When Your Employee Retention Program Goes Wrong
Published by Sarah Tudor Glaser and Eric A. Welter on February 23, 2018
A good employee is an invaluable resource. Smart employers recognize good employees and do what they can to keep them around, but going too far can have unintended consequences.
In October 2017, the Fourteenth Court of Appeals in Houston, Texas reversed a trial court’s summary judgment in Rieves v. Buc-ee’s Ltd. holding that an employment agreement was unenforceable because its provision that required an employee to repay substantial parts of her compensation upon termination of employment was an unlawful restraint of trade. The agreement, requiring that retention payments made to an employee would be forfeited back to the company, was not an enforceable restraint of trade under Texas law because it did not contain reasonable limitations.
As a short aside for those who don’t live in Texas, Buc-ee’s can be found along the side of major highways across the state and is known as the pit stop with all the good food, clean restaurants, and kitsch. Here’s a fan photos page from their website—-they have a cult following that includes beaver merchandise of all kinds. If you are from Texas, of course you know what Buc-ee’s is—-and you know that it is basically a giant gas station and convenience store with a friendly beaver mascot.
Kelley Rieves was hired by Buc-ee’s in August 2009, as an Assistant Store Manager. Before she was hired, she met with Don Wasek, Buc-ee’s President, to discuss how she would be paid. They agreed on a combination of an hourly pay rate and a flat monthly amount that totaled around $55,000 annually. In August 2009, Rieves signed an employment agreement that contained these payment terms and that stated she was an at will employee.
About a year later, Rieves signed a new employment agreement that contained similar terms—-this time Rieves earned a weekly salary and was “advanced a monthly retention payment” of a percentage of the store’s net profit. Rieves was still an at will employee. Under both agreements, Rieves was paid the monthly payments contemporaneously, but the agreements stated that the payments would be forfeited back to the company if Rieves did not stay employed with the company for five years. Yes, you read that right—-if Rieves left the company within five years, she would have to pay back all the monthly payments she received.
Giving Buc-ee’s the benefit of the doubt, it sounds like Rieves was a good catch and they wanted to keep her around for a while. This was probably not the way to go about it though. Practically speaking, asking an employee (who is not highly compensated) to pay back around $60,000 after they have resigned is going to be very difficult and going to feel punitive and unfair to the employee. And it was—-Rieves filed suit requesting a declaration that the agreements function as unreasonable restraints of trade and are unenforceable. Buc-ee’s filed a counterclaim to recover the unpaid money. Both sides sought attorneys’ fees.
The trial court upheld the agreement, requiring Rieves to return the money and awarding attorneys’ fees to Buc-ee’s, but the Court of Appeals overturned the decision and held that the agreement was an unlawful restraint of trade and therefore unenforceable. Key for the Court of Appeals was the fact that under the terms of the agreements, Buc-ee’s could fire Rieves at any time, including on the last day of the five-year term, and Rieves would have to return all of the money.
An enforceable restraint of trade under Texas law must contain reasonable limitations as to time, geographic area, and scope of activity—-which this agreement had none. The Court also noted the inherent unfairness of the agreement, especially considering Rieves was not a highly paid employee or privy to confidential information and trade secrets.
Buc-ee’s attempted to liken its agreements to the forfeiture provision at issue in ExxonMobil Corp. v. Drennen, an important Texas Supreme Court case addressing forfeiture provisions in non-competes, but the Court differentiated the two on the grounds that (1) the issue in Drennen was related to cancellation of future payments of unvested stock options that had been awarded but not delivered—-as opposed to the return of stock options or salary that had already vested; and (2) the Supreme Court in Drennen specifically differentiated forfeiture provisions intended to reward employees for their loyalty and non-competes that restrain competition. The Court was clear that Buc-ee’s agreements did not reward Rieves for her loyalty because they required her to give up a substantial portion of her compensation even if it was Buc-ee’s that terminated her employment and the longer she worked for Buc-ee’s the larger the penalty becomes if she exercises her right as an at-will employee to quit her job. Finally, the Court noted, Buc-ee’s had already paid the funds to Rieves.
Ultimately, the Court reversed the trial court’s finding that the agreement was enforceable, meaning Rieves did not have to return her compensation to Buc-ee’s. The Court also remanded Rieves’ request for attorneys’ fees to the trial court for further proceedings.
Employee retention programs is an important goal, but in meeting that goal is important to (1) set them up so they accomplish their stated goals and reward loyal employees; (2) they are equitable and, (3) they are actually enforceable. Buc-ee’s likely had good intentions when it created its retention program; however, the end result was good for neither the company nor its employees. If you want to establish a creative program to retain employees, running it by Texas counsel could save you time, energy, and money.Topics: Business and Franchise Litigation, employee retention, employee rewards, Employment Litigation, Financial Services, Government Contracting, Healthcare, Hiring, Hospitality, incentives, Media & Entertainment, Performance Management & Termination, Retail, Technology, Texas, Transportation, unfair competition and trade secrets