A Texas Company’s Chairman is Personally on the Hook for $1.3 Million for Hiring a COO Without Board Approval

employmentcontractEarlier this month, the First Court of Appeals  in Wilmot v. Bouknight upheld an award of $1,337,500 against a company executive and the chairman of the board who hired a chief operating officer (COO) for a 5-year term knowing that he did not have the authority to enter into such agreement without the board approval and knowing that the board would not approve the agreement.

For two years, the chairman proceeded to give the COO assignments, provided him paychecks, promised him additional compensation, and treated him like he was working for the company. Then he fired him, almost three years before the contract was to expire.

The COO sued the chairman in his personal capacity arguing that he fraudulently induced him into the employment agreement by representing that he had the authority to enter into the agreement while knowing full-well that he did not have such authority. The chairman claimed that he was not liable for the remaining compensation because: (1) there was no valid contract; (2) the “merger clause” in the contract subsumed any oral representations; (3) he was acting as an agent of the company; and (4) employees cannot sue for fraud in Texas. The trial court rejected all of his arguments and found that the chairman committed fraud when he told the COO that he had the authority to bind the company to the employment agreement while knowing full well that he did not have it.

TAKEAWAY: It’s not uncommon for employees to complain that their compensation structure or other terms of employment turned out to be different from what the employer promised when they were originally hired. And, typically, while disappointing, such difference in what was offered vs. what the employee actually received, does not give rise to a legal claim. This is because Texas is an at-will employment state, which means that an employer may change the terms of employment or compensation at any time and if an employee does not like it, they can leave.

However, as illustrated in the above case, where an employee is not at-will (has a guaranteed term of employment) and the company (or in this case, the chairman of the company) make representations about the future employment or conditions of employment, without any intention of fulfilling them, then the person making such representations may be liable for fraud. Moreover, making representations on behalf of the company does not absolve a corporate agent from being personally liable for such statements.

Thus, while proving fraud in employment agreements in Texas has become harder after Sawyer v. E.I. DuPont de Nemours & Co., it is not out of the realm of possible, especially, where an employee has a guaranteed-term contract.

Leiza often helps employers and employees negotiate and draft employment agreements and advises in employment-related disputes. If you need help in this area, contact Leiza for a consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

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