Texas is an employment-at-will state. That means either party can end the employment relationship at any time without reason. In an employment-at-will state, the employer does not have to have good cause to fire an employee. However, an employee who is terminated without good cause related to the job may be eligible to collect unemployment benefits.
Like any legal concept, there are a few exceptions.
An employment contract that specifies the situations when the relationship can be terminated will form a contract that overrides employment-at-will. That is why it is important that an employee handbook not create a contractual relationship between the employer and the employee.
A well-crafted employee handbook is a valuable asset to your business. A handbook describes operating policies, employee benefits, and sets clear expectations for the employment relationship. A common practice is for employees to sign and agree to abide by the policies outlined in an employee handbook; however, careful wording is necessary to avoid creating an employment contract that would abridge the employer’s ability to terminate the relationship at will.
What turns a handbook into a contract?
An enforceable contract must contain a mutual agreement and consideration (benefit). To avoid turning an employee handbook into an employment contract, set expectations but avoid making promises, state clearly that either party can terminate the relationship without cause, make no promises of continued employment, and avoid creating inflexible discipline systems. Employers whose handbooks contained discipline systems that abrogate the right to terminate the employee at will have inadvertently created employment contracts.
The simplest way to avoid turning an employee handbook into a contract is to provide a disclaimer that acknowledges the handbook contains guidelines only, does not create a contract of employment, and that it is subject to change including revocation by the employer at any time. Including a disclaimer protects the employer from claims that an employee handbook creates an employment contract that modifies the at-will employment relationship.
My last post noted how writing things down supports healthy business relationships. If writing things down is so important to protecting a healthy business, why don’t people do it?
Common reasons for resisting written agreements are:
“I do deals on a handshake. It’s a matter of trust.”
“It’s too expensive; I’d have to hire an attorney.”
“My friend wouldn’t break a promise. He’d never do that to me.”
None of these are good excuses from my perspective. I’ve seen too many business relationships deteriorate as a result of otherwise savvy business owners adopting these excuses. Let’s explore the problems with handshake agreements.
- Verbal agreements are too broad. People invariably do not remember details exactly the same way; therefore, a handshake agreement often will lack all of the necessary terms of the agreement. Example: Joanna installs tile. Bert hires Joanna to install tile in his bathroom for an agreed price payable half up front and half when the job is complete. Joanna estimates the job will take 2 days to complete. Bert selects tile from Joanna’s sample books. Joanna installs the selected tile and matching grout. Bert is unhappy because he wanted contrasting grout. The grout decision was a missing term. Bert demands that Joanna remove and replace the grout at no extra charge. Joanna believes their contract requires Bert to pay the rest of the agreed price and re-negotiate a new contract for removal and replacement of the grout. The parties have created their own mess. At a minimum, Joanna should be using a written work order or estimate that clearly lays out what work will be done, what decisions the customer will make, and how changes will be handled.
- Verbal agreements can be ambiguous. When terms are not reduced to writing, they are subject to differing interpretations much the same way that two people witnessing the same event often describe it differently. Even lawyers are guilty. Example: Samantha cannot afford a lawyer to handle her entire divorce. She hires Amanda’s virtual law firm to provide limited scope services to aid her in handling her own divorce. Both agree that for a flat fee, Amanda will draft the divorce petition and court orders, give Samantha instructions for filing the petition, and provide a publication explaining the divorce process including how to handle the final hearing. In the interim, Samantha agrees to pay her spouse a small sum every month to cover an unexpected home repair. Samantha expects Amanda to draft an agreed temporary order since their flat fee covers “court orders.” Amanda disagrees. Her intention was that “court orders” included only the final divorce decree. “Court orders” in this context is ambiguous. A written agreement signed by Amanda and Samantha would have given Amanda the opportunity to spot the ambiguity before agreeing to provide services and, even if imperfect, writing down the parties’ expectations would have given them a starting point for discussing adding services to their agreement.
- Oral agreements are hard to enforce, and agreements are worthless if they are not enforceable. Agreements are not enforceable if all the parties have not agreed to all the terms. Example: Ben and Dan form a partnership to start a mobile car wash service. Ben owns a panel van that he will contribute to the business. He estimates the van is worth $10,000. Dan will contribute $10,000 in cash for start-up costs. Both will work without salary for 6 months, and Dan will “manage” the business. After 60 days, the relationship starts disintegrating. It seems Ben and Dan can’t agree on anything. Ben has had enough and kicks Dan out of the business. Ben claims all of the improvements Dan made to the truck belong to him. Dan wants his $10,000 back and wants to be paid for the time he spent building the business. Since the parties never agreed to an exit strategy, Dan has no contract that provides him reimbursement for his time or his money. Dan must rely on common law theories of recovery to get his money back and soon realizes that attorneys’ fees and litigation costs will exceed his initial $10,000 investment. While he may be able to recoup attorneys’ fees after a trial, he decides a lawsuit is a risk he does not want to take.
- Verbal agreements are susceptible to differences in memory making the proof of terms a matter of which party is more credible. Lawyers call this a “he said/she said” dilemma. Example: In the previous example, Dan visits a lawyer. He explains his agreement with Ben, and wants to know how to get his money back and get paid for his time and efforts to build the business. After a few minutes of hard questioning, Dan realizes that by not writing things down, Ben can simply deny the terms of their agreement. Whereas a written agreement speaks for itself, to enforce their verbal agreement, Dan will have to find witnesses and other evidence to prove every part of the agreement. Most of the terms were made in private conversations between Dan and Ben, so most of Dan’s witnesses are relying on Dan’s description of the agreement. Dan’s lawyer calls this hearsay and explains it may not be useful in court. A legal action to enforce their agreement will come down to who is more believable under the pressure of a court proceeding.
A trusting relationship does not cure the parties’ failure to communicate effectively. The failure to define all important terms can be fatal to any agreement. Writing things down gives people the opportunity to avoid future problems.
Lately, I’ve been a single question several times.
How do you enforce an oral contract?
Answer: It’s difficult but often not impossible.
The question actually raises questions: how are you going to prove you have an oral contract? Will the breaching party admit the to making the contract? Not likely. Do you have notes, emails, texts, anything in writing? Are there witnesses to the conversation? If so, are they reliable? If not, have the parties started performing?
And the questions go on and on trying to build a trail of reliable, admissible evidence to prove up the oral agreement. One must also ask, is attempting to enforce the verbal agreement in court going to be cost effective?
Of course, that depends on the agreement. It likely is not cost effective to file a lawsuit over a low value agreement, but may well be worth the time, money, and effort to enforce a high value contract. There are avenues to try before filing a lawsuit.
Sometimes, a written demand for performance does the trick. Mediation is also a less costly alternative to a lawsuit if the other side is willing to participate. Most people who ask me the question realize it would have been easier to have reduced the agreement to writing.
Thus, this series was born. I’m calling it “Writing It Down.” This series of posts will explore using simple written agreements to support small businesses.
It’s a fact that many small business ventures fail in their first year. There are tons of resources on the web about why so many new businesses fail, and I won’t attempt to recreate them here. However, I’ve noticed five things that many failed businesses have in common. The purpose of this post is to help you avoid these shortcomings when starting your business. Here they are in a nutshell:
- Write a business plan.
- Set goals.
- Get professional help early.
- Understand the difference between employees and contractors.
- Write everything down.
Show me How!