Demasse v. ITT Corp. , 194 Ariz. 500 ( 1999 )

OPINION

FELDMAN, Justice.

¶ 1 The United States Court of Appeals for the Ninth Circuit certified to us two questions of Arizona law. We have jurisdiction pursuant to article VI, § 5(6) of the Arizona Constitution, A.R.S. § 12-1861, and Rule 27, Arizona Rules of the Supreme Court.

¶ 2 The certified questions are:

1. Once a policy that an employee will not be laid off ahead of less senior employees becomes part of the employment contract under Leikvold v. Valley View Community Hospital, 141 Ariz. 544, 688 P.2d 170 (1984), as a result of the employee’s legitimate expectations and reliance on the employer’s handbook, may the employer thereafter unilaterally change the handbook policy so as to permit the employer to layoff employees without regard to seniority?

2. In order to sue for breach of contract on the ground that an employer is bound by representations made in its handbook, must employees exhaust the complaint procedure described in the same handbook?

¶ 3 The questions certified posit that the layoff seniority provision has become part of the employment contract. See Leikvold, 141 Ariz. at 546, 688 P.2d at 172. Using this assumption, we respond to each question in the negative.

FACTS AND PROCEDURAL HISTORY

¶4 ITT Cannon (“ITT”) is a Delaware corporation primarily engaged in defense contracting in the Phoenix area. ITT hired Roger Demasse, Maria A. Garcia, Billy W. Jones, Viola Munguia, Greg Palmer, and Socorro Soza (collectively “Demasse employees”) as hourly workers at various times between 1960 and 1979. Although it is unclear when ITT first issued an employee handbook, evidently there have been five editions, the most recent in 1989.

¶ 5 Because the complete handbooks are not part of our record, we decide this case in the context of the limited provisions before us, using the certified question’s predicate that the seniority layoff promise became part of the Demasse employees’ contract. Thus the questions of which terms in the manual and what additional circumstances, if any, formed the implied-in-fact contract are left for the federal court. See Leikvold, 141 Ariz. at 548, 688 P.2d at 174 (holding that whether any particular manual provision modifies any particular employment-at-will relationship and becomes part of the particular employment contract is a question of fact). Given the question certified, we take as a fact that the seniority layoff provision was contractual.¹

¶ 6 We note, however, that all five handbooks apparently included the seniority layoff provision. The earliest version provided simply that layoffs within each job classification would be made in reverse order of seniority. Later versions also gave more senior employees the ability to “bump” less senior employees. The issues presented focus on the 1989 handbook, which included two new provisions. First, a disclaimer added to the first page ‘Welcome” statement provided that “nothing contained herein shall be construed as a guarantee of continued employment____ ITT Cannon does not guarantee continued employment to employees and retains the right to terminate or layoff employees.” ITT Cannon Handbook for Hourly Employees 1989, Appellant’s Brief, Appendix V, at 24. Second, this Welcome statement included a new modification provision, which read:

Within the limits allowed by law, ITT Cannon reserves the right to amend, modify or cancel this handbook, as well as any or all of the various policies, rules, procedures and programs outlined in it. Any amendment or modification will be communicated to affected employees, and while the handbook provisions are in effect, will be consistently applied.

Id. The 1989 edition also provided that “specific provisions of policies, rules, procedures and programs supersede[] the contents of this handbook,” thus apparently allowing ITT to modify specific provisions through methods other than issuing a new handbook. Id. When the 1989 handbook was distributed, ITT employees signed an acknowledgment that they had received, understood, and would comply with the revised handbook. Demasse v. ITT Corp., 915 F.Supp. 1040, 1043 (D.Ariz.1995).

¶7 Four years passed before ITT notified its hourly employees that effective April 19, 1993, its layoff guidelines for hourly employees would not be based on seniority but on each employee’s “abilities and documentation of performance.” Demasse, Soza, and Palmer were laid off ten days after the new policy went into effect, Munguia five days later, and Jones and Garcia almost nine months later. All were laid off before less senior employees but in accordance with the 1993 policy modification.

¶ 8 The Demasse employees brought an action in federal district court alleging they were laid off in breach of an implied-in-fact contract created by the pre-1989 handbook provisions requiring that ITT lay off its employees according to seniority. The parties filed cross-motions for summary judgment. The court first examined ITT’s handbook disclaimer statements and, as a matter of law, found them not clear and conspicuous enough to prevent formation of an implied-in-fact contract. Id. at 1043-44. Instead, the judge found the language “could be read to mean that termination or layoff will always be completed according to the terms provided in the handbook.” Id. at 1044. Thus, whether an implied-in-fact contract covering layoff seniority rights had been created remained a question of fact precluding summary judgment on that issue. Id. (citing Wagenseller v. Scottsdale Mem’l Hosp., 147 Ariz. 370, 382, 710 P.2d 1025, 1037 (1985); Leikvold, 141 Ariz. at 548, 688 P.2d. at 174).

¶ 9 As a second, dispositive matter, however, the judge ruled that even if an implied-in-fact contract had been created, only the provisions of the most recent handbook provided its presently enforceable terms. See id. (citing Chambers v. Valley Nat’l Bank, 721 F.Supp. 1128, 1131 (D.Ariz.1988)). Under this interpretation, the terms of the Demasse employees’ implied-in-fact contract with ITT at any given time were those of ITT’s most recently published handbook. Id. at 1044-45. Consequently, the judge found that when ITT modified the handbook in 1989, the newly added and amended terms automatically became part of the contract, including the modification provision authorizing subsequent unilateral changes. Id. at 1045. As a result, when ITT distributed the 1993 “revised layoff policy,” which removed seniority rights and stated that it superseded previous handbooks, ITT validly and unilaterally modified the contract. Id. Because only the 1989 terms, as amended by the 1993 notice, were in effect when the Demasse employees were laid off, the judge held as a matter of law that ITT “did not breach the contract.” Id. at 1046. The judge thus allowed ITT to unilaterally alter its contract with the Demasse employees.

¶ 10 On appeal, the Ninth Circuit agreed that Leikvold controls the issue of whether the older handbooks’ seniority provisions became part of the employment contract. Demasse v. ITT Corp., 111 F.3d 730, 733 (9th Cir.1997). But unlike the district court, the circuit court recognized that the truly difficult question was “whether ITT could unilaterally change layoff policies which were an enforceable part of the Demasse employees’ contract of employment by simply issuing the 1989 handbook declaring that it could amend its handbooks and policies — and then [implementing that provision] by modifying its layoff policy in 1993.” Id. at 734. ITT argued that as a matter of Arizona law it was “free” to “discard a layoff selection methodology that had become outdated.”² Id. at 733. The Demasse employees responded that ITT could not remove its contractual seniority layoff provision without additional consideration. Id. The circuit court recognized that the federal district courts had concluded that Arizona law recognized continued employment alone as sufficient consideration to modify the contract terms so that when employees continued to work after a new handbook was distributed, the new edition superseded prior editions. Id. at 734-35. The circuit court then observed that although the district courts have so construed Arizona law, no Arizona appellate court has directly addressed this issue. Thus, the court certified the question to us. Id. at 735-36.

QUESTION 1

A. The implied-in-fact contract

¶ 11 Because we answer the first question on its premise that a contract exists, we discuss the implied-in-fact contract term only to distinguish the present situation from a complete at-will agreement. The difference is dispositive with regard to methods necessary for modification.

¶ 12 Complete at-will employment is for an indefinite term, and American courts have come to hold it can be terminated at any time for good cause or no cause at the will of either party. See, e.g., Wagenseller, 147 Ariz. at 375-76, 710 P.2d at 1030-31. At-will employment contracts are unilateral and typically start with an employer’s offer of a wage in exchange for work performed; subsequent performance by the employee provides consideration to create the contract. See Wagner v. City of Globe, 150 Ariz. 82, 85, 722 P.2d 250, 253 (1986) (citing 1A A. Corbin, Corbin on Contracts § 152, at 13-14 (1963)). Thus, before performance is rendered, the offer can be modified by the employer’s unilateral withdrawal of the old offer and substitution of a new one: the employer makes a new offer with different terms and the employee again accepts the new offer by performance (such as continued employment). Thus a new unilateral contract is formed — a day’s work for a day’s wages. See id.; Pine River State Bank v. Mettille, 333 N.W.2d 622, 626-27 (Minn.1983); see also Mattison v. Johnston, 152 Ariz. 109, 112, 730 P.2d 286, 289 (App.1986). But the parties are free to create a different relationship beyond one at will “and define the parameters of that relationship, based upon the totality of their statements and actions.” Wagner, 150 Ariz. at 86, 722 P.2d at 254.

¶ 13 Arizona recognizes that irnplied-in-fact contract terms may create an exception to employment that is completely at will. See Wagenseller, 147 Ariz. at 376, 710 P.2d at 1031. While employment contracts without express terms are presumptively at will, an employee can overcome this presumption by establishing a contract term that is either expressed or inferred from the words or conduct of the parties. See id. at 381, 710 P.2d at 1036; Leikvold, 141 Ariz. at 548, 688 P.2d at 174. When so inferred, the implied-in-fact term is part of the contract. Wagenseller, 147 Ariz. at 381, 710 P.2d at 1036. An example of such a term is one that offers the employee job security — one specifying the duration of employment or limiting the reasons for dismissal. See id.; Leikvold, 141 Ariz. at 548, 688 P.2d at 174; see also Berube v. Fashion Ctr. Ltd., 771 P.2d 1033, 1044 (Utah 1989).

¶ 14 When employment circumstances offer a term of job security to an employee who might otherwise be dischargable at will and the employee acts in response to that promise, the employment relationship is no longer at will but is instead governed by the terms of the contract. See Wagenseller, 147 Ariz. at 381-83, 710 P.2d at 1036-38; Leikvold, 141 Ariz. at 546-48, 688 P.2d at 172-74; see also Carroll v. Lee, 148 Ariz. 10, 13, 712 P.2d 923, 926 (1986); Swingle v. Myerson, 19 Ariz.App. 607, 609, 509 P.2d 738, 740 (1973) (“There is no difference in the legal effect between an express contract and an implied contract.”).

¶ 15 This, of course, does not mean that all handbook terms create contractual promises. A statement is contractual only if it discloses “a promissory intent or [is] one that the employee could reasonably conclude constituted a commitment by the employer. If the statement is merely a description of the employer’s present policies ... it is neither a promise nor a statement that could reasonably be relied upon as a commitment.” Soderlun v. Public Serv. Co., 944 P.2d 616, 620 (Colo.App.1997). An implied-in-fact contract term is formed when “a reasonable person could conclude that both parties intended that the employer’s (or the employee’s) right to terminate the employment relationship at-will had been limited.” Metcalf v. Intermountain Gas Co., 116 Idaho 622, 778 P.2d 744, 746 (1989) (citing Wagenseller, 147 Ariz. at 381, 710 P.2d at 1036; Duldulao v. St. Mary of Nazareth Hosp. Ctr., 115 Ill.2d 482, 106 Ill.Dec. 8, 505 N.E.2d 314 (1987); 1A A. Corbin, supra § 17, at 38 (1960)).

¶ 16 When an employer chooses to include a handbook statement “that the employer should reasonably have expected the employee to consider as a commitment from the employer,” that term becomes an offer to form an implied-in-fact contract and is accepted by the employee’s acceptance of employment. Soderlun, 944 P.2d at 621. Thus, handbooks can include a variety of non-promissory information for employees: the company’s mission, employee guidelines, expressions of policy regarding opening and closing hours, and benefits. While a handbook generally promulgates company rules, mostly non-contractual in nature, only a few substantively govern the employee’s job and employment expectations. See Richard J. Pratt, Unilateral Modification of Employment Handbooks: Further Encroachments on the Employment-Atr-Will Doctrine, 139 U. Pa. L. Rev. 197, 205 (1990).

B. Modification

¶ 17 ITT argues that it had the legal power to unilaterally modify the contract by simply publishing a new handbook. But as with other contracts, an implied-in-fact contract term cannot be modified unilaterally. See Stephen Carey Sullivan, Unilateral Modification of Employee Handbooks: A Contractual Analysis, 5 Regent U.L. Rev. 261, 286 (1995). Once an employment contract is formed — whether the method of formation was unilateral, bilateral, express, or implied — a party may no longer unilaterally modify the terms of that relationship.³ See id.; Toth v. Square D Co., 712 F.Supp. 1231, 1235-36 (D.S.C.1989); see also Thompson v. Kings Entertainment Co., 674 F.Supp. 1194, 1198 (E.D.Va.1987) (holding modification is not automatic and effective solely on issuance of new handbook); but see Fleming v. Borden, Inc., 316 S.C. 452, 450 S.E.2d 589 (1994); Progress Printing v. Nichols, 244 Va. 337, 421 S.E.2d 428 (1992).⁴

¶ 18 The cases dealing with employment contracts are merely part of the general rule that recognizes no difference in legal effect between an express and an implied contract. See Carroll, 148 Ariz. at 13, 712 P.2d at 926 (citing Restatement (Second) of Contracts § 19 cmt. a (hereinafter Restatement)). Thus an implied-in-fact employment term must be governed by the same traditional contract law that governs express promises and must be modified accordingly. See McIlravy v. Kerr-McGee Corp., 119 F.3d 876, 881 (10th Cir.1997); Yeazell v. Copins, 98 Ariz. 109, 115-16, 402 P.2d 541, 545-46 (1965) (“He who asserts the modification of a contract has the burden of proof.”); Bishop Realty v. Perk Inc., 292 S.C. 182, 355 S.E.2d 298, 300-01 (1987). As a result, to effectively modify a contract, whether implied-in-fact or express, there must be: (1) an offer to modify the contract, (2) assent to or acceptance of that offer, and (3) consideration. See Toth, 712 F.Supp. at 1235-36; see also McIlravy, 119 F.3d at 881; Robinson v. Ada S. McKinley Community Serv. Inc., 19 F.3d 359, 364 (7th Cir.1994); Doyle v. Holy Cross Hosp., 186 Ill.2d 104, 237 Ill.Dec. 100, 708 N.E.2d 1140, 1144 (1999); Brodie v. General Chem. Corp., 934 P.2d 1263, 1268 (Wyo.1997).

¶ 19 The 1989 handbook, published with terms that purportedly modified or permitted modification of pre-existing contractual provisions, was therefore no more than an offer to modify the existing contract. See Toth, 712 F.Supp. at 1236; Thompson, 674 F.Supp. at 1197. Even if the 1989 handbook constituted a valid offer, questions remain whether the Demasse employees accepted that offer and whether there was consideration for the changes ITT sought to effect.

1. Continued employment alone does not constitute consideration for modification

¶ 20 Under Arizona law, consideration necessary to modify an existing contract is “any detriment to promise[e], or benefit to promisor” that supports the new promise. Stovall v. Williams, 100 Ariz. 1, 4, 409 P.2d 711, 713 (1966); see also USLife Title Co. v. Gutkin, 152 Ariz. 349, 354, 732 P.2d 579, 584 (App.1986); Restatement § 71. Moreover, legal consideration, “like every other part of a contract, must be the result of agreement. The parties must understand and be influenced to the particular action by something of value ... [that is] recognized by all [parties] ... as the moving cause.” Yuma Nat’l Bank v. Balsz, 28 Ariz. 336, 343, 237 P. 198, 200 (1925). Consideration will be found when an employer and its employees have made a “bargained for exchange to support [the employees’] ... relinquishment of the protections they are entitled to under the existing contract.” Doyle v. Holy Cross Hosp., 289 Ill.App.3d 75, 224 Ill.Dec. 507, 682 N.E.2d 68, 72 (1997), aff'd 186 Ill.2d 104, 237 Ill.Dec. 100, 708 N.E.2d 1140 (1999).

¶ 21 The cases ITT cites⁵ hold that continued work alone both manifested the Demasse employees’ assent to the modification and constituted consideration for it. We disagree with both contentions and the cases that support them. Separate consideration, beyond continued employment, is necessary to effect a modification. See McIlravy, 119 F.3d at 880; Brodie v. General Chem. Corp., 112 F.3d 440 (10th Cir.1997); Robinson, 19 F.3d at 364 (Under Illinois law acceptance and consideration “cannot be inferred from [employee’s] continued work”; there must be some benefit to employee, detriment to employer, or employee’s continued work under new manual must have been bargained-for exchange.); Doyle, 237 Ill.Dec. 100, 708 N.E.2d at 1144 (when employee has implied-in-fact job security term, continued work gives no benefit to employee and works no detriment to employer and thus is not consideration); Jewell v. North Big Horn Hosp. Dist., 953 P.2d 135, 138 (Wyo.1998); Michael Starr, Blasts from the Past: Superseded Employment Handbooks Live On, 12 No. 8 Corp. Couns. 1, 14 (1998) (stating that it is not uncommon for courts to require that new consideration be something beyond continued employment).

¶ 22 The Tenth Circuit Court of Appeals recently dealt with this issue in Mcllravy. Kerr-McGee issued five handbooks over a twelve-year span. The early handbooks contained a seniority layoff provision. Later handbooks contained disclaimer provisions expressly stating that employment with Kerr-McGee was at will. Applying Wyoming law, the Tenth Circuit held that Kerr-McGee failed to show that the disclaimer successfully modified the pre-existing implied-in-fact contract created by the earlier handbooks. 119 F.3d at 881. To effect a modification, Kerr-McGee had to show an offer, assent, and consideration. Id. “As far as consideration is concerned, an employee’s continued employment will not suffice for modification that restores at-will status; separate consideration must be provided.” Id. (citing Brodie, 934 P.2d at 1269). Following Brodie and Mcllravy, as well as the other cases cited above, we, too, hold that continued employment alone is not sufficient consideration to support a modification to an implied-in-fact contract. Any other result brings us to an absurdity: the employer’s threat to breach its promise of job security provides consideration for its rescission of that promise.

2. Acceptance

¶ 23 Continued employment after issuance of a new handbook does not constitute acceptance, otherwise the “illusion (and the irony) is apparent: to preserve their right under the [existing contract] ... plaintiffs would be forced to quit.” Doyle, 237 Ill.Dec. 100, 708 N.E.2d at 1145 (citing Doyle, 224 Ill.Dec. 507, 682 N.E.2d at 68). It is “too much to require an employee to preserve his or her rights under the original employment contract by quitting working.” Brodie, 934 P.2d at 1268; see Robinson, 19 F.3d at 364; Torosyan v. Boehringer Ingelheim Pharmaceuticals, Inc., 234 Conn. 1, 662 A.2d 89, 99 (1995). Thus, the employee does not manifest consent to an offer modifying an existing contract without taking affirmative steps, beyond continued performance, to accept.

There is no doubt that the parties to a contract may by their mutual agreement accept the substitution of a new contract for the old one with the intent to extinguish the obligation of the old contract, but one party to a contract cannot by his own acts release or alter its obligations. The intention must be mutual.

Yeazell, 98 Ariz. at 116, 402 P.2d at 546 (quoting York v. Central Ill. Mut. Relief Ass’n, 340 Ill. 595, 173. N.E. 80, 83 (1930)); see also Thompson, 674 F.Supp. at 1199. If passive silence constituted acceptance, the employee “could not remain silent and continue to work. Instead [he] would have to give specific notice of rejection to the employer to avoid having his actions construed as acceptance. Requiring an offeree to take affirmative steps to reject an offer ... is inconsistent with general contract law.” Thompson, 674 F.Supp. at 1199 (citing 1 S. Williston, A Treatise on the Law of Contracts § 91 (W. Jaeger 3d ed.1957)). The burden is on the employer to show that the employee assented with knowledge of the attempted modification and understanding of its impact on the underlying contract. See Toth, 712 F.Supp. at 1235-36; see also Robinson, 19 F.3d at 364; Bartinikas v. Clarklift, Inc., 508 F.Supp. 959, 961 (N.D.Ill.1981); Torosyan, 662 A.2d at 98-99.

¶24 To manifest consent, the employee must first have legally adequate notice of the modification. See Helle v. Landmark, Inc., 15 Ohio App.3d 1, 472 N.E.2d 765, 777 (1984) (“[A]ny contemplated modification would require legally adequate notice to the employees of the proposed change, in addition to the other elements of contract modification”). Legally adequate notice is more than the employee’s awareness of or receipt of the newest handbook. See Toth, 712 F.Supp. at 1235-36 (mere receipt of revised manual is not consent to proposed modification). An employee must be informed of any new term, aware of its impact on the pre-existing contract, and affirmatively consent to it to accept the offered modification. See Preston v. Claridge Hotel & Casino, Ltd,., 231 N.J.Super. 81, 555 A.2d 12, 16 (1989) (employees were “oriented” with handbook that explained what they could expect in terms of employment and what would be expected of them, but when employees were issued “revised” handbooks, they were not “reoriented” as to significance of newly added contractual disclaimer, thus preventing disclaimer from taking effect).

¶ 25 When ITT distributed the 1989 handbook containing the provisions permitting unilateral modification or cancellation, it did not bargain with those pre-1989 employees who had seniority rights under the old handbooks, did not ask for or obtain their assent, and did not provide consideration other than continued employment. The employees signed a receipt for the “1989 handbook stating that they had received the handbook[,] understood that it was their responsibility to read it, comply with its contents, and contact Personnel if they had any questions concerning the contents.” Demasse, 915 F.Supp. at 1043. The Demasse employees were not informed that continued employment — showing up for work the next day — would manifest assent, constitute consideration, and permit cancellation of any employment rights to which they were contractually entitled. Thus, even if we were to agree that continued employment could provide consideration for rescission of the job security term, that consideration would not have been bargained for and would not support modification. Thus, even if we were to agree that continued employment could provide consideration for rescission of the job security term, that consideration would not have been bargained for and would not support modification. Our courts have not adopted any conflicting principle.

C. Arizona courts have not recognized an employer’s right to unilaterally modify a pre-existing implied-in-fact employment contract

¶ 26 The notion that Arizona law allows an employer to unilaterally modify a preexisting implied-in-fact employment contract to restore employees to discharge-at-will status originates from Bedow v. Valley Nat’l Bank, 5 IER cases 1678, 1680, 1988 WL 360517 (D.Ariz.1988). The Bedow court held that “as a matter of basic contract law, each successive version of defendant’s personnel policy manual modifies and supersedes prior issued versions,” citing only out-of-state eases as direct support. Id. Although there was no Arizona law on point, the judge concluded that Arizona law implicitly supported such a holding, citing Mattison, 152 Ariz. 109, 730 P.2d 286. Id. But Mattison's holding that continued employment for a substantial period of time was sufficient consideration to support a post-employment restrictive covenant agreement was made in a case in which the court of appeals believed it was dealing with only complete at-will employment. 152 Ariz. at 112, 730 P.2d at 289. Unlike the present case, the Mattison employees had no job security term. Thus, even if Mattison’s holding is correct, it cannot control what consideration would be necessary to modify a contract containing such a term. We do not believe Mattison should apply to either the situation in Bedow or the present case.

¶ 27 In a subsequent case, a United States district court judge held an employer’s unilateral addition of a disclaimer in a revised handbook was valid even though it destroyed pre-existing implied-in-fact job security terms. Chambers, 721 F.Supp. 1128 (citing Mattison and Leikvold). Like Bedow, Chambers relied on Mattison for the conclusion that “an offer of a modification to a unilateral contract of employment ... [can be] accepted by continuing ... employment,” even though Mattison dealt only with at-will discharge. Id. at 1131-32. Chambers also cited Leikvold for the proposition that an employer could add a contractual disclaimer that returned the relationship to at-will status. Id. at 1131. Thus Chambers assumed the validity of any unilateral amendment made by the employer during the time the contract was in effect and looked only to the handbook terms existing at the time the employee was terminated. Id. Despite the fact the employee in Chambers was hired and worked for fourteen years under an implied-in-fact job security term, Chambers permits the employer to unilaterally disclaim those provisions and terminate the employee. Id. at 1129, 1132.

¶ 28 If Chambers is good law, Leikvold’s implied-in-fact exception is meaningless. If a contractual job security provision can be eliminated by unilateral modification, an employer can essentially terminate the employee at any time, thus abrogating any protection provided the employee. For example, an employer could terminate an employee who has a job security provision simply by saying, “I revoke that term and, as of today, you’re dismissed” — no different from the full at-will scenario in which the employer only need say, “You’re fired.” This, of course, makes the original promise illusory. We therefore disagree with Chambers and Bedow.

¶29 Leikvold gives employers a method to avoid creating implied-in-fact relationships from handbook representations but does not permit retroactive and unilateral rescission of contractual terms. 141 Ariz. at 548, 688 P.2d at 174. The case holds that an employer is “certainly free to issue no personnel manual at all or to issue a personnel manual that clearly and conspicuously tells [its] employees that the manual is not part of the employment contract and that their jobs are terminable at the will of the employer.” Id. We followed that language, however, with the statement that “if an employer does choose to issue a policy statement, in a manual or otherwise, and, by its language or by the employer’s actions, encourages reliance thereon, the employer cannot be free to only selectively abide by it. Having announced a policy, the employer may not treat it as illusory.” Id. Nothing could be more illusory than to hold that after an employer makes contractual promises, it may issue a new handbook that unilaterally rescinds them, then fire its employees in violation of its original but since obviated promises.

¶ 30 In the briefs and at oral argument, as well in the dissents, there was a note of concern that holding that an employer could not cancel existing contractual terms by issuing a new handbook would be a radical departure from Arizona law. We blaze no new ground in this opinion. It has always been Arizona law that a contract, once made, must be performed according to its terms and that any modification of those terms must be made by mutual assent and for consideration. See Angus Med. Co. v. Digital Equip. Corp., 173 Ariz. 159, 164, 840 P.2d 1024, 1029 (App.1992); Nationwide Resources Corp. v. Massabni, 134 Ariz. 557, 563, 658 P.2d 210, 215 (App.1982); Coronado Co. v. Jacome’s Dep’t Store, Inc., 129 Ariz. 137, 140, 629 P.2d 553, 556 (App.1981); Yeazell, 98 Ariz. at 115-16, 402 P.2d at 545-46. To those who believe our conclusion will destroy an employer’s ability to update and modernize its handbook, we can only reply that the great majority of handbook terms are certainly non-eontractual and can be revised, that the existence of contractual terms can be disclaimed in the handbook in effect at the time of hiring and, if not, permission to modify can always be obtained by mutual agreement and for consideration. In all other instances, the contract rule is and has always been that one should keep one’s promises.

D. Justice Jones’ dissent

¶31 All concede, including ITT and the dissent, that the question certified requires us to assume the handbook and whatever other dealings may have taken place between ITT and the Demasse employees created a contractual provision that restricted ITT’s ability to discharge. Nevertheless, the dissent argues, this relationship was still completely at will in nature — an offer of a day’s wages for a day’s work. Dissent at ¶¶ 58.⁶ This view cannot survive the posture of the case as presented, for then the promise could have been revoked on the very day made and on any day thereafter. The certified question does not posit an unenforceable, illusory contract.

¶ 32 How the contract is labeled — “at will,” “at will but modified by an implied-in-fact term,” or “implied in fact” — is not the issue. Whatever the label, the question assumes there was a contract including the job security provision, so the issue in this ease is simply whether that contractual term, express or implied-in-fact, may be unilaterally rescinded by ITT. The dissent evidently agrees that this is the issue because the dissenting opinion is primarily directed at the proposition that ITT could unilaterally modify the contract by inserting the disclaimer provision in the 1989 handbook and then issuing the 1993 change revoking the layoff provision.

¶33 The dissent first argues that this 1989 modification was effective because ITT provided consideration by continuing to provide jobs and because the Demasse employees manifested their assent by continuing to work at their jobs. Dissent at ¶¶ 63-64. The dissent finds legal support for this position because ITT retained the ability to shut down the whole operation at any time, and its failure to do so constituted consideration for the modification. Dissent at ¶ 63. Further consideration is found in the fact that the Demasse employees did not exercise their right to quit. Dissent at ¶ 64. We are unable to agree with this view of the employment relationship. The Illinois Supreme Court answered a similar argument in words we believe are applicable to the dissent:

[W]e are unable to conclude that consideration exists that would justify our enforcement of the modification against existing employees. Because the defendant was seeking to reduce the rights enjoyed by the plaintiffs under the employee handbook, it was the defendant, and not the plaintiffs, who would properly be required to provide consideration for the modification. But in adding the disclaimer to the handbook, the defendant provided nothing of value to the plaintiffs and did not itself incur any disadvantage. In fact, the opposite occurred: the plaintiffs suffered a detriment — the loss of rights previously granted to them by the handbook — while the defendant gained a corresponding benefit.

For these reasons, we agree with the plaintiffs that, after an employer is contractually bound to the provisions of an employee handbook, unilateral modification of its terms by the employer to an employee’s disadvantage fails for lack of consideration____Applying well-established principles of contract law, these courts have held that modifications to terms and provisions of employee handbooks cannot apply to existing employees in the absence of consideration. Moreover, these eases have held that the requisite consideration for a modification that would operate to an employee’s disadvantage is not supplied simply by the employee’s continued work for the employer. That is to say, in addition to an offer and acceptance, consideration must be found elsewhere, ...

* H* *

If, as [the employer] argues, [the employees’] continued work amounts to acceptance and consideration for the ‘loss’ of their right under the economic-separation policy, then the only way [the employees] could preserve and enforce their contractual rights would have been to quit working after [the employer] unilaterally issued the disclaimer. This would make the promise by [the employer] not to terminate, except under the terms of the economic-separation policy, illusory. The illusion (and the irony) is apparent: To preserve their right under the economic-separation policy the [employees] would be forced to quit.

Doyle, 237 Ill.Dec. 100, 708 N.E.2d at 1144-1146 (quoting Doyle, 224 Ill.Dec. 507, 682 N.E.2d at 68) (citations omitted).

¶ 34 Of course, nothing in the agreement deprived ITT of the privilege of going out of business, merging with another company, shutting down its factory, or taking any other action not addressed in the contract. But failure to do what is permitted is not consideration unless such forbearance is bargained for. See Restatement § 71(1), (2), and cmts. b and a (substituted contract must be accepted by the obligee before it replaces the provisions of the original contract). We believe it is even more unrealistic to find consideration in whatever detriment ITT may suffer because, as the Martone dissent implies, its unilateral modification may cause declining morale in the work place. See Martone dissent at ¶86. The Demasse employees’ unhappiness on learning that ITT would not perform its promise was certainly to be expected, but it did not provide consideration to transform ITT’s anticipatory breach into a valid agreement to modify. See Restatement §§ 71 and 73.

¶ 35 As a second rationale supporting ITT’s right of unilateral amendment, the dissent suggests an “express rejection of strict rules of contract modification.” Dissent at ¶ 74. This argument is based on the language found in In re Certified Question/Bankey v. Storer Broadcasting Co.⁷ and is described by the dissent and a commentator as an “administrative law model.” Dissent at ¶ 75 (quoting Henry H. Perritt, Jr., Employee Dismissal Law & Practice § 4.44 (3d ed.1992)). We do not believe the analogy is apt. When a promise is contractual, its enforceability should be determined under the law of contracts. We do not agree that a party to a contract containing a term that proves to be inconvenient, uneconomic, or unpleasant should have the right, like an administrative agency, “to change the rules prospectively through proper procedures.” Dissent at ¶ 75 (quoting Perritt, supra § 4.44). According to Bankey, unilateral contract modification is achieved by simply publishing a new handbook with an additional clause stating that the contract has been changed. See Bankey, 443 N.W.2d at 121. We do not believe contract law recognizes such a right.

¶36 Next, the dissent would recognize ITT’s “unilateral right to change” a contract term as a matter of “equity and pragmatic reason,” citing a number of cases, including Bedow and Bankey, that purport to justify a variety of unilateral employer modifications when made in good faith in pursuit of legitimate business objectives. Dissent at ¶ 78 (quoting Bankey and citing Woolley v. Hoffmann-LaRoche, Inc., 99 N.J. 284, 491 A.2d 1257 (1985)). Accepting, arguendo, that ITT was operating in good faith and in pursuit of its legitimate business objectives in modifying the handbook, we nevertheless conclude that contract law does not give ITT the right to do so unilaterally. Woolley, in fact, rejects the approach later taken by Bankey and does not support the dissent. See Woolley, 491 A.2d at 1267. Self-interest may certainly provide a party with a legitimate business reason to request assent to a contract change, but the law has never before permitted unilateral change or excused non-performance of a contract on such a ground. Id. at 1269-71. Nor, we believe, would ITT recognize that its employees have such a unilateral right.

¶37 The dissent suggests certain legitimate business interests that would provide an employer with legal justification to unilaterally amend an employment contract. See dissent at ¶ 83. While such concerns may be legitimate, they do not legally justify an employer’s disregard of its other contractual obligations. For example, economic hardship may force an employer to reduce its work force, although the employer may desire to keep its most productive employees and terminate the least productive ten percent. Even if the employees to be terminated have a contract limiting the employer’s termination rights to situations when the employer has good cause, some cases recognize that the employer may be entitled to eliminate the least productive without regard to seniority. See, e.g., Soderlun, 944 P.2d at 619 (citing cases holding that economic hardship constitutes good cause to terminate employee). When the employees to be terminated have a contract that includes a reverse seniority provision, however, the employer can still eliminate ten percent of the work force as long as it does so in compliance with the provision binding it to first eliminate the last employees hired. Those who argue that this is not the most cost-efficient method to determine which employees should be retained must keep in mind that the employer chose to offer the reverse seniority policy, and that those who make contracts must perform. Thus we simply disagree with the cases the dissent cites for the legitimate business interests theory. See dissent at ¶ 83.

¶38 Finally, the dissent is correct that Leikvold holds that a handbook statement or promise will not be considered contractual in nature if an adequate disclaimer is made. See dissent at ¶ 83. But the facts hypothecated to us indicate no disclaimer was made before the contract of employment, that the layoff provision became part of the employment contract, and that ITT thereafter unilaterally attempted to change the promise. Leikvold does not say that the disclaimer can be effective when published after the contract has been made. Neither Leikvold nor any of our cases have held or stated, even in dicta, that such provisions may be inserted ex post facto, as it were, to change existing contractual provisions. The principle is well stated in Woolley and, we believe, answers the contention that enforcing contractual promises will mean the death of handbooks. Martone dissent at ¶ 86.

Our opinion need not make employers reluctant to prepare and distribute company policy manuals. Such manuals can be very helpful tools in labor relations, ... and we would regret it if the consequence of this decision were that the constructive aspects of these manuals were in any way diminished. We do not believe that they ... should be diminished as a result of this opinion.

All that this opinion requires of an employer is that it be fair. It would be unfair to allow an employer to distribute a policy manual that makes the workforce believe that certain promises have been made and then to allow the employer to renege on those promises. What is sought here is basic honesty: if the employer, for whatever reason, does not want the manual to be capable of being construed by the court as a binding contract, there are simple ways to attain that goal. All that need be done is the inclusion in a very prominent position of an appropriate statement that there is no promise of any kind by the employer contained in the manual; that regardless of what the manual says or provides, the employer promises nothing and remains free to change wages and all other working conditions without having to consult anyone and without anyone’s agreement;____

491 A.2d at 1271 (emphasis added); see also Doyle, 237 Ill.Dec. 100, 708 N.E.2d at 1145.

¶ 39 The dissent attempts to reach conclusions about what the parties intended at the time they made the contract of employment. But what each party intended depends on what representations were made in the handbooks, what may have been said in the hiring process, and how each understood the bargain. We have no record from which to determine any of this, and our case law indicates such questions are ordinarily questions of fact. The district judge denied summary judgment because the nature of the bargain between the parties was a question of fact. Respectfully, we believe the dissenters err in attempting to decide these issues as if they were questions of law.

E. Justice Martone’s dissent

¶40 The substantive portion of Justice Martone’s dissent is based on Bankey, together with his views of the nature of the promise and the future of handbooks. For the reasons previously set forth, we disagree. We also refuse to follow Bankey’s rationale or model.

¶ 41 In footnote 1 to his dissent, Justice Martone raises a question about the method followed to hear and decide this case. He notes that we did not reschedule oral argument after Justice Moeller retired and his successor had been appointed. Id. (citing and quoting Hazine v. Montgomery Elevator Co., 176 Ariz. 340, 344-45, 861 P.2d 625, 629-30 (1993)). His comments needlessly raise a question of institutional practice, if not integrity, and thus require that we address the matter even though it was not raised and is not before the court.

¶ 42 Hazine’s procedural advice is inapplicable here because of an important factual difference. Our comments in Hazine were addressed to the situation the court faced in Bryant v. Continental Conveyor & Equipment Co., 156 Ariz. 193, 751 P.2d 509 (1988). Justice Hays had retired when Bryant was argued, and the process of filling the vacancy was under way. It was in that context that Justice Moeller, writing for the Hazine court, noted:

Bryant was argued while a vacancy on the court was in the process of being filled. A visiting judge was called in and the case was decided on a 3 to 2 basis, with the permanent members of the court splitting 2 to 2. Bryant was therefore suspect authority from the moment it was issued, particularly given the preexisting Boswell [v. Phoenix Newspapers, Inc., 152 Ariz. 9, 730 P.2d 186 (1986)] opinion. In retrospect it would have been advisable, when it became known that a split in a court in transition was occurring, to delay argument, or to have reargument.

In the recent past, this court has, when confronted with a 2 to 2 split by permanent members of the court, declined to render a decision ... [citing cases].

Hazine, 176 Ariz. at 344-45, 861 P.2d at 629-30.

¶43 This case, on the other hand, was argued on October 23, 1997, and a tentative disposition reached and assignment of the opinion made, as usual, at conference shortly after argument. At that time, Justice Moeller was a regularly appointed, permanent member of the court. Although final decision and filing of this opinion occurred after Justice Moeller’s retirement on January 31, 1998, his participation conforms to the court’s regular practice both before and after Ha-zine.

¶ 44 In fact, Justice Moeller participated, without objection or comment, in twenty-two other cases in which the same practice was followed, among them State v. Greene, a capital case in which Justice Martone wrote the court’s opinion affirming the death penalty and Justice Moeller made the three-justice majority. 192 Ariz. 431, 967 P.2d 106 (1998).

QUESTION 2

¶ 45 The second certified question turns on whether the Demasse employees failed to exhaust the grievance procedure outlined in the employee handbook before they filed suit. Due to the lack of a complete series of ITT’s handbooks, it is difficult to determine when the provision was added to the handbook. As of the 1989 version, the complaint procedure read as follows:

If you have a personal problem that is work related, or if you feel a policy, rule, or procedure in this handbook has not been fairly administered in your particular ease, you [sic] first step is to discuss it frankly with your supervisor. Your supervisor is the most important person to you and your success on your job. If, after an open discussion with your supervisor concerning your problem, you are not satisfied, ITT Cannon has an open door policy that gives you the freedom to take your problem to the next level of management within your department. If you are still not satisfied, you may also contact a representative of the Personnel Department. Remember, your first step is to take the problem to your supervisor. If this informal procedure is not satisfactory in resolving your problem in relations to the administration of a policy, rule or procedure in this handbook, you may take the option of submitting a formal complaint. The formal complaint must be in writing and submitted to the Personnel Department within five (5) workings [sic] days of the occurrence of the facts concerning the complaint. The written complaint statement must include the names of two employees selected from the department in which the complaint occurred. These two employees will serve on a complaint committee along with two other members selected by management to serve on the same committee. The complaint will then be reviewed by these four persons.

If the committee fails to reach a majority decision, the complaint may be submitted to the Division General Manager for final resolution.

Further details concerning this procedure can be obtained from your supervisor. A direct line of communication between you and your supervisor will usually resolve any work related problems.

ITT Cannon Handbook for Hourly Employees 1989, Appellant’s Brief, Appendix V, at 24.

¶46 When the Demasse employees filed their breach of contract claim in federal court, ITT counterclaimed that the remedy for any grievance must be pursued via ITT’s complaint procedure. Moreover, ITT asserted this was an exclusive remedy, barring the Demasse employees from filing suit even after their termination. ITT argues that the Demasse employees cannot sue without first exhausting the handbook grievance procedures, citing both Moses v. Phelps Dodge Corp., 818 F.Supp. 1287 (D.Ariz.1993), and Thomas v. Garrett Corp., 744 F.Supp. 199 (D.Ariz.1989). We answer the question on the assumption that the quoted complaint procedure was a part of the Demasse employees’ contract.

¶ 47 We do not find helpful the two cases on which ITT relies. In Thomas, the primary issue was whether an employee handbook with a clear and conspicuous disclaimer created an implied-in-fact contract between the employer and its employees. 744 F.Supp. at 200. The judge found that due to the clarity and conspicuousness of the disclaimer, an implied-in-fact contract had not been created. At the end of the decision, the judge said that even if the handbook had created a contract, that contract included an internal grievance procedure that had to be exhausted before bringing suit. Id. at 202. Because Thomas does not provide the text of the procedure, we do not know its terms and whether it extended to complaints regarding employee termination.

¶48 In Moses, the court held that an employee was barred from filing suit by the express terms of the grievance procedure provided in the employees’ handbook. 818 F.Supp. at 1291. The employee contended that the procedure was permissive, not mandatory, and she was therefore not required to exhaust it. Id. at 1290. The judge found, however, that the explicit text of the grievance procedure provided otherwise. Id. at 1291. Specifically, the provision read that the procedures “set forth in this Employee Handbook constitute the sole and exclusive procedure for the processing and resolution of any controversy, complaint, misunderstanding or dispute that may arise concerning any aspect of your employment or termination of your employment.” Id. at 1290-91. The court found the language was clear and unambiguous and thus controlled the employee’s remedy.

¶ 49 The complaint procedure in ITT’s handbook is much different from the provision in Moses. ITT’s complaint procedure first directs that if an employee has “a problem that is work related, or if you feel a policy, rule or procedure in this handbook has been unfairly administered in your particular case, your first step is to discuss it frankly with your supervisor. Your supervisor is the most important person to you and your success on the job.” ITT argues that the Demasse employees should have utilized this procedure. But once terminated, an employee no longer has a supervisor. Thus the designated complaint avenue is cut off. See Dutrisac v. Caterpillar Tractor Co., 749 F.2d 1270, 1274 (9th Cir.1983) (to bring suit, employee must first either exhaust the contractual grievance procedure or prove he was prevented from exhausting that procedure). Additionally, the remainder of the grievance procedure provides that “if you are not satisfied, ITT Cannon gives you the freedom to take your problem to the next level of management”; if still unsatisfied, “you may contact a representative of the Personnel Department.” And if the informal procedure is not satisfactory, “you may take the option of submitting a formal complaint.” Finally, employees are reminded that direct communication with supervisors will “usually resolve work related problems.” Nowhere does ITT’s provision state that it is either an exclusive remedy or applies to breach of contract termination grievances. Thus, unlike the provision in Moses, ITT’s handbook provision is permissive, not mandatory, and only contemplates resolution of work-related, not termination-related, grievances.

¶ 50 We conclude that failure to exhaust the grievance procedure does not preclude a terminated employee from filing suit. Therefore we need not address here whether a provision that provides an exclusive remedy would validly preclude a terminated employee from filing a breach of contract claim.

CONCLUSION

¶ 51 We answer the questions certified as follows:

Question 1: An employer cannot unilaterally modify and thus negate the effect of implied-in-faet contractual terms by subsequently publishing a handbook permitting unilateral modification or rescission. Modification of the terms of implied-in-fact contracts are governed by traditional contract law principles, which require assent and consideration to the offer of modification. Continued employment alone will not suffice. Because the question certified posits that the Demasse employees have a contract term providing them layoff seniority rights, ITT could not unilaterally change the handbook policy to rescind or reserve the right to rescind those provisions.

Question 2: ITT’s complaint procedure does not provide either that it is an exclusive remedy or that it applies to termination grievances; therefore, the Demasse employees were not required to exhaust the complaint procedure before bringing an action for breach of contract.

CONCURRING: THOMAS A. ZLAKET, Chief Justice, JAMES MOELLER, Justice (Retired).

1 . ITT apparently conceded this in district court. See Demasse v. ITT Corp., 915 F.Supp. 1040, 1043 (D.Ariz.1995) (noting that “[d]efendants do not dispute that these pre-1989 handbooks create a contract term requiring layoffs to be made according to seniority”).

2 . ITT cited Chambers, 721 F.Supp. 1128, Bedow v. Valley National Bank, 5 IER Cases 1678, 1988 WL 360517 (D.Ariz.1988), and Duncan v. St. Joseph's Hospital & Medical Center, 183 Ariz. 349, 903 P.2d 1107 (1995), for support. Demasse, 111 F.3d at 733.

3 . In the unilateral or at-will context, once the offer is accepted by commencement of performance, the terms cannot be changed. Restatement (Second) of Contracts § 45. Thus, if an employer offers a day’s pay for a day’s work, the employer cannot, after employee performance, reduce the offer of pay that induced the performance.

4 . Dissenting, Justice Jones argues that in Fleming and Progress Printing, the South Carolina and Virginia Supreme Courts rejected the Toth and Thompson approaches. Dissent at ¶¶ 79-80. We do not agree. In Fleming, the South Carolina court refused to follow either Toth or the view advanced by ITT, which would recognize a right of unilateral modification. Instead, the Fleming court held that when the employer has provided employees with actual notice of a modification, continued work will evidence assent to that modification, but the question of actual notice and assent will be for the jury. 450 S.E.2d at 595-96. Progress Printing considered which of two documents given to a probationary employee thirteen days apart, if not both, governed the terms of his employment from the outset. 421 S.E.2d at 430-31. Nowhere in Progress Printing did the court refer to or dimmish Thompson. For the reasons stated in ¶ 23, we disagree with the approach taken by Fleming and believe Progress Printing is not on point with the issues presented in this case.

5 . See, e.g., Pine River State Bank, 333 N.W.2d at 627; Hogue v. Cecil 1. Walker Mach. Co., 189 W.Va. 348, 431 S.E.2d 687, 691 (1993).

6 . Unless otherwise indicated, reference to a single dissent is to the dissent by Vice Chief Justice Jones.

7 . 432 Mich. 438, 443 N.W.2d 112 (1989).