Texas employment relationships are governed by the employment-at-will doctrine, which means that the employment relationship is subject to termination by either party, at any time, with or without cause, and without liability. Employment at will is the “default rule” under Texas law and is presumed in the absence of a specific contractual agreement to the contrary. Whether you represent employers or employees, here are 10 points to consider* when negotiating a written employment contract:
- Employer Pros and Cons of a Written Agreement
Written agreements have a number of disadvantages for an employer: drafting and negotiating individual employment agreements can be costly; pre-printed form agreements tend to be inflexible, poorly drafted, and difficult to enforce; most employment agreements will have to be modified over time; and a written agreement strips an employer of the flexibility the law grants it to set and modify the terms of employment. In certain situations (e.g., in dealing with highly compensated or key employees), however, written employment agreements may provide advantages for an employer that outweigh the disadvantages. An employer can include non-disclosure and/or non-competition provisions that protect its business interests in the event the employment arrangement is terminated. An employer also can negotiate for an arbitration clause in an employment agreement with a key employee.
- Employee Pros and Cons of a Written Agreement
A written employment agreement provides certainty in the terms and conditions of employment. Written employment agreements can benefit a highly compensated or key employee by including, for example, detailed provisions for incentive compensation and enhanced employee benefits that would be difficult, if not impossible, to define clearly and agree upon without a formal contract. Plus, written agreements often provide enhanced job security by limiting an employer’s right to terminate a highly compensated or key employee at will. A non-key employee can benefit from a written employment agreement that provides for employment for a fixed period of time. Such an agreement would require an employer to have “good cause,” as defined in the agreement, prior to discharging the employee, thus abrogating the employment-at-will doctrine.
- Parties’ Bargaining Power
Under well-established principles of contract construction, ambiguous language in a contract is construed strictly against the party who drafted the instrument. This principle of contra proferentem is typically applied in interpretation of standard form contracts or invoked against a party operating at a distinct bargaining advantage. Where appropriate, employers should consider including a provision in their employment agreements addressing “ambiguities,” which specifically negates the contra proferentem principle by stating, for example: “The Company and the employee have participated fully in the review and revision of this Agreement. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. The language in this Agreement shall be interpreted as to its fair meaning and not strictly for or against any party.”
- Position and Job Duties
An employee should demand that his or her position and/or essential job duties be stated specifically in the agreement and that the employer obtain his or her consent to any changes in the enumerated duties. Conversely, an employer should try to negotiate the unilateral right to determine and modify an employee’s job duties. At a minimum, an employer should obtain a clause that reserves its discretion to make unilateral changes in an employee’s job duties.
- Compensation – Generally
Employee compensation can be divided into four categories: base wage, incentive compensation, employee benefits, and severance benefits. Most employment agreements provide an employee with a combination of different types of compensation (e.g., most key employees receive benefits in addition to a base wage or incentive compensation). The more complex the compensation provisions, the more likely a dispute will arise. Keep these provisions as simple as possible. Look to publicly available employment agreements in your client’s industry for guidance.
- Incentive Compensation
If the employment agreement contains complex incentive compensation provisions and a substantial amount of money is involved, it is good practice to include an arbitration provision in the agreement. Arbitration may provide a faster and less expensive dispute resolution process if the parties disagree over the payment or amount of bonus compensation.
- Employee Benefits
Because most employers provide a group benefits package to all employees, employee benefits usually are not a significant negotiation issue when drafting an employment agreement. Regardless, an employee should review the benefits package to determine whether it meets his or her needs and, if not, should negotiate for supplemental benefits or additional compensation. The employee should consider the market value of the benefits package and the percentages paid by the employer and the employee. The employer, for its part, will want to include language providing that the company is not required to adopt or maintain any particular plan or policy, so that it retains the flexibility to modify, change, or discontinue benefit plans as needed.
- Severance Benefits
A high-level executive employee should insist that a change-in-control provision be included in any severance package. A “change in control” clause provides severance benefits to an executive employee if his or her employment is terminated as a result of, or shortly after, a change in the employer’s ownership. Such a provision protects a high-level executive employee in the event that a change in the ownership of a business substantially changes the management group with whom the executive must work and/or changes the objectives and direction of the business enterprise. Some change in control provisions pay severance compensation if an employee resigns after a change in control. Others require that the employee be terminated in order for benefits to be paid. Change in control provisions must be drafted with care because specific tax consequences may apply to severance payments made under a change in control provision. When drafting and negotiating such provisions, seek expert tax advice.
- Duration – Fixed Term
Agreeing to pay a fixed weekly, monthly, or annual salary, alone, does not make an employment agreement an agreement for a “fixed term.” However, it is still prudent for an employer to use caution in quoting an annual (or other fixed term) salary in offer letters and employment agreements for employees the company intends to employ at will. If an employer does not intend to modify the at-will employment relationship, include a disclaimer stating: “The above notwithstanding, [Company] may terminate the employment relationship at any time, with or without cause. All employees of [Company] are employed at-will.”
- Fixed Term – With Contingencies
When drafting fixed-term employment agreements, consider possible contingencies (conditions subsequent) that might result in the parties wanting to sever their relationship before the end of the stated term without liability. For example, the agreement should include termination provisions in the event of an employee’s death or disability. The parties also should consider termination provisions in the event of a company sale or merger, an employer’s insolvency, or a change in control or ownership. Take care to particularly define when such contingencies are considered to have occurred.
* These negotiating tips are excerpted from Texas Employment Law.
Texas Employment Law is a one-stop resource all your employment questions. This two-volume set spans the gamut of the employment relationship, from hiring practices to wrongful termination, and includes many topics not addressed in other employment law practice guides, including: immigration-related employment practices; workplace privacy; workplace torts; defamation in the workplace; whistleblower protection under the Texas Whistleblower Act and Sarbanes-Oxley; and protection of business interests. Also included is complete coverage of discrimination in the workplace, in six separate and detailed chapters. Whether you represent management or employees, Texas Employment Law will cut your research time and make you a stronger client advocate.