Written Employment Contracts

• Author: Laura M. Franze
• Pages: 223-260

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2-1

CHAPTER 2

WRITTEN EMPLOYMENT

CONTRACTS

BY LAURA M. FRANZE

2.1. SCOPE OF CHAPTER

2.2. GOVERNING PRINCIPLES

A. Default Rule: Employment At-Will

B. Statutory Restrictions on Employment Contracts

1. Federal Statutes

2. Texas Statutes

C. Advantages and Disadvantages of Written Employment Contracts

1. Employer’s Perspective

2. Employee’s Perspective

D. Negotiating and Drafting—Preliminary Considerations

1. Parties’ Bargaining Power

2. Limits on Prospective Employee’s Ability to Contract

2.3. ELEMENTS OF WRITTEN EMPLOYMENT CONTRACTS

A. Position and Job Duties

B. Compensation

1. Base Wage

2. Incentive Compensation

a. Criteria

b. Form, Amount, Calculation

c. Timing

d. Termination

3. Employee Benefits

4. Severance Benefits

a. Purpose

b. Amount and Method of Payment

c. Severance Not Payable

d. ERISA Considerations

e. Change in Control

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5. Regulatory Considerations Related to Executive Compensation

C. Duration

1. Fixed-Term Agreement

a. Termination and Renewal

b. Good Cause Limitation on At-Will Employment

2. Indefinite-Term Agreement

3. Condition Subsequent Agreement

4. Renewable Agreement

D. Termination

1. Termination At-Will

2. Termination for Good Cause

3. Satisfaction Clauses

4. Termination Upon Notice

5. Non-Durational Agreements

E. Protection of Trade Secrets

F. Rules of Construction

1. Choice of Law

2. Choice of Forum

3. Successors and Assigns

4. Modification

5. Severability

6. Waiver

7. Arbitration

8. Notices

9. Indemnification

10. Attorneys’ Fees

APPENDICES

Appendix 2-1 Sample Employment Agreement for an Executive Employee

Appendix 2-2 Sample Employment Agreement for an Account Executive or Sales

Employee

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2:1. SCOPE OF CHAPTER

This chapter provides an overview of the legal principles that govern written employment agreements, and

discusses in detail the essential elements of such agreements. The chapter also analyzes the strategic considerations

in drafting written employment agreements. Chapter 3, Wrongful Discharge, covers issues of breach, remedies,

and mitigation of damages.

2:2. GOVERNING PRINCIPLES

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Texas employment relationships are governed by the employment at will doctrine. See, e.g., Ed Rachal Found. v.

D’Unger, 207 S.W.3d 330, 332 (Tex. 2006) (per curiam) (“[E]mployment is presumed to be at-will in Texas absent an

unequivocal agreement to be bound for [a] term.”); City of Odessa v. Barton, 967 S.W.2d 834, 835 (Tex. 1998). See generally

Ch. 1 (Employment Relationship Defined); Ch. 3 (Wrongful Discharge). Employment at will means the employment

relationship is subject to termination by either the employer or the employee at any time, with or without cause, without

liability for either party. See generally Williams v. First Tennessee Nat’l Corp., 97 S.W.3d 798, 802-803 (Tex. App.—Dallas

2003, no pet.); Reyna v. First Nat’l Bank in Edinburg, 55 S.W.3d 58, 71 (Tex. App.—Corpus Christi 2001, no pet.); Day

& Zimmermann v. Hatridge, 831 S.W.2d 65, 68 (Tex. App.—Texarkana 1992, writ denied). Employment at will is the

“default rule” under Texas law and will be presumed in the absence of a specific contractual agreement to the contrary.

See Williams, 97 S.W.3d at 803; Reyna, 55 S.W.3d at 71. In order for an agreement to override the employment at will

presumption, the agreement must specifically and expressly limit the parties’ rights to terminate the employment relationship

in a “meaningful and special” manner. Id.; Smith v. SCI Mgmt. Corp., 29 S.W.3d 264, 267-68 (Tex. App.—Houston [14th

Dist.] 2000, no pet.). The Texas Supreme Court has repeatedly opined that “employment is presumed to be at will in Texas

absent an unequivocal agreement to be bound for that term.” D’Unger, 207 S.W.3d at 332 (citing Midland Judicial District

Community Supervision v. Jones, 92 S.W.3d 486, 487 (Tex. 2002)); see also Montgomery County Hosp. Dist. v. Brown,

965 S.W.2d 501, 502 (Tex. 1998). (“For . . . a[n] employment contract to exist, the employer must unequivocally indicate

a definite intent to be bound not to terminate the employee except under clearly specified circumstances.”).

In D’Unger, the Texas Supreme Court reiterated its earlier rejection of the so-called “English rule” that hiring an

employee at a stated amount per week, month, or year always constitutes a promise of definite employment for that term.

207 S.W.3d at 332 (citing Midland Judicial District Community Supervision v. Jones, 92 S.W.3d 486, 487 (Tex. 2002)).

“Standing alone, an agreement to pay at a stated rate is not enough; if it were, there would be very few at will employees.” Id.

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Under Texas law, all employment relationships technically are based upon the law of contracts. Consequently,

an employer and an employee have a substantial amount of flexibility in determining the terms and conditions of

employment. Certain state and federal statutes, however, limit or affect the terms to which the parties to any employment

relationship may agree. These statutory restrictions cannot be eliminated or altered by an employment agreement.

1. Federal Statutes

The following federal statutes limit the parties’ flexibility in determining the terms and conditions of employment:

• The Fair Labor Standards Act, 29 U.S.C. §201, establishes the federal minimum wage and governs payment

of overtime compensation. See generally Ch. 9 (Wages, Hours and Overtime).

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• The Equal Pay Act, 29 U.S.C. §206(d), prohibits discrimination on the basis of sex in determining compensation.

See generally Ch. 19 (Sex Discrimination).

• The Civil Rights Act of 1866, 42 U.S.C. §1981, prohibits race discrimination in the creation and enforcement

of contracts.