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Fraudulent Inducement of Employment Contract

employment attorney san diegoThis article discusses California law with regard to fraudulent inducement of employment, a situation in which an employer is alleged to have made false statements to a prospective employee for the purpose of inducing the candidate to accept the employer’s job offer. It also explores the remedies available to an employee against an employer where the employee suffers injury as a result of an employer’s alleged fraudulent inducement.

Facts Establishing Fraudulent Inducement

In Lazar v. Superior Court (Rykoff-Sexton, Inc. (1996) 12 Cal. 4th    631, the Defendant employer (“Rykoff”) made certain representations and promises to Plaintiff Lazar for the purpose of inducing Lazar to quit his well-paying job in New York and move to Los Angeles to accept employment with Rykoff.  Lazar had been employed with a family-owned restaurant equipment company in New York for 17 years, and was then the president of the company, earning $120,000 a year.  Lazar accepted the job offered by Rykoff, based on Rykoff’s representations and promises, uprooted his wife and two teenage children from their home in New York, and moved to California.

Lazar performed his job well, but was nonetheless terminated from his employment with Rykoff after just two years of employment. Rykoff told Lazar his job was being eliminated due to a management reorganization. Lazar thereafter sought, but was unsuccessful in obtaining comparable employment. Lazar subsequently sued Rykoff, asserting claims for (1) violation of Labor Code §970 (false representation to induce relocation), (2) wrongful termination in violation of public policy, (3) intentional misrepresentation, (4) negligent misrepresentation, (5) breach of contract, (6) intentional infliction of emotional distress, and (7) negligent infliction of emotional distress. The trial court dismissed all of Lazar’s claims except his breach of contract claim and his claim for violation of Labor Code §970.

In his complaint filed against Rykoff, Lazar alleged that the employer a) promised Lazar he would continue to be employed by Rykoff as long as he did a good job, b) represented that its financial health was excellent, and c) promised Lazar’s salary would begin at $130,000 a year and would quickly rise to $150,000. Lazar further alleged that each of these representations was false and were known by Rykoff to be false at the time they were made to Lazar. In particular, Lazar alleged that Rykoff intended to treat Plaintiff as an at-will employ who could be terminated for any or no reason, at any time. Further, Rykoff’s financial condition was shaky at best, and in fact, Rykoff was planning an operational merger to ensure its continued existence, which would eliminate Lazar’s position. Moreover, Lazar’s salary could not quickly rise to $150,000, since company policy limited raises to 2 to 3% per year.

California Supreme Court Decision

Following various rulings in the case, the California Supreme Court granted Lazar’s petition for review, but made it clear that the only issue it would consider and decide was “whether or under what circumstances a plaintiff may state a cause of action for fraudulent inducement of employment contract.” [emphasis added].

The Supreme Court held that Lazar could sue Rykoff for damages based on Rykoff’s alleged fraudulent representations and promises inducing Lazar to quit his job and move his family to Los Angeles, to accept employment with Rykoff. In so ruling, the Supreme Court stated:

Consistent with the foregoing, as to his fraud claim, Lazar may properly seek damages for the costs of uprooting his family, expenses incurred in relocation, and the loss of security and income associated with his former employment in New York.

Id.

The Court further explained that, in pursuing its claim against Rykoff for fraudulent inducement of employment, Lazar could properly seek damages for “all the detriment proximally caused thereby,” citing Civil Code §3333. Id. This measure of damages could include not only Lazar’s loss of income from his former job in New York, but also damages for the emotional distress Lazar suffered as a result of Rykoff’s alleged fraud, including Lazar’s resulting loss of employment with Rykoff and inability to find substitute employment. Also noteworthy, the Supreme Court also held that Lazar was entitled to seek punitive damages based on his claim of fraudulent inducement.

Conclusion

The California Supreme Court’s decision in the Lazar case is important, in part, because it has a more far-reaching effect than Labor Code §970, which provides that it is unlawful for an employer to “knowingly make false representations” concerning (1) the kind, character or existence of work offered, (2) the length of time the work will last, (3) the compensation for the work, (4) the sanitary or housing conditions relating to the work, or (5) the existence or nonexistence of any strike, lockout or other labor dispute, to induce an employee to relocate in order to accept a job with the employer.

In contrast, the Supreme Court’s decision in Lazar applies to any and all misrepresentations or false promises which induce a person to enter into employment, and not simply representations or promises which induce one to relocate in order to accept such employment.  Moreover, the Lazar decision enables employees who have been induced to accept employment based on other fraudulent conduct, and not simply “knowingly false representations,” to sue for fraudulent inducement.  For instance, an employee may sue for fraudulent inducement to accept employment if the employer’s representations or promises are not known by the employer to be false, if the employer does not have good reason to believe them to be true (negligent misrepresentation). Similarly, in certain circumstances, an employer may be liable even if he/she makes no misrepresentations whatsoever, if he/she conceals material facts which, if known to the employee, would cause the employee to decline the offer of employment, This holding means that an employee may recover damages against an employer for misrepresentations or omissions in a very broad range of circumstances, making it extremely important for employers to take care when soliciting employment candidates.

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By | 2017-09-11T06:15:32+00:00 May 10th, 2016|Labor & Employment Law|Comments Off on Fraudulent Inducement of Employment Contract