In a tight job market marked by low unemployment, employers may be tempted to exaggerate job benefits or make unrealistic promises to attract new hires. Such impulses should be resisted, to avoid the risk of lawsuits based on a theory of fraudulent inducement to hire. Should the employment relationship end badly, unhappy former employees may sue on this theory if they feel they were hired under false pretenses.
While the elements of this claim vary depending on state law, in general, fraudulent inducement may be found if the employee can prove that the employer made a significant misrepresentation concerning the job or the company; the person making the statement knew or believed it was false at the time he or she made it; the statement was made with the intent of deceiving the prospective employee; and the prospective employee reasonably relied on the false statement and suffered damages because of that reliance. For the most part, damages must go beyond the loss of employment in order to state a claim.
Misrepresentations that have been found actionable include statements about the financial stability of the company; promises of compensation, benefits and support services that the company never intended to keep; and assurances of long-term job security that the employer does not intend to honor. In fact, claims have even been based on the failure to disclose harmful information, such as corporate financial instability, when the applicant makes inquiries and the employer’s concealment is intended to persuade the employee to accept employment.
In one New York case, a subsidiary of IBM was found liable for fraudulent hiring when it lured two IBM employees away by falsely representing that the subsidiary’s financial security was assured by a long-term contract with IBM. The court found that the employees stated a viable claim because their reliance on the false assurances caused them to lose salary, vacation pay and pension benefits they would have accrued had they not been persuaded to leave their old jobs. In another New York case, a law firm was found to have fraudulently induced an employee to leave her job by representing that she would lead the firm’s large environmental law practice when, in fact, it had no environmental practice.
Penalties can be costly. If the misrepresentation is found to be deliberately made for the purpose of luring the applicant, punitive damages may be imposed. In California, a provision of the labor law makes it a misdemeanor to make knowingly false representations to persuade potential employees to relocate in order to take a job. In addition to criminal penalties, California Labor Code Sec. 970 provides for double damages on any civil claims brought under the statute. In other states, as well, the potential for civil damages is heightened when a false promise or assurance convinces an applicant to give up their present job and relocate their home and family in order to take the new job.
Employers can take certain measures to reduce the likelihood of being faced with such lawsuits. First, all individuals involved in recruiting and hiring should be instructed not to make any statements about the company or the job they know are not true, or to make any promises concerning job functions, pay, benefits or job security that the employer does not intend to keep. While it is natural to present the job in a positive light, it is also wise to qualify statements so they will not be misconstrued as ironclad promises. If an opening is temporary, that fact should be disclosed.
Further, any written employment agreement should clearly spell out the terms of employment and state that the written agreement supercedes all prior agreements or understandings concerning employment. An unambiguous writing can demonstrate that it is not reasonable for the employee to rely on any contrary verbal statements. Similarly, written reminders that employment is at-will can undercut claims that the employee relied on promises of long-term job security. By avoiding false assurances and setting forth rights and responsibilities in clear writing, employers can prevent misunderstandings and reduce the chances of being held liable for fraudulent inducement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
