerability to opportunistic behavior and is anindicator of confidence that one person has in another person or in anorganization. 4 '

More than an abstract notion of dependence, trust is a critical elementsupporting an organization's effectiveness.14

' A lack of trust inhibitscommunication and retards cooperation, problem solving, and overallperformance. 43 Employees with the highest trust in the organization-those whose trust the employer should value most-suffer the greatestnegative reactions when that trust is violated.1 44

An employee who perceives a violation of a psychological contractalso reduces her commitment to the organization. Commitment is areciprocal bond that measures an employee's performance and loyalty tothe organization. 45 Commitment also implicates an employee's sense ofattachment, affiliation, and identification with the organization. 146 When anemployee reduces her commitment to the organization, she perceives herstatus in the company in terms of self-worth, not organizational worth. 47

In addition, personal accomplishment supercedes a desire for promotion.la4

Employees begin to look outwards for other jobs that provide increasedstatus and wages. 149

Additionally, breaches of psychological contract result in lower jobsatisfaction. 50 Reduced satisfaction can result in many of the problems

139. Frank L. Jeffries & Richard Reed, Trust and Adaptation in Relational Contracting,25 ACAD. MGMT. REv. 873, 873 (2000) (quoting Susan D. Boon & John G. Holmes, TheDynamics of Interpersonal Trust: Resolving Uncertainty in the Face of Risk, inCOOPERATION AND PROSOCIAL BEHAVIOR 190, 194 (Robert A. Hinde & Jo Groebel eds.,1991)).

140. Cassar, supra note 133, at 197.141. Jeffries & Reed, supra note 139, at 873.142. Robinson & Rousseau, supra note 135, at 255.143. Id at 255-56 (citing R.W. Boss, The Effect of Leader Absence on a Confrontation-

Team Building Design, 14 J. APPLIED BEHAV. Sci. 469, 469-78 (1978); C. O'Reilly & K.Roberts, Relationships Among Components of Credibility and Communication Behaviors inWork Units, 61 J. APPLIED PSYCHOL. 99, 99-102 (1976); Dale E. Zand, Trust andManagerial Problem Solving, 17 ADMIN. Sci. Q. 229, 229-39 (1972)).

144. Id. at 257.145. Cassar, supra note 133, at 197-98.146. Richard T. Mowday et al., The Measurement of Organizational Commitment, 14 J.

VOCATIONAL BEHAV. 224 (1979).147. Heather Maguire, Psychological Contracts: Are They Still Relevant?, 7 CAREER

DEV. INT'L 167, 177 (2002).148. Id.149. Id. at 177-78.150. Cassar, supra note 133, at 198.

2005]


mentioned above: higher turnover, lower productivity, and reduced loyaltyto the organization.' 5 1 Thus, psychological contracts form an integral partof the relational contract between an employee and an employer.

B. Corporate Codes and the Relational Contract

A corporate code (also known as a corporate credo, code of ethics, orsimply a credo)' is a document developed by an organization thatexpresses that organization's values and the ethical rules it expectsemployees to follow.'53 Such codes have been described as a "middleground" between formal legal structures and informal personal values-anexplicit but general standard of behavior that promotes conformity withstandards by rewarding compliance and penalizing deviance. 15 4

Commentators on corporate codes classify them according to contentand design.'55 Corporate codes state commitments to constituencies as wellas present affirmations of company values. 5 6 Johnson & Johnson, theworldwide provider of health care goods and services, has a code of thisnature. 5 7 Values statements and management philosophy statements

151. See Marks, supra note 121, at 457.152. Although these terms may signify slightly different expressions of desired ethical

behavior, this Article will use these terms interchangeably.153. Margaret Anne Cleek & Sherry Lynn Leonard, Can Corporate Codes of Ethics

Influence Behavior?, 17 J. Bus. ETHICS 619, 622 (1998) ("A code of ethics is a formaldocument that states an organization's primary values and the ethical rules it expects itsemployees to follow."); M. Schwartz, The Nature of the Relationship Between CorporateCodes of Ethics andBehaviour, 32 J. Bus. ETHICS 247, 248 (2001) ("[A] code of ethics is..• a written, distinct, and formal document which consists of moral standards used to guideemployee or corporate behaviour.").

154. Earl A. Molander, A Paradigm for Design, Promulgation and Enforcement ofEthical Codes, 6 J. Bus. ETHICS 619, 619-20 (1987) (defining ethical code as "part of thatmiddle ground between internalized societal values on the one hand and law on the other");see also Messod D. Beneish & Robert Chatov, Corporate Codes of Conduct: EconomicDeterminants and Legal Implications for Independent Auditors, 12 J. ACCT. & PUB. POL'Y 3,6 (1993) (defining corporate code of conduct as a "self-regulatory device[] in which acorporation provides behavioral guidance to employees and policy commitments tostakeholders").

155. Joshua A. Newberg, Corporate Codes of Ethics, Mandatory Disclosure, and theMarket for Ethical Conduct, 29 VT. L. REv. 253, 256 (2005) (exploring different categoriesof content and design).

156. William S. Laufer & Diana C. Robertson, Corporate Ethics Initiatives as SocialControl, 16 J. Bus. ETHICS 1029, 1030 (1997) (noting that corporate credos are "statementsof commitment to constituencies, as well as statements of corporate values"); see alsoPatrick E. Murphy, Corporate Ethics Statements: Current Status and Future Prospects, 14J. Bus. ETHICS 727, 728 (1995) (discussing codes as illustrative of corporate commitment toethics).

157. Newberg, supra note 155, at 256 n.15 (listing Johnson & Johnson as a companywith a code of ethics).


establish guiding organizational principles of the firm,' 58 while compliancerules emphasize prohibitions against illegal and unethical conduct.159

Corporate codes may be inward looking, focusing on the regulation ofintra-corporate structures,"6 or outward looking, emphasizing corporatecitizenship and relations to stakeholders.' 6

1 Credos can vary in specificity,ranging from highly specific regulations to simple statements of values. 162

While some codes neatly fall into one of these classifications, many codescombine multiple types of credos (i.e. combining a values statement with acompliance code) in a single statement. 63 Some organizations even havemultiple corporate codes that address differing constituencies.' 64

Although corporate codes vary widely across organizations, mostcodes share a few common traits.' 65 A typical corporate code usuallyexpresses some broad-based commitment to integrity,166 highest ethicalstandards, 167 or principled business conduct. 68 More specific policy

158. Laufer & Robinson, supra note 156, at 1030 (defining management philosophystatements as "formal edicts of corporate philosophy"); Murphy, supra note 156, at 728(defining values statements as proclamations "intend[ing] to set out the guiding principles ofthe firm").

159. Laufer & Robinson, supra note 156, at 1030 (defining compliance codes as "codeswith provisions that contain guidelines and prohibitions regarding unethical and illegalconduct").

160. See Patrick E. Murphy, Creating Ethical Corporate Structures, 30 SLOAN MGMT.

REV. 81, 85 (1989) (exploring benefits of corporate codes on internal company functions).161. See Donald R. Cressey & Charles A. Moore, Managerial Values and Corporate

Codes of Ethics, 25 CAL. MGMT. REV. 53, 57 (1983) (discussing corporate codes' effect onvarious "publics").

162. See Newberg, supra note 155, at 257 (citing Harrah's Entertainment, Inc., Code ofCommitment (2000), http://harrahs.com/about us/code of commitment/index.html, as anexample of a one-page values statement); Sandra Pelfrey & Eileen Peacock, Ethical Codesof Conduct Are Improving, 16 Bus. F. 14, 15 (1991) (describing the continuum of speci-ficity in corporate codes).

163. See Linda Klebe Trevino et al., Managing Ethics and Legal Compliance: WhatWorks and What Hurts, 41 CAL. MGMT. REV. 131, 137 (1999) (noting that firms oftencombine both value-based and compliance methods of ethics management).

164. For example, Johnson & Johnson has both a corporate credo and a code of ethics.Newberg, supra note 155, at 256 n.15; see also Murphy, supra note 160, at 83 tbl.2(reproducing credo). The credo may also be found at the company's website athttp://www.jnj.com/our company/ourcredo (last visited Nov. 29, 2005).

165. See Newberg, supra note 155, at 257 (highlighting commonalities among corporatecodes).

166. E.g., Intel Corp., Principles for Responsible Business (2004), http://www.intel.com/intel/finance/prin-resp bus.htm ("Intel adheres to strict standards of honesty and conductsbusiness with uncompromising integrity and professionalism."); MTL Sys., Inc., Letter fromMTL's Employee Owners (2003), http://www.mtl.com/about/employeeletter.htm ("Ourword is our bond as is properly reflected in our Corporate Credo: Corporate integrity makesthe Difference! Personal Integrity makes the Corporation!").

167. E.g., Kmart Corp., Kmart Corporation Code of Business Conduct (2003),http://www.kmartcorp.con/corp/story/general/code of conduct.stm ("Kart... values itsreputation for integrity and adherence to the highest ethical standards by its associates.");

2005]


statements tend to fall into four categories. 69 First, credos affirm that theorganization will follow the law. Certain laws are specifically mentioned,such as intellectual property protections, antitrust rules, and employmentdiscrimination laws. 70 Firms may also commit themselves to following thelaws of other nations in which they do business. 7 ' Second, codes demandhonesty, including the maintenance of corporate records, accuratereporting, and avoiding the deception of competitors, customers, andsuppliers. 172 Third, codes require employees to be loyal to the company bynot having personal employee interests interfere with the interests of theorganization.1 73 This includes steering business to a relative or disclosingcompany secrets. 74 Finally, codes exhort fair and respectful treatment ofexternal stakeholders such as investors, suppliers, employees, customers,and competitors.171

A corporate code can play an essential role in an organization'sthinking. In 1982, an unknown assailant tampered with Johnson & Johnsonbrand Tylenol capsules, resulting in a number of deaths in the Chicagoarea. 76 Tylenol's share of the analgesic market plummeted from that of aleading brand to a paltry ten percent virtually overnight. 7 7 Johnson &

Johnson Controls, Inc., Ethics Policy-The Cornerstone of Customer Satisfaction (2003),http://www.jci.com/corpvalues/ethicsprint.htm ("Our Creed . . . We will conduct ourbusiness with the highest ethical standards.").

168. E.g., McKesson Corp., Code of Business Conduct and Ethics (2004),http://www.vitarx.com/corpgov-conduct.html ("Our business depends on the reputation ofthe Company and its employees for integrity and principled business conduct."); CinergyCorp., Code of Business Conduct and Ethics (2003), http://www.cinergy.comIpdfslcode of businessconduct and ethics.pdf ("Because our business depends upon thereputation of the Company and its directors, officers and employees for integrity andprincipled business conduct, in many instances this Code goes beyond the requirements ofthe law.").

169. Cf Newberg, supra note 155, at 258 (using five categories of corporate policies).170. Id. at 258-59.171. E.g., Medtronic, Inc., Code of Conduct, http://www.medtronic.comlcorporatel

codeofconduct.html (last visited Nov. 29, 2005) ("Medtronic must comply with exportcontrol and economic sanctions laws of the United States, as well as those of other countriesin which it does business."). The company explains that it possesses a credo because"Medtronic's reputation throughout the world for legal, moral, and ethical behavior is one of[its] most valuable assets." Id.

172. Newberg, supra note 155, at 260 (advocating honest business practices).173. Id. (illustrating prohibition on conflicts of interest).174. Id. at 261.175. Id. at 261-62. See generally Thomas Donaldson & Lee E. Preston, The Stakeholder

Theory of the Corporation: Concepts, Evidence, and Implications, 20 ACAD. MGMT. REV.65 (1995).

176. Granville King III, Crisis Management and Team Effectiveness: A CloserExamination, 41 J. Bus. ETHiCs 235, 247 n.2 (2002).

177. David Collins, A Lesson in Social Responsibility: Corporate Response to the 1980sTylenol Tragedies, 27 VT. L. REV. 825, 826 (2003) (illustrating Tylenol's drop in business).David Collins was a member of the strategy committee that managed the Tylenol crisis. Id.


Johnson reacted swiftly by mandating a nationwide recall, communicatingopenly with the press and public, and assuming full responsibility for thetragedy even though it had no legal obligation to do so. 17 8 Johnson &Johnson's reliance on its corporate credo to treat stakeholders fairly anddeal with the public honestly was viewed as pivotal in containing thetragedy. 79 As a result, Tylenol remained the market leader in its field. 80

Scholars and managers now view Johnson & Johnson's heavy reliance onits credo during the Tylenol tragedy as the prototypical example of ethicalbehavior based upon a corporate code of ethics.

Although Johnson & Johnson's strong reliance on its credo representsa dramatic example of the power of corporate codes, credos with that muchpower over a firm's activities may be the exception and not the norm.Although limited support exists showing that credos promote ethicalbehavior,'8 ' other research concludes that minimal or no association existsbetween the presence of a corporate code and ethical employee behavior. 18 2

A 2001 survey of nineteen studies of code effectiveness conducted since1979 revealed that only eight studies showed a significant relationshipbetween corporate codes and ethical behavior.'83 The remaining eleven

at 825 n.*.178. Id. at 825-27.179. See Collins, supra note 177, at 827-28 (illustrating Johnson & Johnson's use of the

credo); Brian Allen Warwick, Commentary, Reinventing the Wheel: Firestone and the Roleof Ethics in the Corporation, 54 ALA. L. REV. 1455, 1468 (2003) ("Because of a credo thatJohnson & Johnson had in place, a directive that prioritized the responsibilities of thecorporation, the company was able to quickly react to a faulty product in the marketplaceand avert a financial catastrophe."); see also MICHAEL NOVAK, BUSINESS AS A CALLING 153-58 (1996) (summarizing Johnson & Johnson's use of the credo); Harvey L. Pitt & Karl A.Groskaufmanis, Minimizing Corporate Civil and Criminal Liability: A Second Look atCorporate Codes of Conduct, 78 GEO. L.J. 1559, 1635 & n.449 (1990) (reporting thatJohnson & Johnson was widely applauded for adhering to its credo during the Tylenoltragedy).

180. Collins, supra note 177, at 826 (discussing Tylenol's return to the top of themarket).

181. See, e.g., Donald L. McCabe et al., The Influence of Collegiate and CorporateCodes of Conduct on Ethics-Related Behavior in the Workplace, 6 Bus. ETHICS Q. 461, 471(1996) (reporting that the existence of ethical codes is correlated with lower levels of self-reported unethical behavior); Mark John Somers, Ethical Codes of Conduct andOrganizational Context: A Study of the Relationship Between Codes of Conduct, EmployeeBehavior and Organizational Values, 30 J. Bus. ETHICS 185 (2001) (discussing a survey ofmanagement accountants that revealed a positive correlation between presence of corporatecodes and reduced unethical conduct).

182. See Lawrence B. Chonko & Shelby D. Hunt, Ethics and Marketing Management:An Empirical Examination, 13 J. Bus. RES. 339, 356 (1985) (surveying marketing managersand concluding that "no relationship [exists] between corporate and industry codes of ethicsand the extent of ethical problems"); Cleek & Leonard, supra note 153, at 627 (surveyingbusiness students and reporting that "codes of ethics are not powerful enough tools to affectethical decision-making behavior").

183. Schwartz, supra note 153, at 249-50.

20051


studies reported a weak or non-significant relationship.1 84

If it is uncertain that corporate codes are an effective tool for changingcompany behavior, it is similarly questionable that corporate codes impactemployees' relational contracts. Some codes, particularly those that areoutward looking in nature, 85 may not address employees. Furthermore,most credos do not appear to take a values-centered approach that wouldbest express company commitment to its workforce. 8 6 Rather, most credosoffer rule-based statements of right and wrong, exhorting employees to begood organizational citizens and to treat customers well.187 A more recentstudy surveying the two hundred largest companies in the world revealedstronger, but not robust, evidence of concern for employees in corporatecodes.188 Of the 105 corporate codes examined,189 forty percent encouragedthe personal growth and talents of its employees, thirty-nine percentexhorted treating employees with dignity and respect, twelve percentoffered competitive terms of employment, and two percent advocatedenabling a balance between work and private life.' 90 Far more common inthese codes were commitments to obey the law (fifty-seven percent),supply quality goods and services (sixty-seven percent), and treat theenvironment with due care (fifty-six percent). 191 Concern for the customer,the environment, and following the law received more emphasis thancommitments to employees' work environment or well-being. Overall,empirical evidence supporting the influence of corporate codes overemployees appears to be mixed at best' 92 and perhaps unsupportable. 93

184. Id.185. See Cressey & Moore, supra note 161, at 57 (noting that some codes of conduct

"show concern for ethics in decisions affecting a corporation's 'publics' (such ascompetitors, consumers, governments, and others)").

186. See Donald Robin et al., A Different Look at Codes of Ethics, 32 Bus. HORIzONS 66,70 (1989) (discussing codes' lack of ethical content).

187. Seeid.at7l.188. Muel Kaptein, Business Codes of Multinational Firms: What Do They Say?, 50 J.

Bus. ETHICS 13 (2004).189. The remaining ninety-five organizations surveyed did not report having a corporate

code of ethics. See id. at 17.190. Id. at 19 tbl.V.191. Id. at 19-20 tbl.V.192. Gary R. Weaver, Does Ethics Code Design Matter? Effects of Ethics Code

Rationales and Sanctions on Recipients' Justice Perceptions and Content Recall, 14 J. Bus.ETHICS. 367, 367 (1995) ("Although codes of ethics figure prominently in organizations'efforts to reduce unethical behavior on the part their members, evidence on the actualimpact of codes is at best mixed." (citation omitted)).

193. See, e.g., John C. Lere & Bruce R. Gaumnitz, The Impact of Codes on DecisionMaking: Some Insights from Information Economics, 48 J. Bus. ETHICS 365, 372-73 (2003)("Although the literature suggests that an important role for codes of ethics of corporations.. . is to affect decision making among those who are 'governed' by the code, empiricalevidence indicates that there is little impact of codes or statements in codes on decisionmaking.").


In addition, courts have been reluctant to enforce corporate codes asenforceable promises. 194 In Tripodi v. Johnson & Johnson,95 Tripodi, anemployee of Therakos, Inc., 196 questioned the effectiveness of hisemployer's testing of certain medical equipment, which the employercalled Centrinet. Tripodi contended that a prior photoreceptor, which hadbeen approved by the FDA, and Centrinet, which had not been approved,were sufficiently distinct that new clinical tests were necessary to establishCentrinet's effectiveness. 197 Such tests would have resulted in significantmarketing delays. 198 After Tripodi repeatedly raised the issue withsuperiors, Therakos discharged him.' 99 Tripodi claims that Therakosdischarged him because of his justified criticism that what Therakosplanned to do violated FDA regulations.00 Therakos responded that itdischarged Tripodi for inappropriate comments to management and failureto establish a time chart, satisfy goals, and guide the research effortproperly.'

Tripodi alleged that Therakos wrongfully discharged him in violation

194. See Allen v. Ethicon Inc., 919 F. Supp. 1093 (S.D. Ohio 1996) (determining that thecredo of a company owned by Johnson & Johnson was not a specific promise of job securityor continued employment, but an articulation of the company's aspirational goals andideals); cf Ullmo v. Gilmour Acad., 273 F.3d 671, 677 (6th Cir. 2001). In Ullmo, the courtheld that the "philosophy" section in a school's student and parent handbook stating thatschool "teachers mirror the Holy Cross tradition as they work for the full development oftheir students, in and out of the classroom, respecting pupils' differing abilities and styles oflearning" was too nonspecific and aspirational to require an enforceable promise to providechild with parents' desired type of education that was designed to help overcome learningdisability. Id. at 674, 676-77. Vague statements that are not specifically corporate credoshave also not been upheld as enforceable contractual language. See, e.g., Thompson v. St.Regis Paper Co., 685 P.2d 1081, 1084 (Wash. 1984) (finding that handbook languageproviding that terminations "will be processed in a manner which will at all times be fair,reasonable and just" was too vague and general to establish a legally enforceable impliedpromise of just cause termination); see also Vice v. Conoco Inc., 150 F.3d 1286 (10th Cir.1998); Monroe v. Host Marriot Servs. Corp., 999 F. Supp. 599 (D.N.J. 1998); Orr v.Westminster Vill. N., Inc., 689 N.E.2d 712, 721 (Ind. 1997) (holding that handbook's vagueand general statements concerning employee performance evaluations and job security areinsufficient to create valid offer when balanced against clear and definite language whichgave employer discretion in disciplining employees). But cf Sol Picciotto, Rights,Responsibilities and Regulation of International Business, 42 COLUM. J. TRANSNAT'L L. 13 1,145 (2003) (examining how corporate codes may be enforceable through contractualagreements between retailer and subcontractors that incorporate them).

195. 877 F. Supp. 233 (D.N.J. 1995).196. Johnson & Johnson, Inc. was the corporate parent of Therakos, Inc. Id. at 234.

Tripodi was employed directly by Johnson & Johnson before his assignment to Therakos.Id.

197. Id. at 234-35.198. Id. at 235.199. Id.200. Id.201. Id.

2005]


of Johnson & Johnson's company credo--a widely disseminated documentapplicable to all employees of Johnson & Johnson and its subsidiaries. 20 2

This credo establishes the company's general obligations to variousstakeholder groups, including its employees. 23 The credo does state that"[e]mployees must feel free to make suggestions and complaints" and that"[management's] actions must be just and ethical."2°

The trial court rejected the notion that the credo established specificemployment rights to Tripodi including job security and heightenedprotection from discharge. 25 The court concluded that the credo statementswere not contracts but "goals and aspirations .... [E]mployees could notreasonably expect that the generalized statements concerning employeerelations were enforceable obligations. 2 6 The court analogized to otherparts of the credo, noting that its stated commitment to nurses and doctorsfor high quality products at reasonable prices is not a contractual commandfor a specific kind of good. In addition, its statement that "[o]ur suppliersand distributors must have an opportunity to make a fair profit '20 7 does notimpose a contractual obligation upon Johnson & Johnson to guarantee aprofitable return to them.208 The court set aside the plaintiffs verdict andentered judgment notwithstanding the verdict in favor of the defendant.2 9

An interesting adjunct to the Tripodi case is the reaction of the jury.The jury concluded that the credo constituted a binding contract betweenJohnson & Johnson, Therakos, and Tripodi. 210 The jury found that Tripodiwas not terminated for just cause and that Therakos breached its promise toTripodi. 211 The trial court set aside the jury's verdict.212 The divergent jury

202. Id.203. The portion of the Johnson & Johnson credo relevant to employees states:

We are responsible to our employees, the men and women who work with usthroughout the world. Everyone must be considered as an individual. We mustrespect their dignity and recognize their merit. They must have a sense ofsecurity in their jobs. Compensation must be fair and adequate, and workingconditions clean, orderly and safe. We must be mindful of ways to help ouremployees fulfill their family responsibilities. Employees must feel free tomake suggestions and complaints. There must be equal opportunity for employ-ment, development and advancement for those qualified. We must providecompetent management, and their actions must be just and ethical.

Johnson & Johnson, Our Credo, http://www.jnj.com/our company/our credo (last visitedNov. 29, 2005).

204. Id.205. Tripodi, 877 F. Supp. at 239-40.206. Id. at 240.207. Johnson & Johnson, supra note 203.208. Tripodi, 877 F. Supp. at 240.209. Id. at 240.210. Id. at 236.211. Id.212. Id. at 240.


finding supports psychological contract literature noting the breadth anddepth of expected promises by employees in the workplace well in excessof existing laws. The finding also reinforces that a difference existsbetween employee psychological contracts and employment termsperceived as actionable in court.

Although research is mixed on the effectiveness of codes and thejudiciary is suspicious of codes as enforceable obligations, this does notnecessarily mean that corporate codes are merely ceremonialpronouncements without importance or effect. Rather, corporate codeshave a multitude of uses for organizations wishing to use them as astrategic tool. First, in spite of the discussion of codes earlier in thissection, corporate codes can actually be used as a genuine source of anorganization's value system. One need only consider Johnson & Johnson'sreaction to the Tylenol disaster as an example of a code successfullyguiding the employees of an organization through a corporate crisis.2 13 Thelack of support for a broader empirical basis supporting the influence ofcredos may come as much from the difficulty in developing measurabletests than from their lack of influence over the organization.214 Employeesmay be reluctant to make known their ethical failings,2 5 or there are simplyno useful mathematical measurement tools that can accomplish the task.216

Even if we assume that corporate codes have no influence overemployees' perceived relationship with their employer, codes still have animportant place in organizational life. Firms may use codes to benefit fromthe growing demand by consumers to support ethically behavingorganizations. Socially responsible investing, the consideration of thesocial and environmental performance of firms as a significant factor in

21171making investment decisions, is a two trillion dollar industry.1 8

213. Interestingly, this is the same credo that the Tripodi court rejected as a source of anenforceable contract. Id. at 236.

214. Newberg, supra note 155, at 267 n.84 ("Measuring ethical or unethical behavior,and in turn linking it to the character of a code, is difficult." (quoting Weaver, supra note192, at 368)).

215. Id.216. See Cressey & Moore, supra note 161, at 73 (concluding that "there is no practical

way of measuring any effects the codes might have had on the conduct of corporatepersonnel"); Charles E. Harris, Structuring a Workable Business Code of Ethics, 30 U. FLA.L. REV. 310, 327 (1978) ("[E]thics are not susceptible to being measured or established bymathematical formulae or other quantifiable factors.").

217. Newberg, supra note 155, at 288; see also Cynthia A. Willams, The Securities andExchange Commission and Corporate Social Transparency, 112 HARv. L. REv. 1197, 1278(1999) ("Information about a management's pattern of compliance with domestic statutesand international treaties is financially significant information ....").

218. Steve Schueth, Socially Responsible Investing in the United States, 43 J. Bus.ETHics 189, 191 (2003). Quite surprisingly, the socially responsible investing movement isa purely consumer driven phenomenon. See id. ("Wall Street did not cook this one up. Thevast majority of the nearly 800 investment management firms in this country who currently

20051


Although a strong empirical connection has yet to be established betweencorporate codes and socially responsible investment decisions, no doubt theethical practices of an organization are considerations to socially consciousinvestors.2 9 Also, firms may engage in social marketing, advertising thattheir products were manufactured with some aspect of social orenvironmental policy in mind.220 Consumers may only purchase productsfrom socially conscious organizations or be willing to pay a premium forenvironmentally friendly products. 22' Finally, corporate credos maybuttress efforts at corporate social reporting, the practice of some largecorporations of voluntarily disclosing annual reports of their corporatesocial activities such as charitable contributions and environmentalstewardship.222

In sum, although questionable evidence exists supporting theargument that corporate codes have a direct effect on employee behavior,the ambiguity in this area may arise from the difficulty of applyingappropriate research tools as much as the lack of available evidence.Corporate codes may have some influence over an employee's relationalcontract, but further research will decide exactly how much, what kind, andin what fashion.

C. Organizational Culture and the Relational Contract

In 1985, two pipeline companies merged their resources to form aninterstate business benefiting from economics of scale. After facing anumber of financially difficult years, the company entered the energytrading market and transformed from a barely surviving firm into a thrivingorganization. By the late 1990s, commentators praised this once tinyenterprise as one of the world's most innovative organizations. Thecompany not only traded energy, but created whole new futures markets forcommodities such as Internet bandwidth, television time for advertising,and weather futures. This seventy billion dollar company, known to theworld as Enron Corporation, was poised to dominate the twenty-first

identify themselves as running socially screened portfolios not only weren't doing it eight ornine years ago, but had no interest." (footnote omitted)).

219. Newberg, supra note 155, at 289.220. See Geoffrey Brewer, Consumers Want Brands-and Social Responsibility, 152

SALES & MARKETING MGMT. 76, 76 (2000) (reporting the results of a survey which statesthat "[f]ifty-four percent of Americans ... watch a company's social performance, includingits labor practices, business ethics, and environmental impacts").

221. See Michel Laroche et al., Targeting Consumers Who Are Willing to Pay More forEnvironmentally Friendly Products, 18 J. CONSUMER MARKETNG 503 (2001) (discussingprofile of consumers who are willing to pay more for environmentally friendly products).

222. Newberg, supra note 155, at 290-91.


century economy. 223

Enron, of course, had a code of ethics.224 This lengthy tome 25

exhorted its employees to "be proud of Enron and to know that it enjoys areputation for fairness and honesty and that it is respected. 2 26 The codedeclared that "[f]aws and regulations affecting the company will beobeyed.,227 Enron's Principles of Human Rights affirmed that it takes itsrole as an international employer and global corporate citizen seriously.22

These principles pronounced that the company should treat others like onetreats oneself, work with customers honestly, and respect the rights of allindividuals.229

Enron's code had much to say about its employees as well. The codecharged employees to adhere to the "highest ethical standards., 230 Enronemployees were to play an active role in the community, thereby fosteringa long-term partnership with the neighborhood where its employees live.23'

The code also establishes ethical standards for securities trading byemployees, 23 2 employee conduct and firm loyalty, 23 3 employee use of

23423company secrets, and workplace safety.235 Compliance with these ethicalstandards was a condition of employment, and the code warned that anyviolations of these ethical standards might result in disciplinary action,

236even termination.Obviously, Enron did not practice what it preached. Put simply,

Enron devised quasi-partnerships that allowed the company to sell assetsand manufacture false earnings. 237 Debt was shuttled into other partner-

223. See Ronald R. Sims & Johannes Brinkmann, Enron Ethics (Or: Culture MattersMore than Codes), 45 J. Bus. ETHics 243, 244 (2003) (discussing creation and rise ofEnron); National Public Radio, The Fall of Enron, http://www.npr.org/news/specials/enron(last visited Nov. 18, 2005) (same).

224. ENRON, CODE OF ETHics (2000), http://www.thesmokinggun.com/graphics/packageart/enron/enron.pdf.

225. At sixty-two pages, Enron's code is more detailed than all but two of the top 200multinational firms. See Kaptein, supra note 188, at 18.

226. ENRON, supra note 224, at 2.227. Id. at 13.228. Id. at 4.229. Id. at 4-6.230. Id. at 12.231. Id. at 5-6.232. Id. at 7-12.233. Id. at 13-14.234. Id. at 15-22.235. Id. at 24.236. Id. at 8.237. For a more in-depth look at Enron's practices and ultimate demise, see The Role of

the Board of Directors in Enron's Collapse: Permanent Subcomm. on Investigations of theS. Comm. on Governmental Affairs, 107th Cong. 18 (2002), available athttp://www.gpo.gov/congress/senate/senatel21pl07.html (containing testimony of Enronofficials). See also Lisa M. Fairfax, The Sabranes-Oxley Act as Confirmation of Recent

2005]


ships to keep the losses off Enron's own balance sheet.238 Ultimately,Enron's questionable partnerships became public, failed in increasingnumbers, and placed millions of dollars of unanticipated liability onEnron's books that Enron could not satisfy.239

A "culture of cleverness" devolved from a pursuit of excellence to amere appearance of excellence through elaborate self-dealing trans-actions.24° Even with the presence of a specific code of ethics, ethicalboundaries at Enron simply eroded away in a rule-breaking, intimidating,aggressive work environment. 24' As one employee reported, "[I]t was allabout ...deliberately breaking the rules., 242 Another stated that "therewere no rules for people, even in our personal lives. Everything was aboutthe company and everything was supposed to be on the edge-sex, money,all of it. ,,243 Work was a "very arrogant place, with a feeling of invinci-bility. 244 Enron's implicit corporate culture, not its explicit code of ethics,established the norms of this workplace.

Corporate culture has been defined as an internal consistency withinan organization that influences the behavior and values of its employees.245

Culture to an organization is what personality is to an individual.246 A

Trends in Director and Officer Fiduciary Obligations, 76 ST. JOHN'S L. REV. 953, 956 n.17(2002) (listing numerous resources examining the Enron debacle); Marianne M. Jennings, APrimer on Enron: Lessons from a Perfect Storm of Financial Reporting, CorporateGovernance and Ethical Culture Failures, 39 CAL. W. L. REV. 163 (2003) (discussing theconfluence of events that lead to Enron's collapse).

238. Catharine E. Stark, Comment, Regulating Corporate Governance: Amended Rulesof Professional Conduct Allow Lawyers to Make the World a More Ethical Place, 53 CATH.

U. L. REV. 1195, 1209-10 (2004).239. Id. The misdeeds of Enron have spawned a veritable "cottage industry among legal

academics." Jonathan C. Lipson, Directors' Duties to Creditors: Power Imbalance and theFinancially Distressed Corporation, 50 UCLA L. REV. 1189, 1194 n.6 (2003) (citingDouglas G. Baird & Robert K. Rasmussen, Four (or Five) Easy Lessons from Enron, 55VAND. L. REV. 1787 (2002)); William W. Bratton, Enron and the Dark Side of ShareholderValue, 76 TuL. L. REV. 1275 (2002); Mark Klock, Two Possible Answers to the EnronExperience: Will It Be Regulation of Fortune Tellers or Rebirth of Secondary Liability?, 28J. CORP. L. 69 (2002); Symposium, Enron and Its Aftermath: Rebuilding Corporate Boardsand Refocusing Shareholders for the Post-Enron Era, 76 ST. JOHN'S L. REV. 787 (2002);Lessons from Enron: A Symposium on Corporate Governance, 54 MERCER L. REV. 663(2003)); see also C. William Thomas, The Rise and Fall of Enron, 193 J. ACCT. 41, 41(2002) ("The Enron case is a dream for academics who conduct research and teach.").

240. Sims & Brinkmann, supra note 223, at 246.241. Id. at 247.242. Id. at 244 (citing C.A. BARTLETT & M. GLINSKA, ENRON'S TRANSFORMATION: FROM

GAS PIPELINE TO NEW ECONOMY POWERHOUSE (2001) (Harvard Business School casestudy)).

243. Id. at 247.244. Id.245. John W. Teague, Comment, Does Corporate Culture Justify Defensive Measures to

Takeover Attempts?, 42 BAYLOR L. REV. 791, 795 (1990).246. Id. (citing R. KILMAN ET AL., GAINING CONTROL OF THE CORPORATE CULTURE ix


corporate culture represents the cumulative philosophies, beliefs, values,assumptions, and norms of an organization. 14 More formally, culture is:

a pattern of shared basic assumptions that was learned by a groupas it solved its problems of external adaptation and internalintegration, that has worked well enough to be considered validand, therefore, to be taught to new members as the correct way toperceive, think, and feel in relation to those problems.248

Definitions of culture need not be so esoteric, but rather have beendescribed as simply a "feeling in the organization," to "rules of the game,"to "how things are done around here. '" 249

Unlike the limited empirical support found for the ability of acorporate credo to influence employee behavior, significant research showsthat corporate culture has a profound impact on employees' relationshipswith their employers. For example, a frequent topic of managementscholars is organizational commitment, the psychological state of anemployee affecting his or her decision to remain with an organization andsupport its goals. 250 Affective commitment, loyalty to the firm made bychoice and not solely by economic necessity or threat of punishment,251

represents an emotional identification with an organization.252 Genuinelycommitted employees offer an enormous competitive advantage to theorganization that possesses them. 3 Both customer loyalty, the outcome ofsuperior customer service, and investor loyalty, the result of superiorshareholder value, depend upon businesses retaining their employees'

(1986))247. Id.248. EDGAR H. SCHEIN, ORGANISATIONAL CULTURE AND LEADERSHIP 17 (3d ed. 2004).249. Alan M. Wilson, Understanding Organisational Culture and the Implications for

Corporate Marketing, 35 EUR. J. MARKETING 353, 355 (2001).250. See NATALIE J. ALLEN & JOHN P. MEYER, COMMITMENT IN THE WORKPLACE:

THEORY, RESEARCH, AND APPLICATION 3 (Sage Publ'ns 1997) (1950); Rachel S. Amow-Richman, Bargaining for Loyalty in the Information Age: A Reconsideration of the Role ofSubstantive Fairness in Enforcing Employee Noncompetes, 80 OR. L. REv. 1163, 1206-09(2001) (discussing loyalty and organizational commitment).

251. Affective commitment should be distinguished from continuance commitment,which has been defined as an "affectively neutral response that is largely influenced by thepresence or imminence of penalties associated with the intention or decision to discontinuemembership with the organization or occupation." Jean E. Wallace, Becker's Side-BetTheory of Commitment Revisited: Is It Time for a Moratorium or a Resurrection?, 50 HUM.REL. 727, 735 (1997); see also Robert A. Stebbins, On Misunderstanding the Concept ofCommitment: A Theoretical Understanding, 48 SOC. FORCES 526 (1970) (discussing thedifferent dimensions of commitment).

252. Wallace, supra note 251, at 734 ("Affective commitment, or loyalty, is anemotional response to and identification with an organization or occupation.").

253. See generally FREDERICK F. REICHHELD, THE LOYALTY EFFECT: THE HIDDEN FORCE

BEHIND GROWTH, PROFITS, AND LASTING VALUE (1996).

2005]


commitment and loyalty.25 4 Other benefits from highly committed

employees include increased retention, attendance, work effort, and overall

job performance.5 5 Committed employees also produced improved object-

tive measures such as increased sales, improved cost control, and improvedmanager ratings of employee performance.256 Simply, committed

employees are more likely to go above and beyond established expectationsthan less committed ones.257

Corporate culture has been linked to overall organizationalperformance. Denison and Mishra found that strength of culture is tied to

corporate performance such as return on assets, return on investment, salesgrowth, and market share.258 A properly supportive culture promotescompany-wide initiatives such as total quality management practice thatcan improve an organization's overall capabilities.25 9

The origins of this valuable firm asset, not surprisingly, arise from a

supportive and positive corporate culture. Cultural characteristics such as

employer's supportiveness of employees, management's recognition of

employees, employees' perception of fair treatment from management, and

employees' feeling valued as an asset to the organization are the strongestindicators of predicting employee commitment.26 ° A 2003 study reinforcesthese conclusions. Researchers surveyed selected employees of seventy-

five publicly held corporations who were asked the organization'sprioritization of internal and external stakeholders. 261 The study found that

when employees believe that the employer organizational attitudes arefocused primarily on non-employee interests, these employees have

significantly lower levels of employee commitment to the organization.262

Companies whose culture maintains this non-employee focus tend to have

lower sales, lower net income, and lower market value than those firms

254. Tim Davis & Michael J. Landa, Creating Shareholder Value: Impossible Dream orAchievable Business Objective?, 25 CANADIAN MANAGER 23, 24 (2000).

255. Sheri Bridges & J. Kline Harrison, Employee Perceptions of Stakeholder Focus andCommitment to the Organization, 15 J. MANAGERIAL ISsUES 498, 500 (2003).

256. Id.257. Id.258. Daniel R. Denison & Aneil K. Mishra, Toward a Theory of Organizational Culture

and Effectiveness, 6 ORG. Sci. 204 (1995).259. See James R. Detert et al., A Framework for Linking Culture and Improvement

Initiatives in Organizations, 25 ACAD. MGMT. REv. 850 (2000) (discussing the lack of aframework for measuring organizational cultures).

260. Bridges & Harrison, supra note 255, at 500 (citing W.K. Baker, Allen and Meyer's1990 Longitudinal Study: A Reanalysis and Reinterpretation Using Structural EquationModeling, 48 HuM. REL. 169 (1995); Charles Glisson & Mark Durick, Predictors of JobSatisfaction and Organizational Commitment in Human Service Organizations, 33 ADMIN.SCI. Q. 61 (1988); Richard M. Steers, Antecedents and Outcomes of OrganizationCommitment, 22 ADMIN. SCI. Q. 46 (1977)).

261. Id. at 501-03.262. Id. at 504-05.

employment as a relational contract - university of pennsylvania

Documents