Beware of Using Employment Contracts!

Hiring Help Without Unintended Consequences

By Ali A. Akhtar

Hiring employees is not only a big step for a small business, it is a serious legal responsibility. It is crucial for business owners to be clear on how to bring in (or let go of) help without certain legal consequences. In this blog, we’ll discuss the basics of “employment-at-will” in the State of Texas, as well as the issues surrounding employment contracts.

Employment-At-Will 

The baseline law in the State of Texas is that employment is “at will.” This means that either the employer or employee can terminate the employment relationship at any time, with or without cause. 

For business owners, this has quite a few practical benefits, such as: not having to establish detailed employment policies, not having to publish employee handbooks or manuals, and not having to worry about lengthy processes for termination of employees. Contrary to popular belief, for instance, there is no requirement in Texas for a private employer to pay a “severance” upon termination.

Exceptions to the At-Will Doctrine

There are some exceptions to this at-will doctrine, the most common being terminations that violate Federal law (e.g., discrimination on the basis of race, gender, religion, etc.) or State law (e.g., terminating an injured Texas employee for filing a worker’s compensation claim). 

Additionally, there is an exception when there is a binding employment contract between the employer and employee. Employers often end up in this pitfall when they decide to write up a long list of policies, procedures, and commitments and have their employees sign them. By doing so, they run the risk of creating a contract in which they lose their ability to hire and fire employees at will and end up being subject to the same terms and restrictions that are applicable to the employees in the signed agreement. 

For example, some employers try to have their employees sign a “minimum commitment” agreement based on the fact that the employer invests time and money in training and onboarding the employees; such a clause might say that if the employee quits before 6 or 12 months of service, he or she is liable to pay back some or all of the training expenses.  

While this may seem like a form of protection for the employer, it creates a problem because it can be interpreted as creating the same obligation on the employer, i.e., that the employer cannot terminate the employee before that initial term is up (without being liable for damages). For this reason, a Texas business should never try to create a signed employment contract for its employees without having a lawyer review it! 

Other Agreements

There are other agreements that an employer and employee can sign, without altering the at-will status of the relationship. For example, a job may involve the employee getting access to confidential technical or financial information, which is sensitive and competitive in the industry. In this case, employers can have what are called “restrictive covenants,” i.e., terms which restrict what the employee can do with such information. 

One example of such a covenant is a non-disclosure agreement, which prevents the employee from using, sharing, or disclosing such information even after the termination of the employment. Another example is a non-compete agreement, which prevents a departing employee from engaging in a directly competitive business with the former employer for a defined length of time and within a defined geographic area. Such agreements are enforceable in Texas so long as they are reasonably and narrowly tailored.

These restrictive covenants are based on the nature of the business and industry, and the type of information that the employee gets access to, and they do not create problems in terms of altering the at-will nature of the employment.

Independent Contractors

Another way that Texas employers get into trouble is when they try to characterize workers as independent contractors when they are really employees. Just because you have your workers sign something called an “independent contractor agreement” does not mean it will be viewed that way by the law! Texas businesses get penalized for trying to escape their state obligations toward employees (e.g., establishing unemployment insurance accounts, etc.) by trying to incorrectly label them as contractors.

Many small businesses believe that simply because they don’t withhold taxes, and make their workers responsible for their own taxes, that this makes them all contractors. However, that is only one of many factors that the Texas Workforce Commission (TWC) looks at in determining the employee’s status under the law. 

One of the biggest factors is, does the employer make the worker agree to devote full-time efforts to the business or is the worker free to work for other businesses as well? If the former is the case, the worker will be more likely classified as an employee. Likewise, is the worker subject to the business’s direction and control in terms of how to get the job done, or does that get left to the worker’s professional discretion? If the former is the case, the worker will be more likely classified as an employee. 

For a complete list of all the factors analyzed by the TWC for determining employees vs. contractors, please see here: https://www.twc.texas.gov/files/businesses/form-c-8-employment-status-comparative-approach-twc.pdf

Conclusion

In summary, what matters most is not the labels you use, but the substance of the arrangement. No matter what title you put at the top of your agreements, you will need an experienced Texas business lawyer to review them with you and make sure that when you hire part-time or full-time help for your business, you don’t take on more than you bargained for!