Business Law Minute: A Short Guide to Employment Contracts in Texas
If you own a small business in Bexar County or anywhere else in Texas, it is likely that you have had to deal with employees in some capacity. In this article, I will attempt to demystify some of the legal concepts that surround employment contracts in Texas. If you are not already familiar with the basics of contracts, I suggest that you read this Contracts Explainer
to help build your foundation of knowledge.
Right to Work and At Will Employment
Texas is both a “right to work” state, and an “at will employment” state. Many people get these two concepts confused. In this article, I will explain the difference between “right to work” and “at will employment” and also provide some basic tips and considerations for the small business owner who is considering an employment contract.
The “right to work” is a labor & employment law which prohibits employers from basing hiring decisions on membership or non-membership in a labor union. Moreover, the “right to work” laws prohibit agreements between employers and labor unions that would mandate deductions of union dues from the paychecks of even non-union employees.
As a result of employees opting out of union membership, and not being forced to pay union dues, employees receive increased compensation (at least in the short term) and, in turn, the union’s coffers dwindle and the union’s power is diminished.
“At will employment” is another employment law concept. But it has nothing to do with unions. An at-will employment arrangement is an employment in which the employer may terminate an employee at any time, for any reason or no reason (except for an illegal reason, e.g. those reasons set forth under the Civil Rights Act of 1964).
An ”at will employment state” is a state that permits an at-will employment relationship (i.e. employment not under a formal employment contract). Naturally, employers are free to voluntarily
enter into formal employment contracts.
States that do not permit at-will employment essentially impose an implied contract in all employer/employee relationships. Any termination must be for cause – i.e., termination is only allowed for certain reasons. Contrast this with the more permissive “any reason or no reason” standard of an at-will employment.
While there is no requirement for employers to present their employees with a contract, in today’s highly competitive employment market, employers are showing increasing interest in them. Unfortunately, the nature of these contracts can be quite complicated and difficult to understand when the language used is new for the layman. This can not only intimidate employees, but also trip up employers as well, if they do not have competent corporate counsel to assist them.
Many employees even avoid asking exactly what the contract says, with fear of leaving a bad impression or coming off as incompetent, demanding, or worse – a litigation risk. While an employee contract will often not contain any worrisome, one-sided, or problematic language or provisions, some do. And this is why one of the first pieces of advice that a corporate attorney will dispense is “read the contract, read the contract, read the contract.”
Let’s discuss the anatomy of one of these employment contracts. Here are some common features that you may see in an employment contract in Texas:
When agreeing to any job, it is important that there is an agreement or shared understanding on exactly what that job entails. The job description should be clearly stated in the contract so that both the employer and the employee are well aware of what tasks the employee will be responsible for/can be assigned to the employee once the employment commences.
The expectations associated with the employees are also highlighted in the contract in order to minimize any confusion or issues further down the road. If your job includes any required daily benchmarks, be sure that they are clearly outlined in the agreement as well.
One of the first things an employee will notice or consider is the whole package that has been offered – this can include salary, retirement, insurance, and fringe benefits. The compensation an employee is set to receive is likely to be a central component of any employment contract.
In most cases, the employment contract may include a breakdown of the salary that would include items such as:
- travel allowances
- housing allowances
- reimbursal for relocation
- medical, dental, vision insurance expenses
In addition to the salary offered, the benefits that come with the job should also be clearly explained (although many benefits offerings have multiple choices on the “menu”).
In most contracts, employers also take the initiate to include how often the employee will be paid, such as weekly, bi-weekly, monthly, or daily. All vacation, leave, or other paid time off information should also be clearly mentioned with the breakdown of paid and unpaid leave.
Duration or Term of Contract
Contracts are typically limited to a certain time period, referred to as the “term” or “duration” of the contract. In the case of the employment contract, it is of particular importance that the duration of employment be clearly articulated to avoid any confusion and hassle later on.
It is also common for employers to hold on to employees once their contractual duration is completed. While it is ideal for a new contract to be written with the newer details and additions, it may also be a prudent inclusion for the initial contract to have a “default” provision of what will happen if an employee “holds over” without executing a new contract. You can think of this situation as presenting a similar problem to the issue of a renter or tenant who overstays his or her lease.
Like most important contracts, an employment contract should contain relatively specific/detailed terms and conditions for termination. Most employers have a clear idea as to what conditions lead to termination, and they will most likely list them in the details. But there can be other inclusions and this can vary from one employer to another.
The termination conditions may include jargon such as ‘for cause’ and ‘without cause’. For cause translates to a termination for a particular reason, and without cause means that the termination does not require a specific reason. Recall our earlier discussion of “at will” employment, in which we discussed that a without cause termination of employment is legal in the State of Texas.
Some employment contracts may provide the right to challenge a termination in a court of law or through alternative dispute resolution procedures such as arbitration or mediation.
In addition to the terms and conditions of employment reviewed above, terms and conditions that apply to the employees before and after they willingly leave a job may be included in the employment agreement or in any number of ancillary agreements. One example of this is the notice period that is required for an employee after submitting their resignation. Some companies clearly state that the employees will not be eligible to receive severance if they fail to complete their notice period. This is frequently a minimum of two to three weeks, though it may be longer.
While working in a company, an employee may be provided with different amenities such as cars, gadgets and even identity cards. These items remain the property of the employer, and generally must be returned at the conclusion of the employment relationship, so it is also important to pay attention and keep track of all of these potential items.
Confidentiality Agreement (Nondisclosure Agreement)
Trade secrets and other confidential information are of immense importance to companies, which is why they are often keen to ensure that none of them are leaked. To ensure that ex-employees or ex-candidates don’t go around sharing intimate secrets of the company, many employers ask employees or candidates to sign a confidentiality agreement. The confidentiality agreement is also known as the nondisclosure agreement or NDA, which I have written about before
This agreement holds employees accountable for any information leaked and provides a strong incentive to keep trade secrets, well… secret! If the agreement is breeched, it may result in a lawsuit and significant damages against the employee. A well-drafted NDA or Confidentiality agreement, created by a competent business attorney, will generally protect such trade secrets and confidential information for some time after the conclusion of the employment relationship.
Such agreements are particularly useful when ex-employees join a competitor company (for obvious reasons).
Some companies have decided to test their employees for any drugs that they might be using – this can be an employee work quality issue or a liability issue (or both!). As a result,employers sometimes decide to include it in employee contracts so that the employees have no complaints when asked for random drug testing.
Non-competition or in other words ‘covenant not to compete’ clauses are important for both the employer and the employee. Sometimes a noncompete is an entirely separate agreement
; other times, it is just one part of an employment agreement. Essentially, it means that once an employee leaves a company, the employee is not permitted to compete with the company for a certain amount of time and/or in a certain geographic space. Different states have different laws on this topic, and you should consult a Texas business lawyer to advise you on Texas’s unique view of noncompete agreements.
For example, a Texas court would look differently upon a noncompete covering the entire state of Texas for 10 years vs. a noncompete clause covering Bexar County for 3 months.
It is strongly advised for employers to make sure a their noncompete has been drafted and/or reviewed by a lawyer, to avoid any problems in the future. Employees are also advised to take a consultation from a lawyer to ensure that they understand the significant decision of signing a noncompete. It is best not to take this decision lightly!
It is a common practice for employees to recruit their friends and co-workers once they leave a company. Most times, this can be damaging to the company as employee turnover is not good for business. To prevent such things from happening, many companies include a non-solicitation
clause in their employment contracts or ancillary agreements. With its help, many companies are able to prevent poaching of talent by ex-employees.
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