LITIGATION ALERT: EMPLOYER LIABILITY: Punitive Damages for Employees Terminated for Refusal to Perform an Illegal Act

The Texas Supreme Court recently rendered an important decision which has the potential to expand an employer's liability for wrongful termination of employees in Texas.  Texas is an at-will employment state where employers have the ability to terminate the employment relationship at any time and for almost any reason.  One of the few exceptions to Texas's at-will employment doctrine is the public policy exception when an employee is terminated for refusal to perform an illegal act.  These Sabine Pilot wrongful discharge claims were judicially created to prevent employees from having to choose between their livelihoods and breaking the law.  In Safeshred, Inc. v. Louis Martinez, III, the Texas Supreme Court considered whether punitive damages were available against an employer for Sabine Pilot claims, and what must be shown as a prerequisite for those damages.  The Court ultimately held that these claims bear the hallmarks of a tort claim and that punitive damages are available upon a proper showing of malice, which must exist separate and apart from the act of firing itself.  The Court's holding is best understood through an examination of the facts and public policy considerations, as discussed below:  

A.    Facts of the Case

The Plaintiff, Louis Martinez, III ("Martinez") worked for Safeshred, Inc. ("Safeshred") as a commercial truck driver, responsible for hauling loads of cargo between various metropolitan Texas locations.  Before each haul, Martinez was required to inspect his truck and the cargo to confirm compliance with relevant safety regulations and other applicable law.  On numerous occasions, Martinez discovered safety violations with the truck and the cargo but was ordered to drive the truck anyway.  On a subsequent trip, Martinez was cited by a Department of Public Safety officer for numerous violations of state and federal regulations, including those previously pointed out by Martinez.  Martinez testified that he showed this citation to Safeshred management and described the problems with the vehicle and cargo to them.  As Martinez was told by the DPS officer not to drive the truck until the problems were remedied, he subsequently refused to make his hauls.

Martinez was placed on administrative duties for a week, while Safeshred alleged they were bringing the truck into compliance.  Upon the vehicle's return, Martinez noted that some of the defects on the truck itself were corrected, while the problems with the cargo remained.  After various disputes with management over the safety of the load, Martinez resumed making his delivery but returned after a few miles when he felt the cargo shift and feared for his safety.  Martinez once again advised Safeshred but again he was directed to drive the truck or go home.  Martinez refused, went home and was terminated.

Shortly thereafter, Martinez brought a wrongful termination claim against Safeshred under Sabine Pilot and was awarded lost wages, mental anguish damages and exemplary damages.  The court of appeals found insufficient evidence to support mental anguish, but affirmed Martinez's other two awards.

B.    The Supreme Court's Holding and Public Policy Considerations

The Texas Supreme Court first considered whether a Sabine Pilot claim sounds in tort or contract, as that question categorically determines the availability of punitive damages.  Punitive damages are not available solely for a breach of contract claim.  See e.g. Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 571 (Tex. 1981).  Safeshred argued that the employment relationship is one lying in contract and that wrongful termination claims supplement that relationship with an implied provision preventing an employer from terminating an employee for refusing to perform an illegal act.  After examining the split of authority on this issue in other jurisdictions, the Court held that these claims sound in tort and that plaintiffs may recover tort damages, including punitives.

The Court noted that this holding was consistent with its treatment of statutory workers' compensation retaliation claims (another narrow employment-at-will exception), which the Court previously labeled as a tort.  See Cont'l Coffee Prods. Co. v. Cazarez,
937 S.W.2d 444, 453 (Tex. 1996).   Additionally, the Court noted that the decision to label this conduct as a tort supports the public policy considerations embodied in criminal law.

C.    Malice Required to Support Sabine Pilot Exemplary Damages

Exemplary damages in Texas require a showing of malice which varies with the nature of the wrongful act at issue.  When a claim requires harm as a necessary element of liability (such as the illegality of the firing in a Sabine Pilot claim), willfulness alone is not sufficient to support a claim for punitive damages.  See Ware v. Paxton, 359 S.W.2d 897, 899 (Tex. 1962).  Thus, the Court reasoned that a finding of malice here requires more than an employer's mere intent to terminate an employee.  As the illegal activity the employer desires is never actually performed, allowing punitives on this basis alone would punish the employer for conduct that never actually occurs.

In order to demonstrate malice that justifies punitive damages, plaintiffs must show that the employer intended or ignored an extreme risk of some additional harm.  The Court noted four examples of situations where malice might exist in the Sabine Pilot context such as where the employer:

1. circulates false or malicious rumors about the employee before or after the discharge;
2. actively interferes with the employee's ability to find other employment;
3. engages in harassment in connection with a wrongful firing (such as forcing an employee to sign a false confession, singling out an employee for unfavorable work assignments and conducting an unfair disciplinary hearing prior to the firing); or
4. knows the retaliatory firing is unlawful and does it anyway.

While this list is not comprehensive, it provides employers insight into the types of activities that have the potential to expose them to punitive damages.

In this case, the Court noted that the only evidence presented relevant to the malice inquiry was that Safeshred designated Martinez as ineligible for rehire in its internal employment records, further noting that the reason for his termination was job abandonment.  As there was no evidence these records were ever communicated outside the company (and Martinez promptly obtained new employment—eventually within the same industry), Martinez could not demonstrate malice and his punitive damages award was overturned.  Interestingly, the Court noted that had Safeshred merely transferred Martinez to another position rather than terminating him, Martinez may not have had a valid Sabine Pilot claim, which only prohibits discharge.

D.    Lessons For Employers

• • The Safeshred, Inc. v. Louis Martinez, III decision confirms the availability of increased damages in the Sabine Pilot context but correspondingly requires a heightened showing of malice existing outside of the act of firing itself.
  • Proper training on employee demeanor both before and after adverse employment  decisions as well as proper documentation and execution by an employer are key given the availability of punitive damages.
  • Employers should carefully consider future reference checks by potential  employers of terminated employees and ensure that any sensitive or potentially damaging remarks on internal employment records are not shared with other companies.
  • Employers should consider retaining counsel prior to adverse employment decisions to ensure that proper procedures are in place that could help prevent potential allegations of malice in alleged wrongful termination claims.

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This Litigation Alert is a summary of recent developments in the law and is provided for informational purposes only.  It is not intended to constitute legal advice or to create an attorney-client relationship.  Readers should obtain legal advice specific to their situation in connection with topics discussed.

Copyright © 2012 Kane Russell Coleman & Logan PC.  All rights reserved.  Unless otherwise indicated, the authors are not certified by the Texas Board of Legal Specialization.

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