12.3 The Covenant of Good Faith and Fair Dealings in the Employment Context

• Jurisdiction: Arizona

12.3 The Covenant of Good Faith and Fair Dealings in the Employment Context. Plaintiffs sometimes attempt to allege a bad faith claim based upon a breach of the covenant of good faith and fair dealing. This is done as an attempt to circumvent Arizona law that precludes punitive damages in a breach of contract claim in the employment context.³⁰ As previously discussed, any breach of contract claim is governed by the AEPA.

Arizona law implies a covenant of good faith and fair dealing in every contract.³¹ The implied covenant of good faith and fair dealing prohibits a party from doing anything to prevent other parties to the contract from receiving the benefits and entitlements of the agreement.³² Nearly 30 years ago, the Arizona Supreme Court, in Wagenseller v. Scottsdale Memorial Hospital,³³ addressed the scope of the covenant of good faith and fair dealing’s application in the employment context. The supreme court stated:

Courts have generally rejected the invitation to imply such a duty in employment contracts, voicing the concern that to do so would place undue restrictions on management and would infringe the employer’s “legitimate exercise of management discretion.” We think this concern is appropriate.³⁴

As explained by the Arizona Court of Appeals in Woerth v. City of Flagstaff,³⁵ Arizona courts have consistently refused to recognize a tortious breach of the covenant of good faith and fair dealing:

Although Woerth refers to his claim for breach of the covenant of good faith and fair dealing as a claim sounding in tort, Arizona has consistently refused to recognize a tort action for breach of the implied covenant in the employment contract context.³⁶

It is apparent that Arizona law does not recognize a claim for bad faith or tortious breach of the implied covenant of good faith and fair dealing in the employment context for wrongful termination.³⁷ In the employment context, the covenant protects an employee only to the extent that the employer denied the terminated employee benefits agreed to in the actual employment contract.³⁸ Consequently, in a pure at-will employment contract situation where there are no agreed-to benefits and no promise of continued employment or tenure, a termination without cause does not breach the implied covenant of good faith and fair dealing.³⁹

Nevertheless, Arizona courts have recognized a limited circumstance where an employee can assert a claim for breach of the covenant of good faith and fair dealing in the...