Employer's Subjective Test of Performance Sustained as Basis for Contract Termination

Article

The Employment and Labor Law Alert

March 25, 2003

Subjective evaluations of employee performance are appropriate bases for employment decisions, according to the New Jersey Supreme Court. In Silvestri v. Optus Software, Inc., 175 N.J. 113 (Jan. 23, 2003), the Court reviewed an employee’s claim of breach of contract, arising from his termination for failure to fulfill a satisfaction clause, and held that an employer’s subjective evaluation of satisfaction is a sufficient defense to the breach of contract claim.

The Facts

Plaintiff Silvestri was employed by Defendant Optus under a two-year contract, which contained a clause that permitted Optus to terminate Silvestri’s employment for his “failure or refusal to perform faithfully, diligently or completely his duties…to the satisfaction” of the company. Silvestri’s duties included supervising support services staff, communicating with customers and coordinating training for support staff and sellers of the products. Approximately six months into the contract term, Optus’ president began receiving complaints about Silvestri’s support staff and Silvestri personally. These complaints were communicated to Silvestri, but were unresolved. Consequently, nine months in the contract, Optus terminated Silvestri.

Silvestri filed an action against Optus for breach of contract and tortious interference. The parties moved for summary judgment. In support of Optus’ motion, the company president submitted a certification, annexing e-mail communications from customers, in which they explicitly expressed their dissatisfaction. The certification also noted that Silvestri “had failed to ‘exhibit the leadership and management skills necessary to perform his duties to the Company’s satisfaction.'” Silvestri challenged whether Optus’s dissatisfaction was reasonable, asserting that the company had overreacted to customer complaints. The trial court granted summary judgment to Optus, upholding the company’s right to determine whether its employee’s performance was satisfactory.

Silvestri appealed, and the Appellate Division reversed and remanded, concluding that an employer may only invoke a satisfaction clause to terminate employment after satisfying an objective reasonable-person test. Thus, the Appellate Division determined that the reasonableness of Optus’ dissatisfaction with Silvestri was a triable issue of fact.

The Decision

On appeal, the Supreme Court affirmed the validity of satisfaction clauses, including those in which satisfaction is “dependent on the personal, honest evaluation of the party to be satisfied.” This evaluation need not incorporate a ‘hypothetical “reasonable” person’ standard, but rather can consist of individual, idiosyncratic judgment. This standard is in accordance with the recognized and accepted deference afforded business judgment, and an employer’s control of the workplace.

Nevertheless, termination under a contract’s satisfaction clause is not tantamount to an employee-at-will termination, as the contractual provision mandates dissatisfaction as the actual motivation for termination. In this regard, an employer’s mere dissatisfaction, even if idiosyncratic, is sufficient for termination, so long as it is honest and genuine. The Court warns, however, that the language of a contract guides the interpretation of the satisfaction clause. For example, a contract may contain a provision requiring “satisfaction as to mechanical fitness, utility or marketability.” In that case, performance can be measured by objective tests. Similarly, “profitability” may also be assessed on an objective basis. Thus, the standard to be applied will be found in the contract itself.

As Silvestri’s contract contained no indication that an objective test was required for performance evaluation, the Supreme Court held that Optus’ satisfaction was appropriately based on a subjective evaluation. Concluding that Silvestri’s only remaining challenge was to “whether the dissatisfaction with his performance was genuine,” the Court found that Silvestri had not even asserted that the dissatisfaction was not genuine or identified any other motivation for his termination. As Silvestri failed to make a prima facie challenge to the genuineness of Optus’ dissatisfaction, the Supreme Court remanded the matter for entry of summary judgment in Optus’ favor.

In a dissent, two members of the Court asserted both that an objective standard should be applied, and that, even if a subjective standard governs, the genuineness of the decision is a fact question appropriate for a jury trial. Specifically, the dissenting justices suggested that objective criteria might be imposed as a measure of Silvestri’s performance. Additionally, they noted, the employer’s ability to prepare the contract supports the imposition of an objective standard, so as to impose the burden of drafting and proof upon the employer. The dissent further asserted that an employee’s ability to disprove whether an employer’s reasons for termination are genuine requires favoring an objective standard. Finally, the dissenters found that a genuine issue of material fact existed with regard to the genuine nature of Optus’ dissatisfaction, and that the matter should be remanded.

Conclusion

The Silvestri case is instructive at multiple stages of an employment relationship: 1) at the pre-employment stage, employers desirous of entering into employment contracts must ensure that satisfaction clauses contain language so as to permit subjective evaluation; 2) during an employee’s employment, employers must honestly, subjectively monitor and evaluate performance, documenting concerns and deficiencies, even if same are idiosyncratic assessments; and 3) post-employment, an employer must be able to prove the genuineness of the evaluations and assessments as the basis for the action taken.