Let’s Shake On It: Texas Case Exemplifies the Perils of Adopting a Company-Wide Practice of Oral Agreements

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

An opinion out of the Fourteenth Court of Appeals demonstrates why employers need to be weary of developing a practice of oral agreements in regards to compensation upon which at-will employees may detrimentally rely. The court affirmed a judgment in excess of $1.1 million in favor of a former at-will executive employee against his former employer for breach of an oral contract regarding his compensation and severance. Specifically, the appellate court held the evidence was factually sufficient to support the jury’s findings that Richard Holmes and Sempra Energy Trading, LLC had verbally agreed to a retroactive salary increase, to the payment of a bonus, and to the payment of severance. Sempra Energy Trading, LLC v. Holmes, No. 14-13-00206-CV, Tex Court of Appeals for the Fourteenth District (July 24, 2014)

Holmes had worked for Sempra since its formation in 1998. Holmes served as a managing director for Sempra and president of six subsidiary companies. For many years, Sempra compensated Holmes based upon his oral agreements with Chief Executive Officer David Messer. Holmes was paid a base salary of $225,000 plus performance bonuses based upon Holmes’s success in managing the subsidiaries under his direction.

Then, in December 2007, Sempra decided to shut down the synthetic fuel business that Holmes had been running for the company. Holmes and Messer met in January 2008 to discuss whether Holmes would manage the closing of the synthetic fuel business. Holmes agreed to do so if his base salary was increased because managing a wind-down would not give him the opportunity to earn a large performance bonus. Messer verbally agreed to reset Holmes’s salary effective January 1, 2008 to one that was “consistent with his peers”—a salary that Holmes contended to be in the range of $350,000 to $450,000. Messer further agreed to pay Holmes a severance upon the closing of the synthetic fuel business.

Messer and Holmes also verbally agreed that Holmes would manage Sempra’s interest in bankruptcy proceedings for a coal company called Black Diamond. As compensation, Messer agreed to pay Holmes 10 percent of any recovery from Black Diamond. Messer later agreed to increase the bonus to 15 percent of any recovery because the matter required more time and effort than originally anticipated.

Messer and Holmes did not reduce any of these agreements to writing because “that was not the culture of the company.” Moreover, Holmes had a 15-year history of oral agreements with Messer concerning his compensation.

Sempra’s company culture of conducting business transactions based upon a handshake began to change, however, once another company acquired a controlling interest in Sempra in April 2008. Messer then left the company in March 2009. Thereafter, Holmes alleged that Sempra breached the terms the oral agreement that he had made with Messer in January 2008.

Specifically, Holmes alleged that Sempra ultimately raised his salary to $300,000 in March 2010 but that the company refused to pay the higher salary retroactively. He also alleged that Sempra never paid him the 15 percent bonus associated with the Black Diamond recovery. Finally, Holmes argued that Sempra never paid Holmes his severance because Holmes refused to sign a separation agreement and release of claims (claiming that singing a release and agreement was not a term of his verbal agreement with Messer).

The jury found that an oral agreement existed between Holmes and Sempra for a raise of his salary to $300,000 annually, retroactive to January 1, 2008; for a 15 percent bonus associated with the Black Diamond recovery; and for the payment of severance without any condition to sign a separation agreement. The jury awarded Holmes a retroactive salary of $162,500, a bonus of $261,546.15, and severance in the amount of $380,332. The jury also awarded attorneys’ fees in the amount of $293,332 to Holmes. The trial court awarded an additional $90,000 in appellate attorneys’ fees and entered judgment.

The Court of Appeals generally rejected Sempra’s challenges to the jury instructions and its arguments concerning the factual sufficiency of the evidence supporting the jury’s findings and award in Holmes’ favor. The court also rejected Sempra’s argument that that any oral agreement between Holmes and Messer had been displaced since Holmes agreed to a raise to a $300,000 salary without a retroactive reimbursement by continuing to work for the company. Sempra alleged that in 2010 its former chief executive officer had communicated to Holmes that he would not be receiving his salary increase retroactively. The company argued that this communication constituted unequivocal notice to the employee of changes to the terms of employment.

The court reasoned that Sempra had failed to submit a jury question on the issue of notification and failed to object to the omission of such a question to the jury. Moreover, the court ruled that Sempra had failed to conclusively prove that it had given “unequivocal notice” of its proposed modification to Holmes’s oral agreement with Messer—namely, that his raise would not be applied retroactively. Rather, the evidence showed, the court found, that Holmes objected to the arrangement and was continuing to negotiate with Sempra’s new leadership regarding the terms of the oral agreement. Thus, the court affirmed the trial court’s judgment against Sempra.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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