January 1997

Workplace Labor Update - Executive Cries Foul Over Undisclosed Terms – January 1997

4 min

Employers must be careful about what they say and don't say when recruiting employees, or they may face claims of fraud and misrepresentation. A recent case decided by a Maryland appeals court shows that an employer can be liable for failing to disclose to an executive recruit important terms of employment. Lubore v. RPM Associates, Inc., 109 Md. App. 312, 674 A.2d 547, cert. denied, 343 Md. 565, 683 A.2d 177 (1996).

According to the executive, he was employed in a lucrative position when another company expressed interest in hiring him as a marketing and sales executive. Several discussion were held over the next year, during which compensation and job responsibilities were discussed. Eventually, the company sent a written offer setting forth the terms of employment, including details of the compensation offered. After further discussion, the executive orally accepted the offer.

Shortly after the acceptance, the executive resigned his current position. Three weeks later, the company that recruited him sent him a letter "reaffirming" the offered and accepted terms. The letter also stated that all employees were required to sign a contract.

On the executive's second day of employment, he was presented with a fifteen page employment contract. According to the lawsuit, the agreement contained a number of terms that had not been disclosed, including a liquidated damages clause, an employment-at-will clause, non-competition provisions, and a provision allowing the company to decrease compensation. The executive refused to sign the agreement, and was terminated.

The executive sued for fraud, negligent misrepresentation, and breach of contract. The appeals court agreed with the company that it did not breach a contract when it terminated the executive because it found that the executive was an at-will employee, and could be terminated at any time.

However, the appeals court concluded that, if the executive could prove his allegations, the company may be liable for fraud and/or misrepresentation. The court determined that, even if the statements made by the company were not false or misleading, it may have mislead the executive through its failure to disclose significant terms. A "partial and fragmentary" disclosure, if misleading, can lead to liability.

The court also ruled that the company may have had a "special relationship" with the executive and owed him a duty not to negligently misrepresent the terms of the deal. The company knew the executive was resigning a secure and highly paid position, and would suffer a major loss if it misrepresented significant facts about the deal. Also, the court pointed out that the company and executive dealt with each other over an extended period, and intended to create a long-lasting relationship. These circumstances may create such a special relationship.

The company also argued that the executive had suffered no damages as an at-will employee, the company was entitled to terminate him at any time. As noted, the court agreed that he was at-will, but concluded that his damages (if he could prove his allegations) would be based on the loss of his prior position, not his termination from the company.

The court's ruling meant the executive would get the chance to prove his allegations against his employer of fraud and misrepresentation. For other employers, it tolls a warning about recruiting, particularly at the executive level. Talented executives will often hold high-paying, secure positions, and must be convinced to give up those positions. Employers must be careful not to cause a candidate to change his or her circumstances based upon information that could be considered misleading, even if the candidate is to be an at-will employee. Employers should consider the following during negotiations (and before the candidate leaves his or her current position):

  • Don't make promises you aren't able or willing to keep
  • Don't oversell or misrepresent the job or the health and expectations of the company
  • Be careful with offer letters don't leave out material terms, and make it clear that it does not encompass every term of employment
  • Don't disclose only the "goodies;" make sure the candidate is aware of the obligations and restrictions (such as at-will status, non-competition clauses, etc.) as well
  • Do make sure the candidate is not currently restricted by an employment contract or non-competition agreement.