Overview of Texas employment contracts
An employment contract is an agreement between an employer and an employee that sets out the terms of employment, including the specifics of the job the employee will be doing, what the company is going to pay them, when the employee is expected to work, what benefits they will be entitled to, whether commission will be awarded, and what the employee’s rights are with regards to issues like vacation time, health insurance, and severance. Sometimes, these contracts are written formally, but often they’re not: even if there’s not a written contract in place, the existence of a verbal one is presumed. The contracts may be given in an official signed format or exist as a series of emails back and forth between a hiring manager and applicant, or between a human resources representative and potential new hire .
The term of employment can be indefinite or for a set period of time, such as through the end of a school year or until the employee has completed a specific project. A contract may have no effect on the at-will nature of the employment, but the terms of a contract stating how much notice an employer must give before terminating employment, or circumstances under which an employee can leave may have the effect of eliminating the at-will nature of the employment.
Contracts that comply with Texas and federal law are enforceable, but those that violate the law are not. This means that an otherwise legally compliant contract cannot be enforced if it is signed under conditions of coercion or fraud, and a contract that contradicts the law – for example, a contract that requires a worker to pay back wages to their employer in the event that the employer does not gain a promised contract or government approval – cannot be enforced.
Core components of a Texas employment contract
A well-drafted employment contract should include clear statements of the employee’s and the employer’s obligations, and each party’s rights and responsibilities. The contract also must include all three elements of a valid contract under Texas law: (1) an offer; (2) acceptance of the offer; and (3) consideration (i.e., the "bargain" between the parties). Although Texas is an "at will" state, in which employers generally are free to terminate employees for any reason, if an employment contract exists, the employee cannot be fired if the termination violates the contract. The provisions in the contract should reflect that the employer overall is a for-profit entity that seeks to accomplish its overall mission and goals to further its bottom line and to provide for the livelihood of its employees.
The contract generally will include at least the following primary provisions: (a) employee name and classification; (b) position, including the necessary tasks, functions, duties and responsibilities, and any performance standards; (c) location; (d) salary; (e) incentives and bonuses, such as based on hitting budgetary targets (if applicable); (f) duration of employment; (g) confidentiality; (h) noncompete and/or other post-termination obligations; and (i) progressive discipline and termination.
Common clauses found in Texas employment contracts
Employers often use standard or template-form contracts with other clauses as well. Some common provisions found in Texas employment contracts may include a confidentiality policy. This policy prevents employees from disclosing proprietary or sensitive information. An example of sensitive information includes customer lists which are valuable to a company as part of its goodwill. Examples of proprietary information include secret formulas or manufacturing processes. When drafting this provision, it is a good idea to have the employee sign a nondisclosure or confidentiality agreement. The nondisclosure agreement will outline what information is confidential, the purpose for which it was disclosed, and the procedures to maintain the confidentiality of that information.
Another common provision includes a non-compete or "covenant not to compete" clause. Generally, courts do not like to enforce non-compete provisions. However, the Texas Supreme Court adopted the following requirements for enforcing these provisions in light of the recent Texas Supreme Court opinions: the restrictions must be ancillary to or part of an otherwise enforceable agreement; the restrictions must be no greater than necessary to protect the business interest; and the restrictions must not impose a greater hardship on the employee than necessary to protect the business interest.
Other common employment contract clauses include an arbitration agreement or at-will disclaimer. An arbitration agreement addresses what will happen when disputes arise, including whether the dispute will be resolved through litigation or arbitration. Arbitration is a process where an independent third party will make a binding decision on the legal issue, just as a judge and jury would do in a court of law. The at-will clause states that employment is at the will of both the employer and the employee. The employee is always free to leave employment with or without cause and for any reason, and the employer can terminate the employee for any reason with or without cause. This clause should always be included in company policy. One caution when drafting this clause, however, Texas law does not permit an employee to waive his or her right to recover for work-related injuries.
Each of these clauses requires careful drafting for enforcement. If you have questions about drafting or litigation involving these provisions, please contact our firm.
Employment contracts in Texas: Laws and rules
Texas employment contracts are also governed by contract law and the common law of the state of Texas. This means all the rules for formation of a contract, performance of the contract, and breach of the contract, are encompassed in Texas contract law as set out in the Restatement (Second) of Contracts. The Restatement (Second) of Contracts is a companion to the Fair Labor Standards Act (FLSA) and provides ample case law as well as guidelines that govern the substantive relationship between employers and employees in Texas.
The common law of Texas, however, defines the relationship between the parties. Texas has long recognized employment-at-will as the default rule in employment relationships, meaning an employee remains employed at the will of the employer for any reason not "wholly arbitrary" and not recognized by law as a suspect category, such as sex or age. See Sabine Pilot Service, Inc. v. Hauck, 687 S.W.2d 733, 734 (Tex. 1986). But as discussed above, the duties imposed by the employment contract have eroded the common law with regard to the employer’s ability to terminate the employee at will.
Further, the Texas Legislature has carved out a statute of frauds pertaining to employment contracts (Tex. Bus. & Com. Code § 26.01). In Texas, for a contract related to employment of more than one year to be enforceable by the employee against the employer, it must be in writing and signed by the person to be charged with it or by someone authorized by the person to be charged. Further, the statute governs contracts for the lease of real estate for longer than a year, specifically for employment longer than one year. Contract for employment for either one year or less is generally unenforceable due to being included in the Statute of Frauds and not being reduced to writing.
For contracts that do not or cannot comply with the statute of frauds, the Texas Supreme Court has held the doctrine of equitable estoppel is applicable, barring the defendants from pleading up the statute of frauds when plaintiff can show the necessary elements. Haase v. Glen Armour, 625 S.W.2d 908, 911 (Tex. 1981). Generally, the following elements must be demonstrated: (1) the defendant, in the course of his dealings with the plaintiff, committed an act that induced the plaintiff to believe there was an agreement between them; (2) the plaintiff justifiably relied on the agreement or assumption; (3) the plaintiff detrimentally changed his position; and (4) serious injustice would result if the plaintiff is not entitled to recover. Id.
Texas contracts: Enforcement and dispute resolution
Enforcement and dispute resolution largely depends on whether the employer requires the contract to be in writing under Texas minimum wage law. If the employer pays wages that fall below the applicable federal or state minimum wage, Chapter 62 of the Texas Labor Code, sometimes referred to as the Minimum Wage Act ("MWA"), applies. The MWA requires all agreements "to pay wages in an amount less than the minimum wage . . . must be in writing, signed by each party, and contain the stated wages." Tex. Lab. Code § 62.012(b).
Thus, if an employment contract is subject to the MWA, it must be in writing, signed by the employer and employee, and include the stated wages. If so, a violation of the MWA may result in criminal or civil penalties, including damages for unpaid, treble damages, attorney’s fees, and costs. And, under the MWA, an employee is entitled to a private right of action to recover unpaid wages.
If an employment contract is not subject to the MWA (and again, even if it is), a dispute resolution clause can apply to any dispute arising out of or relating to the employment agreement. Such clauses often require that disputes be first submitted for mediation as a condition precedent to binding arbitration . Disputes not resolved through this pre-arbitral mediation process are usually submitted for binding arbitration under rules established by the American Arbitration Association or some other similar organization.
Disputes that the parties agree to submit to arbitration fall under the Federal Arbitration Act, 9 U.S.C. Sections 1-18, under which arbitration awards are final and binding. "Arbitration is preferred as a method of dispute resolution in Texas." Delaney v. KBR, 226 S.W.3d 728, 734 (Tex. App.—Houston [1st Dist.] 2007, no pet.). A federal law also strongly favors the enforceability of arbitration clauses in contracts, so long as the contract evidences a transaction involving interstate commerce. 9 U.S.C. § 2.
Arbitration clauses are different than choice-of-law clauses, so parties entering into an employment contract without a dispute resolution clause are not prevented from later entering into a dispute resolution agreement—even with the same employer or employee. However, it is still advisable that employers require that employees enter into an enforceable, binding employment contract at the outset of the employment relationship.
Benefits associated with a well-written employment contract
The importance of a well-drafted employment contract for the parties cannot be understated. Such a contract can lay out the terms of the employment relationship in detail. The terms can include the job duties, payment, vacation, employment term, confidentiality, termination rights, dispute resolution requirements, and non-disclosure or non-competition requirements if appropriate.
In a best-case scenario, this contract can be agreed to with an attorney on both sides present. As stated previously, that is probably not practical. But if so, it is the best scenario. With good attorneys working to fashion a contract that the parties can agree to, it is much more likely that the oft-unexpressed expectations of the parties are covered. When that happens, the chances of misunderstandings, and therefore disputes, is less. It is rare every party understands a contract by reading it. Particularly an employment contract.
Generally speaking, the employer wants to maximize its flexibility to terminate an employee, wants to avoid any claim related to the employment (or at least limit them), benefits if it has an arbitration clause, advantages if it has detailed policies in the handbook it can point to as clearly documented expectations, and can in general add provisions limiting the remedies against it in a future lawsuit. The employee wants a longer-term commitment on the job, to be able to collect on unpaid wages when due, to be able to leave employment with two weeks notice without adverse consequences, protection of his or her rights like the right to file a charge with the EEOC or a lawsuit, the right to certain reimbursement, the right to seek the same or substantially similar position under a layoff policy, and the ability to bring bad faith claims against the previous employer.
Were there to be significant discussion prior to drafting the contract, with consideration given to the interests of each party, the terms that would lead to the greatest chance of future harmony could be reached.
When to hire an attorney for Texas employment contracts
There is no better time to consult with an attorney about Texas employment contracts than when you are rushing to draft one or reviewing one that’s in front of you. Our employment lawyers in Texas are often rushed because the deal can’t be completed until the contract is signed or the person coming into the company will start working and the needed legal review can’t be done if they are already at work. These clients should be the first to realize that they should call us before they are in a pressurized situation.
Your company, employee or partner interests rely on what the contract says. The terms of the contract dictate the rights of each party. These interests must be protected from the outset or rather from the moment you agree to anything. This does not have to be a complex conversation but the sooner an employment lawyer is involved the better. There are at least three reasons why earlier is better.
- The sooner you involve an attorney , the more likely problems can be avoided. A good lawyer can craft a contract at the front end that covers all necessary bases.
- Even a good executive with an employment contract is at risk if he or she has not consulted an attorney before signing. He or she must be sure that the terms do not go against his or her other employment agreements. Sometimes, companies will include non-competes in contracts to which the employee is not bound already.
- An employee’s interests can be best protected if they consult with us even before they sign a contract because the contract is the essential starting point for protecting those interests for the length of employment and after.
Some other earlier points of contact include when you are firing an employee or you think you are going to fire an employee. Everyone needs to consider the contract terms as to severance, restrictive covenants and many other post-employment issues to assess the benefits or detriment of separation.