The Evolution of Unjust-Dismissal Legislation in the United States

Abstract

In the last decade, state courts in many areas of the United States have ruled in favor of employees alleging they were improperly dismissed. Many economists have contended that any judicial or legislative departure from the employment-at—will doctrine is regressive and inefficient because it restricts employment flexibility and freedom of contract. This paper advances an evolutionary theory of unjust-dismissal legislation in which employer groups eventually support unjust-dismissal legislation in response to the threat of large and variable damage awards imposed by the judicial system. Legislation is sought to clearly define property rights and to limit employer liability. In comparison to the common law, the unjust-dismissal laws that have been proposed are likely to result in smaller awards, reduce uncertainty, resolve disputes rapidly, and reduce legal and other transactions costs. An institutional and empirical analysis supports the conclusion that the proposal of unjust-dismissal legislation is a response to court rulings that weaken and obfuscate the employers’ right to dismiss employees at will. This evidence is inconsistent with the conventional political-economy view of unjust-dismissal legislation.