Most employers are aware of the importance of containing language in employee handbooks that disclaim any intent for the handbook to establish a contract of employment for any particular period of time, and retain an employee’s “at-will” employment status. Recently, in the case of McAllen Hospitals, L.P. d/b/a McAllen Medical Center and South Texas Health Systems v. Lopez, et al, the Texas Supreme Court gave renewed emphasis for such disclaimers.
In McAllen Hospitals, four nurses, who had been paid by the hour for a number of years, sued claiming that they had a contract with the Hospital to be paid an annual salary. The annual salary they claimed was their hourly rate times 2080—the equivalent of working 40 hours for 52 weeks. Because the nurses did not work 2080 hours they claimed they were owed the difference between the amounts paid for hours worked and their “annual salaries”.
The nurses claimed “that in light of all the surrounding circumstances (the representations made to them orally and through the evaluation forms, their statuses as exempt employees, the handbook, the Hospital’s policies, and the course of dealing between the parties) an implied contract existed, whereby the Hospital agreed to pay [the Nurses] a fixed amount of pay per year.” A jury agreed with the nurses and awarded nearly $400,000 in damages, not including attorney’s fees.
The Texas Supreme Court reversed, finding that there was legally insufficient evidence to show that an implied contract existed to pay the nurses an annual salary. First, the Court noted that the nurses had been paid by the hour for years prior to the suit. Thus, this was evidence that that the parties actually intended for payment to be this way rather than an annual salary.
Nevertheless, the nurses claimed the Hospital impliedly contracted to pay them a salary, because:
The Hospital classified them as “exempt” employees.
The Hospital’s various policies explained the rights of exempt and nonexempt employees.
Each year the nurses met with their supervisors to discuss a written evaluation, which also provided the amount of their yearly salaries for the previous year and for the upcoming year.
The Texas Supreme Court found the evidence did not support the implication urged by the nurses. Initially, the handbook expressly provided that “[a] performance review is not a contract or a commitment to provide a salary increase, a bonus, or continued employment. It is a communication process aimed at facilitating optimum employee performance.” Such language expressly barred any implication that performance reviews created a contract to be paid an annual salary. Similarly, the handbook’s general disclaimer that “[i]t is not a contract of employment” prohibited the nurses from arguing that the handbook’s provisions explaining the difference between “exempt” and “non-exempt” employees gave rise to an implied contract that they were entitled to annual salaries because they were classified by the Hospital as exempt.
Lastly, the nurses pointed to the Hospital payroll change forms and internal policies as establishing a contract. In particular, the payroll forms indicated an “annual salary”. However, each one also had a handwritten hourly rate which when multiplied by 2080—the number of hours for full time employment, equaled the annual salary amount. The Supreme Court determined that because of the handwritten hourly rates and the parties’ course of dealings the payroll change forms were not inconsistent with the nurses being paid on an hourly basis.
Key Take Aways
- Don’t underestimate the power of disclaimers. All employee handbooks should contain a general disclaimer to avoid interpreting handbooks as a contract. Not only can this defeat claims with regard to various provisions in the handbook but, as shown by the McAllen Hospital case, well chosen language can vitiate reliance on documents beyond the handbook itself, such as performance evaluations.
- Be careful of what you disclaim. Although not mentioned in the McAllen case, caution must be taken as to what you place in a handbook that contains a disclaimer. You should not include things you want to enforce as a contract in such a handbook. For example, some employers, “for efficiency”, have included arbitration and class waivers in their employee handbooks. However, if the handbook also has a disclaimer that it is not a contract the disclaimer may prevent enforcement of such terms. Similarly, including provisions in a handbook that allow modifying its contents without notice may have the same effect. Accordingly, for those things you want to enforce as a contract, issue them separately to employees rather than through a handbook.
- One form doesn’t necessarily fit all. There is little doubt that the Hospital in the above case found it expedient to use the word “salary” to cover all types of payment. In this instance, it was enough to raise confusion and was part of the evidence that the jury relied on to find an intent to pay an annual salary. Clarity is important. A few word changes could have avoided the issue.
- Be consistent. In today’s climate of seemingly constant lawsuits over overtime violations, being clear as to who is exempt and non-exempt is vital. In most cases, employees who were classified as exempt and paid a salary claim they were not exempt and entitled to overtime. In this case, though, the forms and policies identified the employees as exempt but didn’t pay them a salary. So, the Hospital didn’t have an overtime suit against it, but due to its inconsistency found itself in a lawsuit that took some eight years to finally resolve.
- Update your forms. Although the McAllen Hospital case started before the Department of Labor’s 2017 proposed changes to the salary requirements for exempt status under the Fair Labor Standards Act, it is likely that many employers could be in a similar predicament with regard to internally updating employee classifications. When faced with the DOL’s proposed salary increases for exempt status many employers instead changed certain employees from being paid a salary to an hourly rate of pay. As this case points out, it is important to update the forms as well.
Although no two handbooks will be alike because no two companies are exactly alike, we have developed an internal checklist that identifies the major policies that most employers should have. Some may appropriately be in a handbook and others may be stand-alone practices. If you’d like a copy of the checklist or have any questions about this article, please feel free to contact Keith Sieczkowski, Labor & Employment Lawyer with Branscomb | PC, at firstname.lastname@example.org or (361) 886-3800, or Sandra White, Labor & Employment Lawyer with Branscomb | PC, at email@example.com or (210) 598-5800.