Written Employment Contracts

• Author: Laura M. Franze
• Pages: 185-216

2-185

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

Texas employmenT law 2-186

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 prin-

ciples that govern written employment agreements,

and discusses in detail the essential elements of such

agreements. The chapter also analyzes the strategic con-

siderations in drafting written employment agreements.

Chapter 3, Wrongful Discharge, covers issues of breach,

remedies, and mitigation of damages.

2:2. GOVERNING PRINCIPLES

a. dEFauLt ruLE: EMPLoyMEnt at-wiLL

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 gen-

erally 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 rela-

tionship 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 hir-

ing 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.

B. statutory rEstrictions on

EMPLoyMEnt contracts

Under Texas law, all employment relationships techni-

cally 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, howev-

er, 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 employ-

ment agreement.

1. Federal Statutes

The following federal statutes limit the parties’ flexibil-

ity in determining the terms and conditions of employment:

• The Fair Labor Standards Act, 29 U.S.C. §201, es-

tablishes the federal minimum wage and governs

payment of overtime compensation. See generally

Ch. 9 (Wages, Hours and Overtime).

• The Employee Retirement Income Security Act, 29

U.S.C. §1001, governs employee benets.

• The Equal Pay Act, 29 U.S.C. §206(d), pro-

hibits 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.

• Title VII of the Civil Rights Act of 1964, 42 U.S.C.

§2000e, prohibits discrimination on the basis of race,

color, religion, sex, and national origin in all terms,

conditions, and privileges of employment.

• The Age Discrimination in Employment Act, 29

U.S.C. §621, prohibits age discrimination in all

terms, conditions, and privileges of employment.

See generally Ch. 23 (Age Discrimination).

• The Americans With Disabilities Act, 42 U.S.C.

§12101, prohibits disability discrimination in all as

-

pects of employment and requires an employer to make

reasonable accommodations to employ a disabled per-

son. See generally Ch. 21 (Disability Discrimination).

• The Family and Medical Leave Act, 29 U.S.C

§2601, mandates unpaid leave in the event of birth,