The state of Montana is known for its beautiful landscapes, its abundant natural resources, and much more. But in the policy world, it’s known to many as the only state with just-cause, as opposed to at-will, employment. It’s a system that restricts the ability of employers to fire workers, but avoids litigation by providing clear standards. Workers across the country are seeking more protections after the experience of the pandemic, pushing union drives like the high-profile efforts at Amazon and Starbucks or simply relying on their leverage in a tight labor market. The Montana model can help inform debates about how to balance those worker protections with dynamic labor markets. Some states, including Illinois, have already considered moving to a just-cause system similar to Montana’s.
The muddy middle
At-will employment is the default employment scheme in the United States and, in its purest form, entails maximum flexibility for employers to fire employees without justification. However, across the 1970s and 1980s, U.S. state courts carved out a variety of exceptions to this regime in the spirit of protecting workers from the worst excesses of their employers. Across the United States, three common exceptions emerged: the public policy exception prevents employers from firing employees for behavior that contributes to the public good, like missing work to perform jury duty; the good faith exception prevents employers from firing workers to intentionally deprive them of a promised benefit, like a pension; and the implied-contract exception prevents employers from firing an employee after the employer implicitly suggests they would not do so. By the late 1990s, 43 state courts recognized the public policy exception, 11 recognized the good faith exception, and 41 recognized the implied-contract exception. What the adoption of these exceptions meant was the creation of something like a muddy middle, a system that was no longer purely at-will but also hadn’t transitioned to a purely just-cause approach either.
This muddy middle has had unintended consequences in the labor market. Whereas a pure at-will system is thought to maximize labor market efficiency, analyses from the early ‘90s suggested that states that chipped away at at-will employment, without moving fully to just-cause, saw a 2 to 5 percent reduction in aggregate state employment. A 2006 paper found a decline of 0.8 percent to 1.7 percent in aggregate state employment in the states whose courts adopted an implied contract exception in the ‘80s and ‘90s. These adverse effects stem from employers’ uncertainty when they can’t predict “the volume and cost of wrongful discharge litigation.” In other words, employers were both too scared to fire workers they already employed, for fear of being taken to court, and too scared to hire new employees that they would be unable to fire down the road, for the same reasons. In real terms, this can mean the loss of thousands of new jobs for states, employers, and workers alike.
These trends were quite pronounced in Montana. Beginning in 1982, Montana’s Supreme Court created exceptions to the state’s at-will employment scheme that increased employers’ liability and the damages workers could claim for firings. This expansion was burdensome for employers, who were suddenly liable to pay damages if they, for example, verbally told an employee they were up for a raise but failed to follow through. The threat of litigation was further elevated because the exceptions were defined by unclear standards that had to be adjudicated on a case-by-case basis. As noted above, employers were hesitant to terminate employees, even for what they felt were justifiable reasons, because they were unsure which firings would be approved by the court or a jury and which would not. Courts also delivered unpredictably large awards to wrongfully discharged employees, such as in 1987, when a Montana court awarded an employee $2.5 million. As a result, employment rates decreased in line with the studies cited above.
In effect, this muddy middle was something like the worst of all worlds. It decreased hiring while also creating an overly confusing system for job security that bred more uncertainty than protection. Montana’s legislature recognized the deficiencies of this middle position early and decided to pursue a different approach by codifying the laws more precisely and fully embracing just-cause. As described below, that approach bridged the gap between protecting employees from wrongful discharge and mitigating negative effects on the labor market.
The case for compromise
In Montana, the Legislature responded to these court decisions, and their harmful effects, by adopting a just-cause system that requires an employer to provide good reason for firing an employee, codifying a robust set of worker protections in the process — but not for the reasons one might expect.
With the confusion in the labor market as a backdrop, employers “recognized [their] economic interests in favorable tort reform” and lobbied the legislature to pass the Montana Wrongful Discharge from Employment Act of 1987 (MWDEA). The MWDEA was fundamentally the political outcome of powerful businesses pushing back against economically costly rulings. As the Roosevelt Institute has noted, labor groups didn’t support the bill at the time, mainly because they wanted to preserve the status quo that allowed workers to sue their employers for large damages. Still, the bill ended up as a compromise between more worker-friendly legislators and those of a more business-friendly orientation. Employers sacrificed their right to terminate employees “at will” in return for limits on the damages that could be assessed against them. From an employee’s point of view, workers of all stripes were now guaranteed protection from arbitrary dismissal in exchange for limits on their ability to sue their employer.
Any worker’s uncertainty over whom a court would side with in an arbitrary dismissal case disappeared with the passage of the MWDEA. So, even if workers lost some potential to sue their employer for damages, the MWDEA left them more secure than their peers in other states. Thus, this compromise shouldn’t be construed as a loss for workers, even if labor groups opposed it at the time. After all, this bill explicitly tells employers that they cannot fire an employee without providing just cause and jumping through administrative hoops. The MWDEA, in an irony of history, was a worker-friendly bill passed by a legislature intent on protecting employers.
This compromise steered the ship back to shore. While the court’s actions between 1982-1987 hurt employment, the passage of the MWDEA reversed this trend, adding 0.46 percentage points back to Montana’s annual rate of employment growth and restoring rates to their pre-1982 levels (see Figure 1). As a result, employers gained greater certainty and increased hiring, while workers maintained substantial security due to the newly codified set of protections.
Towards positive-sum outcomes
Montana’s common-law remedy system of the 1982-1987 period was something like a game of Russian roulette for both employees and employers. The legislature’s response, the MWDEA, provided a much-needed and clear-cut remedial process for unjust dismissal cases. What the Montana case shows above all is that the employment relationship need not be a zero-sum game. When employers don’t have to worry about every firing becoming an expensive lawsuit, hiring rates increase and workers have more opportunities to find work. At the same time, when workers don’t have to worry about being fired on a dime they can lead stable and productive lives.
A majority of U.S. states are still playing the game that Montana did during the 1980s, relying on their state courts to interpret exceptions to at-will employment on a case-by-case basis. As we’ve seen, this can have detrimental effects on employment growth and the labor market. As more states consider changing their employment system, Montana’s story can inform the debate and provide a useful case study. For business-friendly legislators, the Montana example suggests a way to boost small businesses and incentivize them to increase hiring. For labor-friendly legislators, it shows a way to codify a more robust set of worker protections without sacrificing employment rates. Overall, states across the political spectrum can benefit from taking a deeper look at Montana’s balanced approach.
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