Category: Executive Compensation

Can an employer require employees to repay training costs in Texas?

by Leiza Dolghih, posted in Employment Agreements in Texas, Employment Law, Executive Compensation, Small Business Help, Texas Employment Law, Texas Legal News

GiveBack-1000x360Earlier this year, the Second Court of Appeals ruled that an employee had to repay 1/3 of his salary to the employer as a reimbursement for training costs when he decided to leave.  The employee argued that the reimbursement agreement contained in his offer letter was unconscionable (legal term for “patently unfair”) and against public policy, but the Court of Appeals rejected both of these arguments in upholding the trial court’s award.

In Sanders v. Future com, Ltd., Sanders signed an offer letter from Future com that stated that he would be responsible for repaying the company for any training provided to him by Future com if he voluntarily left the company within one year after completing such training.  The repayment included travel expenses and “salary paid for study or course time.”  Sanders left Future com within twelve months of receiving certain training but refused to repay $4,003.39 in travel costs and expenses and $34,476.96 in salary that Future com paid Sanders while he was being trained.  The company sued him for breach of the employment agreement.

Sanders argued that the training reimbursement provision was not enforceable for a host of different reasons, but most notably, because it was unconscionable and against public policy.   The Court of Appeals rejected both of the reasons findings that:

  1. The repayment provision was meant to protect the company from the loss of Sanders’ employment before it had the opportunity to recoup its costs from training him.
  2. The company had a legitimate interest in making sure that it was not training employees for its competitors. 
  3. The company did not have to show that it actually suffered loss form Sanders’ departure. 
  4. The repayment provision was clear and understandable and was not hidden so as to create an “unfair surprise” for Sanders.
  5. Since training repayment provisions have been found to serve public good, this provision was not against public policy. 

TexasBarToday_TopTen_Badge_VectorGraphicTAKEAWAY FOR EMPLOYERS: Generally, training repayment provisions in employment agreements are enforceable in Texas.  Employers should make sure that such clauses are written in a clear and understandable manner and are not hidden within employment contracts.   

When determining the parameters of the reimbursement policies, companies should make sure that they comply with the Texas Texas Free Enterprise and Antitrust Act of 1983, which prohibits the restraint on trade.  In the case above, it appears that the company provided significant amount of training that took up to 1/3 of employee’s working time.  In such circumstances,  a reimbursement clause may be more enforceable than where a company provided minimal training.  Thus, when drafting a training reimbursement policy or agreement, it is best to consult with a qualified attorney to make sure that it is enforceable.

Leiza represents companies in business and employment litigation.  If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Erasing Employer Files Costs Employee Severance Pay

by Leiza Dolghih, posted in Employment Agreements in Texas, Executive Compensation, Texas Employment Law, Texas Legal News

vector-hands-with-pen-document-money_146647163The Fifth Circuit Court of Appeals, which presides over Texas, Louisiana, and Mississippi, recently held that an employer could deny employee his severance benefits under an ERISA benefits plan because the employee erased certain files from his computer before returning the laptop to the employer.  

In Gomez v. Ericsson, Inc., Gomez worked for telecommunications company for about three years before being laid off. Shortly after Gomez’s termination, the company presented him with a severance agreement. Under its terms, Gomez was required to waive certain claims against the company and return the company’s property in his possession. In exchange for doing so, the company promised Gomez severance pay pursuant to the terms of both its Standard Severance Plan and Top Contributor Enhanced Severance Plan of 2010.  

However, after the company received Gomez’s laptop, it determined that he had erased certain files from it. Consequently, the plan administrator for the company determined that the employee did not comply with a provision of his severance agreement requiring the return of all company property because work files were missing on the company laptop he returned.  The Court of Appeals agreed with the company. 

TAKEAWAY:    Most companies are not required to pay severance, but will offer it in return for employees agreeing to release their claims against the company and making certain promises to the employer, such as return of property or an agreement not to compete. Signing such agreements without understanding what they require can cost employees their benefits. Thus, before signing any sort of severance documents, employees should carefully read them and, where necessary, consult with an attorney.

Leiza represents companies in business and employment litigation. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

A Former VP of Operations Ordered to Pay $1.9 Million for Taking Company’s Trade Secrets in Violation of a Separation Agreement

by Leiza Dolghih, posted in Breach of Contract, Breach of Fiduciary Duty, Confidentiality Agreements in Texas, Employment Agreements in Texas, Executive Compensation, Non-Compete Agreements in Texas, Texas Employment Law, Texas Legal News, Trade Secrets

Toshiba_HDTD105XK3D1_BLACK_LAPTOPAccording to some studies, more than 60% of employees copy their employers’ documents or files before leaving their employment. They are even more likely to do so if they had been laid off, fired, or passed over for promotion. With senior executives who have access to top level confidential information, such actions can cause irreparable damage to their former companies.

In 2015, Cheasapeake Energy Corp. sued its former CEO and co-founder for emailing himself highly sensitive information and instructing his assistant to print confidential maps after he resigned due to a public falling out with the company.  The year before that, Lyft sued its former COO for transferring to himself thousands of Lyft’s files before joining its arch-rival Uber.  The former COO apparently left Lyft after unsuccessfully pursuing the CEO position. 

A similar drama played out last year in Texas and it involved a VP of Operations of a publicly traded Houston company.  According to Ginn v. NCI Building Systems, Inc., Ginn had been working for NCI for 20 years when he was told that his position of Executive VP of Operations was being eliminated.  The company offered him a separation agreement, which stated that he was resigning on his own accord and imposed a 5-year non-compete, non-solicitation and non-disclosure covenants. In return, NCI immediately vested all of his unvested stock that he had earned over the years – about $1.5 million – and retained him as a consultant for 1-year with a $300+K salary. 

According to the Court of Appeals, while consulting for NCI, the VP began to plan a competing company. Once his consulting gig with NCI expired, he began competing with it. NCI filed a lawsuit alleging violation of a non-compete and non-disclosure covenants, fraud, breach of fiduciary duties, and a few other claims. Two years into the suit, NCI discovered that the night before the VP signed the separation agreement representing that he had returned all of NCI confidential information, he had actually downloaded more than 18,000 files on his private hard drive. The jury found, and the Court of Appeals upheld, that the VP made knowing representations to NCI on which NCI relied in giving him $1.5 worth of stock, thus, committing fraud.

In its lawsuit, NCI asked for a legal remedy called “rescission,” which is meant to put the parties into a position they were in prior to entering into an agreement. Here, NCI asked that the VP return the consideration that the company paid to him in return for his promises, i.e. his salary and the vested stock.  Since he no longer owned the stock, NCI asked that he pay the value of such stock of $1.5+M.  The First Texas Court of Appeals found such compensation legally appropriate and upheld the trial court’s order requiring the VP to pay NCI the compensation he had received. 

Takeaways: There a certain behavioral triggers that cause high-level employees or employees with access to large swaths of confidential information to take or share that information with a competitor.  A company should have a red-flag alert system that notifies them of the increased risk and allows them to take preventative measures before a disgruntled employee downloads or shares the company’s trade secrets with the outside world.  Demotions, denial of a promotion, increased complaints to a supervisor, inadequate bonus, etc., may all serve as triggers for trade secret theft.  Having a system, a checklist, and a designated person who monitors the situation around the company can go a long way in protecting the company secrets. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Business Owners Alert: State Minimum Wage Increases in 2016

by Leiza Dolghih, posted in Executive Compensation, Fair Labor Standards Act, Small Business Help, Texas Employment Law, Texas Legal News

kkWhile the minimum wage in Texas will remain the same in 2016, those Texas companies that have employees in other states, need to be aware of the following minimum wage (and overtime) increases.* Given the recent increase in unpaid overtime lawsuits around the country, companies should be extremely vigilant in ensuring that their employees get paid a proper minimum wage and overtime.

Alaska – Minimum wage increases from $8.75 to $9.75 an hour. Minimum weekly salary for bona fide executive, professional, and administrative employees will increase from $700 to $780 per week (i.e., two times state minimum wage for the first 40 hours of employment).

Arkansas – Minimum wage increases from $7.50 to $8.00 an hour. Minimum wage for tipped employees remains $2.63.

California – Minimum wage increases from $9.00 to $10.00 an hour.  Minimum annual salary for bona fide executive, professional, and administrative employees will increase from $37,440 to $41,600 (i.e., two times state minimum wage for the first 40 hours of employment each week).

Colorado – Minimum wage increases from $8.23 to $8.31 an hour. Minimum wage for tipped employees increases from $5.21 to $5.29 an hour.

Connecticut – Minimum wage increases from $9.15 to $9.60 an hour. Minimum wage for tipped bartenders increases from $7.46 to $7.82 an hour and minimum wage for hotel and restaurant tipped employees other than bartenders increases from $5.78 to $6.07 an hour.

Hawaii – Minimum wage increases from $7.75 to $8.50 an hour. Adjusted minimum wage for tipped employees increases from $7.25 to $7.75 an hour, provided that when tips are added to the wages paid by the employer, the total amount is no less than $15.50 per hour.

Massachusetts – Minimum wage increases from $9.00 to $10.00 an hour. Minimum wage for tipped employees increases from $3.00 to $3.35 an hour.

Michigan – Minimum wage increases from $8.15 to $8.50 an hour. Minimum wage for tipped employees increases from $3.10 to $3.23 an hour.

Nebraska – Minimum wage increases from $8.00 to $9.00 an hour.

New York – Minimum wage increases from $8.75 to $9.00 an hour. Subject to caveats outside the hospitality industry, the minimum wage for all tipped employees will increase to $7.50 an hour. The minimum weekly salary for bona fide executive and administrative employees will increase from $656.25 to $675 per week.

Rhode Island – Minimum wage increases from $9.00 to $9.60 an hour. Minimum wage for tipped employees increases from $2.89 to $3.39 an hour.

South Dakota – Minimum wage increases from $8.50 to $8.55 an hour. Minimum wage for tipped employees increases from $4.25 to $4.28 an hour.

Vermont – Minimum wage increases from $9.15 to $9.60 an hour. Minimum wage for tipped employees increases from $4.58 to $4.80 an hour.

West Virginia – Minimum wage increases from $8.00 to $8.75 an hour. Minimum wage for tipped employees increases from $2.40 to $2.62 an hour.

* This is not a complete list of all geographic areas around the country that increased the minimum wage floor in 2016. Please consult with an attorney regarding specific locations outside of Texas where your company has employees to determine whether their compensation complies with all the applicable state and local laws.

Leiza Dolghih represents both COMPANIES and EMPLOYEES in employment litigation and arbitration proceedings.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

 

Steve Sarkisian Files Wrongful Termination Lawsuit Against USC Trojans; Claims Discrimination Based on Alcoholism

by Leiza Dolghih, posted in Breach of Contract, Disability Discrimination, Employment Discrimination, Executive Compensation, Texas Employment Law, Texas Legal News, Wrongful Termination

downloadIn early October, the University of Southern California fired Steve Sarkisian, its head football coach after an incident where he appeared drunk during a speech at a USC event. Copies of hotel and bar receipts allegedly showing Sarkisian’s alcohol consumption far exceeding the norm spread like a wildfire on the internet. 

Yesterday, Sarkisian admitted that he is an alcoholic in a lawsuit that he filed in California Superior Court.  He alleged that the university discriminated against him based on his disability (alcoholism), failed to engage with him in an interactive process to accommodate such disability, and retaliated against him for his request to accommodate his alcoholism. While Sarkisian’s claims are based on violations of California state law, the Americans with Disabilities Act (ADA) covers alcoholism as disability as well, so whether you are in California or any other state, here are the basics that you need to know about providing accommodations under the ADA to employees who are alcoholics:

  • Alcoholism is considered a disability under the Americans with Disabilities Act. 
  • Thus, just as with any other disabled employee, employers are required to provide accommodation to alcoholics who can perform the essential functions of the job with or without a reasonable accommodation, unless doing so would create undue hardship for the employer (e.g., allowing an employee flexible work schedule to attend AA meetings or attend a rehab facility);
  • According to the EEOC, “regardless of coverage under the ADA, an individual’s alcoholism or drug addiction cannot be used to shield the employee from the consequences of poor performance or conduct that result from these conditions”; 
  • Furthermore, “an employer will always be entitled to discipline an employee for poor performance or misconduct that result from alcoholism or drug addiction”;
  • Employers can prohibit the use of alcohol and drugs at work, but must apply that rule to all employees and not just alcoholics; 
  • Employers are no permitted to tell coworkers that an employee with a disability is receiving a reasonable accommodation.

Conclusion: While an employer may strictly (and uniformly) enforce a no-drug/no-alcohol policy in the workplace, when it comes to handling employees who are recovering or recovered alcoholics or drug addicts, employers may be required to allow them certain accommodations as prescribed in the Americans with Disabilities Act.

Leiza Dolghih represents both COMPANIES and EMPLOYEES in employment litigation and arbitration proceedings.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Negotiating Employment Agreements or the Real Reason Jennifer Lawrence Got Paid Less Than Bradley Cooper

by Leiza Dolghih, posted in Anti-Raiding Agreements in Texas, Arbitration Agreements in Texas, Breach of Contract, Employment Agreements in Texas, Executive Compensation, Non-Compete Agreements in Texas, Non-Solicitation Agreements in Texas, Texas Employment Law, Wrongful Termination

jennifer lawrenceSomebody recently went through Sony’s hacked e-mails and found some that show Jennifer Lawrence and Amy Adams were paid less than the male leads in American Hustle. This prompted Jennifer Lawrence to write an essay titled “Why Do I make Less Than My Male Co-Starts?”

She blamed her lower pay partially on Hollywood being sexist and partially on her not wanting to appear “difficult” and feeling silly about negotiating regarding millions she didn’t really need.  As you can imagine, the essay sparked a whole lot of indignation about the “wage gap” and the sexism in the workplace when it comes to salaries, not just in Hollywood, but everywhere.

However, many of these responses focused on gender issues and failed to address Jennifer’s glaring violation of the cardinal rule of employment negotiations – IF YOU DO NOT ASK FOR IT, YOU WILL NOT GET IT.  This is not a gender specific rule, by the way. Some believe that men are better at asking or demanding to be paid according to their worth than women, but I personally do not think that’s true. In my experience, it’s more of a personality or experience issue than a gender-related trait.  If your personality is like Jennifer Lawrence’s (by her own admission) and does not allow you to ask, find a person who will ask and negotiate for you, i.e. a lawyer or an agent.

I see too often executives (men and women) not asking for what they want in an employment agreement, not asking about what the terms in their employment agreements mean, assuming that their employment terms are not negotiable, or giving up on negotiations too early in the process.  As in any negotiation process, knowledge is power.  So, here is a list of terms that are often negotiable in the executive employment agreements and that you should at least discuss with your employer and your attorney before signing an employment agreement:

1. Severance – is the employer going to provide severance and, if so, how much? Is death or disability a severance trigger? What will happen to medical benefit continuation, prorated bonus, equity vesting acceleration, extension of the option exercise period, or other benefits if the employment is terminated?

2. Term of employment – most executive employment agreements will specify a term of employment, which is, of course, an exception to the at-will approach taken with respect to non-executive employees.  If it is an at-will contract, ask for a specific term. Often, an employer will specify that the company may terminate the executive “for cause.”  What constitutes “cause” is purely up to the parties.

3. Restrictive Covenants – what restrictions will be imposed on the executive after he leaves the company? For how long? The length, geographic scope, term of restrictions and other parameters can be negotiated to strike a balance between protecting the company and allowing the executive to earn a living after he moves on.

4. Cause – does the “termination for cause” clause define what the “cause” is? Does it allow for a cure period, i.e. a period during which the executive can address the company’s concerns before being terminated “for cause”? Is the company’s board involved in the termination process and what are the steps in that process that the company and the employee will have to follow?

5. Good Reason – a “good reason” separation provision allows an executive to resign for certain pre-approved reasons, such as demotion, relocation and other events that would materially change the terms of employment.  What constitutes a “good reason” is negotiable.

6. Equity – will the executive receive equity in the company as part of the compensation? How much? When does it vest? What happens with it if the employee is terminated for cause v. employee leaves for a “good reason.”  Are there additional restrictive covenants tied to the equity award?

7. Arbitration – if a dispute about the employment agreement arises, where will it be brought?  If in court, will an executive want to give up his/her rights to a jury trial? If in arbitration, what arbitration body will decide the dispute and what rules will govern it? Who will pay for costs?

8. Assignment – what happens to the executive’s rights and obligations under the employment agreement if the company is sold or bought? Can the company assign the employment agreement to the new entity? Will it need the executive’s permission to do so?

9. 409A – When possible, severance, other payments and the employment agreement generally should be structured so as not to trigger coverage under Section 409A of the Internal Revenue Code. If the agreement is subject to Section 409A, it should be written to comply with.  Failure to do so can expose the executive, among other things, to a 20 percent additional tax.

10. Other Provisions  –  there are many other employment provisions that an executive can negotiate.  A little bit of planning and persistence in the negotiations at the front end of employment will pay ten-fold at the end of that relationship.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Where CEO Drinks and Sleeps with Employees, A Company Is Not Required to Allow Him to “Cure” His Behavior Before Termination

by Leiza Dolghih, posted in Arbitration Agreements in Texas, Breach of Contract, Employment Agreements in Texas, Executive Compensation, Texas Legal News

MadMencocktailsIn Duncan v. Woodlawn Manufacturing, Ltd., the company fired the CEO after he became intoxicated at a work dinner charged to a company credit card and asked a subordinate employee to kiss him. The CEO sued the company for breaching his employment agreement, which required a company to provide him with a 30-day written notice of a specific action so that he could cure, i.e. fix it, before terminating him.

During the litigation, the following facts came to light about the CEO:

  • He had a drinking problem, which his mother, who also worked for the company, helped him cover up;
  • He had sexual relations with multiple female company employees;
  • He hired a prostitute on a company business trip when he was a CEO;
  • He entertained company clients at a strip club;

At trial, the CEO argued that because the company did not provide him with a 30-day “notice and cure” period specified in the employment agreement, it could not terminate such agreement. In his defense, he also argued that his conduct occurred away from the workplace and was not precluded by his contract or company policy (i.e. no morals clause or fraternization policy), and it did not impair his work performance. In fact, the plant’s sales increased from 17 million to 22 million during his tenure as the CEO.

The Court of Appeals rejected Duncan’s arguments after finding that the evidence showed that giving Duncan a 30-day period to cure his behavior would have been futile, “and the law does not require the performance of a futile act.”  With respect to his alcohol problem, he had been counseled for it prior to his termination without success, and by his own admission, he did not recognize that he had a problem with alcohol until three months after his termination when he finally came to the conclusion that he was an alcoholic.  Thus, the Court of Appeals concluded that “[a] jury might have believed that a letter from the company would not have resulted in an earlier solution of this problem, i.e., would have been futile.

Similarly, with respect to Duncan’s sexual escapades with employees, even if he could have ended them upon the receipt of a written demand from his employer to do so, he could not cure the effect of the rampant rumors around the plant, undo the perception of the favoritism garnered by those who had sexual relations with him, or eliminate the possibility of a sexual harassment claim from the employee whom he had attempted to kiss at a company dinner. Furthermore, the company’s owners believed that his efforts to hide these issues from them “completely” broke their trust in him  and there was nothing he could do to cure his lack of integrity or breach of such trust.

Thus, the Court of Appeals concluded that Duncan’s employer did not breach the employment agreement by failing to give Duncan notice prior to his termination.

TAKEWAY: Many executive employment agreements have a detailed description of what constitutes a termination “for cause” and what notice and cure period an executive must be provided before he can be terminated.  Such provisions are often negotiated by both parties to the agreement, ensuring that should an executive fail to meet his or her performance goals, he or she is allowed a certain time period to improve the performance before being terminated.  Having a clear definition of “good cause,” any “notice and cure” steps the company must follow before termination an employees, and an unambiguous statement of exceptions to such provisions is key to avoiding an expensive wrongful termination lawsuit and bad publicity.

The Duncan v. Woodlawn Manufacturing, Ltd. opinion highlights a simple proposition that a breach of employer’s trust by a high-level executive who owes fiduciary duties to the company, simply cannot be cured.  The determination of whether a particular act by an executive rises to the level of an incurable breach of trust depends on the facts of each particular case. Thus, a company considering termination of an employee “for cause,” or an employee who is facing or has been terminated “for cause,” should consult with an employment attorney to determine the best course of action.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Is Sales Commission Part of an Employment Agreement? Make it Clear and Put it in Writing. This Goes for Employers and Employees.

by Leiza Dolghih, posted in Breach of Contract, Employment Agreements in Texas, Executive Compensation, Texas Business Law, Texas Employment Law, Wrongful Termination

moneyA recent case from the Houston Court of Appeals demonstrates how failing to document the exact terms of a sales commission arrangement can result in a loss of such commission for an employee and a costly legal dispute for an employer.

In Colter v. Amkin Technologies, the company hired Colter as a sales director to sell portable drilling rigs. His offer letter stated that he would get $4,000 a month salary and a commission, the structure of which would be determined at a later time.  The parties never drafted or executed a written agreement detailing the terms of the commission structure.

After Amkin terminated Colter’s employment citing his lack of productivity, Colter sued the company for breach of contract claiming that after he was hired, Amkin’s president orally agreed to pay Colter 3% commission on each sale he made.   Not surprisingly, the president denied making such a promise and testified that based on the commission arrangements made with other sales directors, he would have never offered Colter a guaranteed 3% commission.  Furthermore, the history of commission payments to Colter showed that he got 3% on some sales, but less than 3% or nothing on others.

At trial, the jury was presented with employer’s president’s testimony, employee’s testimony, and documents showing that the employee did not consistently receive 3% commission on each sale he made at Amkin. Based on this evidence, and lack of a written agreement, the jury found that Amkin never agreed to pay Colter 3% commission on each sale.

Colter appealed, claiming that the jury got it wrong and that their finding was not supported by the evidence, but the Court of Appeals affirmed the original judgment stating that the jury was fully within its rights to find Amkin’s president’s testimony more credible than Colter’s testimony that the parties had an oral agreement regarding the commission structure.

TAKEAWAY FOR EMPLOYEES: When entering into an employment agreement, make sure that all parts of your compensation are clearly spelled out in the agreement. Otherwise, you might end up in a situation where it’s your word against the word of your employer, and a jury of your peers will be deciding on who they believe more.  Furthermore, if you believe that you have an agreement, insist on employer complying with its terms.  Failure to insist that the employer pays you what you believe you are owed, can result in a waiver of your rights and significantly hurt your case down the road if you decide to take it to court.

TAKEAWAY FOR EMPLOYERS: Employers also have a direct interest in writing down the precise terms of the compensation. If Amkin here had a written agreement that stated that Colter’s commission was discretionary, Amkin could have probably avoided the lawsuit.  While it might be tempting to rely on an oral agreement when a working relationship is new and going well, remember that when things go sour between an employer and an employee, their memory of what the terms of the oral agreement are, may diverge significantly.

Leiza Dolghih litigates employment and business disputes. She advises employers and employees on how to minimize the risk of litigation before it occurs and pursues and defends their rights in courts and arbitration.  For more information, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

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

by Leiza Dolghih, posted in Employment Agreements in Texas, Executive Compensation, Texas Employment Law, Texas Legal News

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.