984 P.2d 1138 (1999) 194 Ariz. 501

Roger DEMASSE; Maria A. Garcia; Billy W. Jones; Viola Munguia; Greg Palmer; Socorro Soza, Plaintiffs-Appellants.
v.
ITT CORPORATION, a Delaware Corporation dba ITT Cannon, Defendant-Appellee.

No. CV-97-0177-CQ.

Supreme Court of Arizona, En Banc.

May 25, 1999.

*1140 Jack Levine, Phoenix, Attorney for Plaintiffs-Appellants.

Bryan Cave L.L.P. By: John Alan Doran, Teresa D. Forst, Sherin S. Vitro, Merritt L. Bingham, Phoenix, Attorneys for Defendant-Appellee.

Ryley, Carlock & Applewhite By: Michael D. Moberly, Phoenix, Attorneys for Amicus Curiae Phelps Dodge Corporation.

Quarles & Brady By: Jon E. Pettibone, Phoenix, Attorneys for Amicus Curiae Cyprus Climax Metals Company.

David C. Larkin, P.C. By: David C. Larkin, Tempe, Attorney for Amici Curiae Sharon Dick, Dianne Aragon, and Elizabeth Prior.

The Langerman Law Offices By: Amy G. Langerman, Richard W. Langerman, Phoenix, Attorneys for Amicus Curiae Arizona Employment Lawyers Association.

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?

*1141 ¶ 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 *1142 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 *1143 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 implied-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 *1144 Handbooks: Further Encroachments on the Employment-At-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, *1145 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 cites^[5] 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 McIlravy. 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 McIlravy, 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.

*1146 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 ha