Barbara Vargo v. Lincoln Brass Works ( 2000 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
April 13, 2000 Session
BARBARA VARGO v. LINCOLN BRASS WORKS, INC.
Appeal from the Circuit Court for Davidson County
No. 99C-374 Carol Soloman, Judge
No. M1999-00734-COA-R3-CV - Filed March 13, 2003
This appeal involves a dispute between an employee and her former employer over severance pay.
After the employee obtained a $13,750 judgment in the Metropolitan General Sessions Court of
Davidson County, the employer perfected a de novo appeal to the Circuit Court for Davidson
County. Following a bench trial, the trial court concluded that the employee had a vested right to
severance pay under the employer’s severance policy and awarded the employee $15,262.50. The
employer has appealed. We have determined that the employer’s severance policy contained an
enforceable contractual obligation to pay severance pay to eligible employees. In the absence of
proof that the employee was ineligible, we find that the trial court correctly interpreted and applied
the severance policy. Accordingly, we affirm the judgment.
Tenn. R. App. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed
WILLIAM C. KOCH , JR., J., delivered the opinion of the court, in which WILLIAM B. CAIN and
PATRICIA J. COTTRELL, JJ., joined.
Mark C. Travis, Cookeville, Tennessee, for the appellant, Lincoln Brass Works, Inc.
Alan D. Johnson, Nashville, Tennessee, for the appellee, Barbara Vargo.
OPINION
I.
In March 1988, Barbara Ann Vargo went to work as a receptionist and billing clerk for
Lincoln Brass Works, Inc. in its Detroit, Michigan plant. She was an at-will employee. When
Lincoln Brass Works moved its sales office from Detroit to Nashville in 1993, Ms. Vargo moved
to the new Nashville office and worked there as an office manager and administrative assistant.
In 1997, Lincoln Brass Works terminated four employees as part of a reduction in force. The
three employees who had been working in the Nashville office received severance pay. In July 1998,
Lincoln Brass Works terminated twenty-one more employees in a second reduction in force. Ms.
Vargo was the only Nashville employee to lose her job. None of the employees terminated as a
result of this reduction in force received severance pay because the company was in a “cash crunch.”
According to its chief financial officer, Lincoln Brass Works “couldn’t afford severance for anyone”
because the company did not know whether it had enough funds to meet its obligations for raw
materials and other direct labor costs.
In December 1998, Ms. Vargo sued Lincoln Brass Works in the Metropolitan General
Sessions Court of Davidson County seeking severance pay pursuant to a company “severance policy”
that had been adopted in 1996. In January 1999, the general sessions court awarded Ms. Vargo
$13,750, and Lincoln Brass Works perfected a de novo appeal to the Circuit Court for Davidson
County. Thereafter, in March 1999, Lincoln Brass Works formally rescinded its severance policy.
Following a bench trial, the trial court concluded that Ms. Vargo had a “vested right to severance pay
under the facts” and awarded Ms. Vargo severance pay and prejudgment interest in the amount of
$15,262.50.1 Lincoln Brass Works has appealed.
II.
The pivotal issues in the case involve the legal significance and meaning of Lincoln Brass
Works’s 1996 severance policy. Ms. Vargo asserts that the policy is part of her contract of
employment and, therefore, that she is entitled to severance pay in accordance with the terms of this
policy. For its part, Lincoln Brass Works insists that its severance policy was not a contractual
obligation, and, therefore, that Ms. Vargo did not have a vested right to be paid severance when she
was terminated in July 1998.
These issues are purely questions of law because they call for the construction and
interpretation of Lincoln Brass Works’s 1992 “Policies and Procedures Manual” and its 1996
“Severance Policy.” Because these are questions of law, the trial court’s interpretation of these
documents is not entitled to a presumption of correctness on appeal. Angus v. Western Heritage Ins.
Co., 48 S.W.3d 728, 730 (Tenn. Ct. App. 2000). Rather, we must review the documents ourselves
and make our own determination regarding their meaning and legal import. Hillsboro Plaza Enters.
v. Moon, 860 S.W.2d 45, 47 (Tenn. Ct. App. 1993).
III.
An employment relationship is essentially contractual. Hamby v. Genesco, Inc., 627 S.W.2d
373, 375 (Tenn. Ct. App. 1981). Its terms and conditions are supplied from two sources – applicable
federal and state law and the agreement of the parties. An employment agreement may be written,
oral, or a combination of the two. If written, it may be memorialized in a single document or in a
series of documents.
It is not uncommon for employers to include some, but not all, of the terms of their
agreements regarding wages, hours, and conditions of employment in an employee handbook or
manual. Accordingly, these handbooks or manuals may include contractually enforceable promises
on the part of the employer. King v. TFE, Inc., 15 S.W.3d 457, 461 (Tenn. Ct. App. 1999).
However, before a particular provision in an employee handbook or manual will be construed to be
1
$13,750 [severance pay] + $1,512.50 [prejudgment interest] = $15,262.50.
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contractually binding, the relevant language in the manual or handbook, viewed in light of all the
documents pertaining to the contract of employment, must reflect the employer’s intent to be bound
by the particular provision. Rose v. Tipton County Works Dep’t, 953 S.W.2d 690, 692 (Tenn. Ct.
App. 1997); Smith v. Morris, 778 S.W.2d 857, 858 (Tenn. Ct. App. 1988).
The courts will construe provisions in an employee handbook or manual stating that the
employer either guarantees or unequivocally commits to provide a particular benefit or condition of
employment to be contractually binding on the employer.2 However, the courts will decline to
construe an employee handbook or manual to contain enforceable contractual obligations if the
handbook or manual states that it is not intended to be a contract3 or that the provisions in the manual
are subject to unilateral change by the employer without the employee’s consent.4
Whether an employee handbook or manual contains contractually enforceable terms depends
upon the specific language used in the handbook or manual. Rose v. Tipton County Pub. Works
Dep’t, 953 S.W.2d at 692. The interpretive rules used to determine what the language means are the
same as the rules used to construe contracts. Accordingly, the courts will focus on the four corners
of the manual or handbook and the other related employment documents and will construe these
documents as written. They will also give the terms in the documents their natural and ordinary
meaning, Williams v. Maremont Corp., 776 S.W.2d 78, 80 (Tenn. Ct. App. 1988), and will construe
these terms in the context of the entire agreement.
The courts will not make a new contract for parties who have spoken for themselves, Petty
v. Sloan, 197 Tenn. 630, 640, 277 S.W.2d 355, 359 (1955), and will not relieve parties of their
contractual obligations simply because these obligations later prove to be burdensome or unwise.
Boyd v. Comdata Network, Inc., 88 S.W.3d 203, 223 (Tenn. Ct. App. 2002). Thus, when called upon
to interpret a contract, the courts will not favor either party. Marshall v. Jackson & Jones Oils, Inc.,
20 S.W.3d 678, 682 (Tenn. Ct. App. 1999). However, when a contract contains ambiguous or vague
provisions, these provisions will be construed against the party responsible for drafting them.
Hanover Ins. Co. v. Haney, 221 Tenn. 148, 153-54, 425 S.W.2d 590, 592-93 (1968); Realty Shop,
Inc. v. RR Westminster Holding, Inc., 7 S.W.3d 581, 598 (Tenn. Ct. App. 1999).
Neither the 1992 Policies and Procedures Manual nor the 1996 Severance Policy explicitly
states that Lincoln Brass Works guarantees the payment of severance pay or any other benefits. Nor
2
Reed v. Alamo Rent-A-Car, Inc., 4 S.W.3d 677, 687 (Tenn. Ct. App. 1999) (finding an enforceable contract
in a document stating that it was the “entire ag reem ent of em ploym ent” and that the emp loyer agreed to abide by all of
its terms and co nditions); Hamby v. Gensco, Inc., 627 S.W.2d at 376 (finding an enforceable contract in an employee
handbook stating that it contained the employer’s “guaranteed policies, practices, and procedures” as long as the
emp loyment relationship continued).
3
Guekel v. Cumberland-Swan, Inc., No. 01A0 1-9410-CV -00482, 199 5 W L 3865 58, at *3 (Tenn. Ct. App. June
30, 199 5) (N o T enn. R . App . P. 11 application filed ); Gaines v. Response Graphics, Inc., No. 01A01-9204-CV-00181,
1992 WL 319441, at *2 (Tenn. Ct. App. Nov. 6, 1992) (No Tenn. R. App. P. 11 application filed ); Crigger v. Colu mb ia
Power & Water Sy s., No. 01A 01-9 001 -CV -000 36, 1 990 W L 12 157 0, at *2 (Te nn. Ct. App . Aug. 2 4, 19 90), perm. app.
denied (Tenn. Ja n. 28, 199 1).
4
King v. TFE, Inc., 15 S.W .3d at 461 -62; Rose v. Tipton Cou nty Pub. Wo rks Dep’t, 953 S.W.2d at 693-94;
Bringle v. Methodist Hosp., 701 S.W .2d 6 22, 6 24 (Tenn. Ct. A pp. 1 985 ).
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do they contain a specific disclaimer that they are not intended to be contracts or that they are subject
to unilateral revision by Lincoln Brass Works. The Severance Policy states that it “is designed to
provide a period of income after termination to eligible employees” and that
Severance payments will be paid at the rate of one half month’s salary
for each full year of employment, as of the termination date, with a
maximum payment of six months (deductions will be made as
required by law).
It also states that Lincoln Brass Works’s management “has sole discretion to determine eligibility
for severance pay.”
In the absence of more general language regarding Lincoln Brass Works’s contractual
intentions regarding the benefits offered in its Policies and Procedures Manual or Severance Policy,
the most significant phrase illuminating what Lincoln Brass Works had in mind with regard to
severance pay is the statement “[s]everance payments will be paid.” The choice of the phrase “will
be paid” could have one of two meanings in this context. First, because the Policies and Procedures
Manual and Severance Policy are “adhesion contracts,”5 it could reflect Lincoln Brass Works’s
obligation to pay severance benefits. Second, it could express a future contingency. BRYAN A.
GARNER, A DICTIONARY OF MODERN LEGAL USAGE 941-42 (2d ed. 1995). Contracts of adhesion
are construed against their drafters. Griffin v. Shelter Mut. Ins. Co., 18 S.W.3d 195, 199-200 (Tenn.
2000). Accordingly, we construe the Severance Policy against Lincoln Brass Works and find that
it embodies an enforceable obligation to pay severance benefits to “eligible employees.”
The discretion that Lincoln Brass Works retained in the Severance Policy did not involve
determining whether or not to pay severance pay but rather involved determining whether a
particular employee was “eligible” to receive severance pay. According to the policy, an employee’s
eligibility to receive severance pay did not depend on the company’s cash flow but rather on whether
the employee had voluntarily terminated his or her employment or had been “discharged for cause.”6
Thus, Lincoln Brass Works’s reservation of its prerogative to determine whether a particular
employee was eligible to receive severance pay is not inconsistent with our conclusion that eligible
employees had a vested right to receive severance pay from the time the policy was adopted until the
time it was formally rescinded.
The cases relied on by Lincoln Brass Works do not support its argument that retaining the
discretion to determine whether an employee is eligible to receive severance pay permits an
employer to deny severance pay to otherwise eligible employees. MacDougal v. Sears, Roebuck &
Co., 624 F. Supp. 756 (E.D. Tenn. 1985) involves an employee who sought severance pay even
5
An adhe sion co ntract is simply a standard printed contra ct prepared by o ne pa rty to be signed by the p arty in
a weaker bargaining position who has little choice about the terms of the co ntract. Buraczynski v. Eyring, 919 S.W.2d
314, 320 (Tenn. 1996) (characterizing an adhesion contract as a standardized contract offered on an essentially “take
it or leave it” basis without affording a reasonable oppo rtunity to bargain).
6
The Severance Policy states that a discharge for cause “shall be for reasons determined by Company
management and shall include, but not be limited to, unsatisfactory performance and misconduct.”
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though he had been terminated for “wrongful conduct.” The United States District Court granted
the employer’s motion for summary judgment and dismissed the claim because (1) the personnel
manual stated that severance pay would not be given to employees terminated for willful misconduct
and (2) the manual itself specifically disclaimed providing employees “any additional rights to
employment or employment benefits.” MacDougal v. Sears Roebuck & Co., 624 F. Supp. at 759.
Abbott v. Kellwood Co., Gibson Law. No. 1, 1985 WL 661896 (Tenn. Ct. App. Aug. 23,
1985) involved a group of employees who were discharged when a manufacturing plant was sold as
a going concern to another company. The employees filed suit seeking vacation and severance pay.
The trial court determined that the labor contract indicated that severance pay “was intended only
to be paid where the employees did not have new employment lined up” and that each employee
suing for severance pay had, in fact, been hired by the purchaser of the plant.7 Because the
employees seeking severance pay had “new employment lined up,” this court concluded that the trial
court “had a reasonable basis upon which to deny severance pay.” Abbott v. Kellwood Co., 1985 WL
661896, at *3.8
In Abbott v. Kellwood Company, we concluded that the employees could not “reasonably rely
on the promise of severance pay except in the discretion of the company.” Abbott v. Kellwood Co.,
1985 WL 661896, at *4.9 Based on the specific language in the 1996 Severance Policy, we find that
Lincoln Brass Works’s employees could reasonably rely on the company’s promise of severance pay
except when the company, in its discretion, determined that an employee was not eligible to it.
Under the terms of the Severance Policy, an employee’s eligibility to receive severance pay depended
only on the circumstances surrounding his or her termination. Employees who quit voluntarily or
who were terminated for cause were not eligible to receive severance pay. Because this record
contains no evidence that Ms. Vargo quit voluntarily or was terminated for cause, we conclude that
the trial court had a reasonable factual basis for determining that she was entitled to severance pay
under Lincoln Brass Works’s Severance Policy.
7
Earlier in its opinion, this court noted that the emp loyees were d ischarged when K ellwoo d Comp any sold its
plant as a going concern to Active Genera tion, Inc. and that many of the discharged Kellwood emp loyees were
imme diately hired by Active Generatio n, Inc. without any interrup tion in their work. Abbott v. Kellwood Co., 19 85 W L
661896, at *1.
8
This court also stated that the “policy” of the labor contract “indicated” that there was no meeting of the minds
with respect to severance pay because the decision to give severance pay was “unilateral,” the employees “did not
contribute to secure the right,” and the “reservation is absolute.” Abbott v. Kellwood Co., 1985 WL 661896, at *4.
Because the opinion does not set out the disputed severance pay section, we cannot determine reliably what language
prompted the conclusion that decisions regarding severance pay were unilateral or that the reservation [of the obligation
to pay severa nce p ay] was abso lute.
9
W e decline to follow Abbott v. Kellwood Com pany to the extent that its outcome may have been predicated
on the company’s reservation of the right to decide whether an employee was eligible to receive severance pay. An
emp loyer’s reservation o f the right to d etermine an emplo yee’s eligib ility to receive an em ploym ent ben efit does not
necessarily mean that eligible employees do not have an enforceable contractual right to that benefit. Under the facts
in the Abbott v. Kellwood opinion, the employees seeking severance pay were not eligible to receive it because they
alread y had new em ploym ent lined up.
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Written contracts whose terms are plain and unambiguous should be enforced according to
their plain terms. Bob Pearsall Motors, Inc. v. Regal Chrysler-Plymouth, Inc., 521 S.W.2d 578, 580
(Tenn. 1975); Pitt v. Tyree Org. Ltd., 90 S.W.3d 244, 252 (Tenn. Ct. App. 2002). Accordingly, the
post-contracting conduct of the parties does not figure prominently in the analysis when a court is
called upon to construe and give effect to an unambiguous contract. However, when a particular
contractual provision is ambiguous, the “rule of practical construction” permits the courts to use the
contracting parties’ conduct and statements regarding the disputed provision as guides in construing
and enforcing the contract. Fidelity-Phenix Fire Ins. Co. v. Jackson, 181 Tenn. 453, 466-67, 181
S.W.2d 625, 631 (1944); American Barge Line. Co. v. Jones & Laughlin Steel Corp., 179 Tenn. 156,
173-74, 163 S.W.2d 502, 509 (1942); Williamson County Broadcasting Co. v. Intermedia Partners,
987 S.W.2d 550, 552 (Tenn. Ct. App. 1998).
We have already noted that the Severance Policy’s use of the phrase “[s]everance payments
will be paid” is ambiguous because it could connote either an obligation or a future contingency.
Our construction of this language as connoting a contractual obligation to pay severance pay to
eligible employees is buttressed by the evidence regarding Lincoln Brass Works’s interpretation and
application of the clause after its adoption in 1996. Prior to the 1998 reduction in force, Lincoln
Brass Works had consistently paid severance benefits to employees who had not quit voluntarily or
who had not been terminated for cause. Business employers are rarely gratuitous when it comes to
their employees’ salary and benefits. Accordingly, the company’s practice of consistently paying
eligible employees severance pay fairly reflects its understanding that it was contractually obligated
to do so.
IV.
We affirm the judgment and remand the case to the trial court for further proceedings
consistent with this opinion. We tax the costs of this appeal to Lincoln Brass Works, Inc. and its
surety for which execution, if necessary, may issue.
_____________________________
WILLIAM C. KOCH, JR., JUDGE
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