Texas Executive Employment Agreements: Checklist for Employees
Employees signing employment agreements in Texas should be mindful of the following potential terms:
1. Term of Employment. Employment agreements are typically either for a fixed term or are at-will. An at-will agreement, obviously, can be terminated by either party at any time for any reason. Some agreements contain “Evergreen” provisions, which state that the term of the agreement shall be automatically extended unless one of the parties notifies the other of its intention that the agreement expire at the end of the then current term (with such notice typically being due thirty or sixty days before the end of the term). Moreover, some employment agreements that are purportedly for a fixed term (e.g., a one-year term) also contain provisions pursuant to which the employer may terminate the employee “for any reason” on shorter notice (e.g., “thirty days’ notice”)—such an agreement is in reality a 30-day employment contract.
2. Position, job duties, location. Employment agreements routinely contain provisions outlining what the employee’s title will be, what his duties will be, to whom he will report, where he will work, etc. From the employee’s perspective, it is important that these terms be fairly well defined. For example, does the agreement allow the employer to transfer the employee out of state, or are there restrictions on the employer’s ability to do so? Does the agreement permit the employer to alter the employee’s job duties, or to change the person to whom the employee reports? Especially from the employee’s perspective, it is important that the agreement define these terms with some precision.
3. Compensation. Employment agreements typically reference some guaranteed compensation (e.g., salary) and some discretionary compensation (e.g., bonuses and stock options). On the guaranteed part, employees need to know whether they are to be classified as “exempt” under the FLSA or non-exempt. Employees need to know what must occur for the bonus to be paid. Is payment of the bonus totally discretionary? Does it depend upon the company’s performance, or the employee’s performance, or both? Granting of stock options often usually will be governed by a separate plan, and the employee needs to know what its terms are.
4. Termination for Cause. Employment agreements often provide that an employee may be terminated for “cause,” and “cause” is defined to include various acts or omissions by the employee. Some of the acts—such as commission of a felony, or embezzlement of company funds—are fairly easy to understand. However, defining “cause” to include the employee’s failure to perform her job duties may be somewhat problematic from the employee’s perspective, because whether the employee is performing well can be subjective. Generally, employees want what constitutes “cause” to be defined as precisely as possible. Even in an at-will employment agreement, whether “cause” exists can be relevant for other reasons—e.g., whether the terminated employee is eligible to receive severance benefits.
5. Termination for Good Reason. Employment agreements for a specified term often set forth situations in which the employee may voluntarily resign. “Good reason” for the employee to terminate might exist where the employee is demoted, or his pay is cut, or he his transferred. Again, even in at-will employment situation, the concept of termination for “good reason” might be relevant to whether the employee receives severance benefits.
6. Nondisclosure Agreements. Employment agreements routinely contain provisions prohibiting the employee from disclosing the employer’s confidential or proprietary information to a third party. An employee needs to know what information the employer considers to be confidential or proprietary.
7. Noncompete Agreements. Especially for salespeople, executives, or managers, employment agreements can contain provisions limiting an employee’s right to compete with the employer, both during and after employment. The provision usually will specify certain activities in which the employee may not engage, and will typically contain a geographic scope as well. The employee will want to fully understand how long the non-compete lasts, and what it precludes the employee from doing (both in terms of the activities to be restrained and the geographical scope of the restrictions).
8. Nonsolicitation Agreements. Along with noncompete provisions, employment agreements often contain provisions prohibiting the employee from soliciting the employer’s customers, or its employees, or its vendors. In Texas, these provisions can be enforceable, but they are held to the same standard to which noncompete agreements are held—i.e., the employer must give consideration to the employee (such as confidential information) that justifies the nonsolicitation provision, and the provision must be reasonable in scope.
9. Change in Control. What happens if the employer is purchased by another company? Should that affect the employee’s obligations? Should the employee be able to escape his noncompete and nonsolicitation obligations? On a related note, should the employer be able to assign the agreement to another company (so that the “new” company can enforce the employee’s noncompete and nonsolicitation obligations)? Employment agreements don’t always address these issues, but employees are wise to think about them.
10. Arbitration. More and more, employment agreements state that legal disputes between employers and employees must be submitted to binding arbitration (versus being litigated in court). Provisions like this can be one-sided (i.e., sometimes, only the employee is required to arbitrate its disputes, whereas the employer can go to court). Employers need to be mindful of the effects of agreeing to arbitrate disputes as opposed to litigate them.
11. Choice of Law and Forum Selection. Employment agreements usually specify the state whose law will govern the agreement, and they sometimes specify the place where suit must be filed in the event of a legal dispute. The latter can be especially problematic for an employee, because it may require her to bring any claims she may have in a foreign state, which can be very expensive.