Employment Law Basics for Texas Business Owners: Hiring, Firing, and the Rules Between

By Hank FasthoffJuly 6, 2026

Texas is an at-will employment state, and most business owners understand that to mean they can hire and fire anyone for any reason at any time. That's roughly correct. At-will employment has exceptions, and the rules governing how you classify workers, what you pay them, how you document the relationship, and what you owe when the relationship ends are more detailed than most business owners realize.

Employment questions come up repeatedly in every operating business. Each new hire raises classification issues (exempt or non-exempt, employee or contractor). Each termination raises procedural questions (final pay timing, COBRA notice, return of property, potential claims). Each workplace dispute raises questions about documentation, policy, and exposure. Having a working understanding of Texas employment law basics isn't a substitute for legal counsel, but it prevents the mistakes that produce the most expensive claims.

At-Will Employment

Texas follows the at-will doctrine, which means either the employer or the employee can end the employment relationship at any time, for any reason or no reason, with or without notice. You don't need cause to terminate an employee, and the employee doesn't need cause to resign. There's no general requirement for advance notice, severance, or a progressive discipline process unless you've created one through a contract, a handbook, or a policy.

Federal and state law still prohibit termination for certain reasons regardless of the at-will doctrine. You can't terminate an employee because of race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information under Title VII, the ADEA, the ADA, and GINA. You can't terminate an employee for filing a workers' compensation claim under the Texas Labor Code. You can't terminate an employee for reporting a violation of law to a governmental authority (whistleblower protection). And you can't terminate an employee in retaliation for exercising a legally protected right (filing an EEOC charge, requesting FMLA leave, or participating in a workplace investigation).

At-will employment can also be modified by contract. If your employment agreement states the employee can be terminated only "for cause," you've converted the relationship from at-will to contractual, and you'll need to prove cause if the employee challenges the termination. If your employee handbook states that employees will be given written warnings before termination, a terminated employee may argue that the handbook created an implied contract to follow that procedure. Preserve at-will status by including a conspicuous disclaimer in every offer letter, employment agreement, and handbook stating that employment is at-will and that nothing in the document creates a contract for a definite term or alters the at-will nature of the relationship.

Offer Letters Versus Employment Agreements

An offer letter is a short document confirming the terms of employment. It typically includes the employee's title, start date, compensation, reporting structure, and benefits eligibility. Offer letters are appropriate for most employees and should include the at-will disclaimer.

An employment agreement is a longer, more detailed contract that governs the employment relationship. Employment agreements are appropriate for senior executives, key employees whose departure would affect the business, and employees who will receive equity, deferred compensation, or other benefits tied to continued employment. Employment agreements typically include compensation and bonus structure, equity or incentive compensation provisions, confidentiality and non-disclosure obligations, non-compete and non-solicitation covenants (enforceable in Texas under Business and Commerce Code § 15.50 if ancillary to an otherwise enforceable agreement and reasonable in scope, geography, and duration), invention assignment provisions (requiring the employee to assign intellectual property created during employment to the company), termination provisions (for cause, without cause, resignation, and the consequences of each), and severance terms (if any).

Don't use an employment agreement when an offer letter is sufficient, because the employment agreement may create contractual obligations that limit your flexibility. Do use an employment agreement when the employee's role, compensation, or access to confidential information justifies the additional protections.

Exempt Versus Non-Exempt Classification

Every employee must be classified as exempt or non-exempt under the Fair Labor Standards Act (FLSA). Non-exempt employees are entitled to overtime pay (1.5 times their regular rate) for hours worked over 40 in a workweek. Exempt employees aren't entitled to overtime regardless of hours worked.

To qualify as exempt, an employee must meet both a salary test and a duties test. Under the current FLSA standard, the salary threshold is $684 per week ($35,568 per year). A federal judge in the Eastern District of Texas struck down the DOL's 2024 attempt to raise the threshold, and the $684 per week figure remains in effect as of this writing, though the issue is subject to ongoing litigation. Beyond the salary test, the employee must perform duties that fall within one of the recognized exemptions (executive, administrative, professional, computer professional, or outside sales).

Misclassifying a non-exempt employee as exempt means the employee didn't receive overtime pay they were owed. Consequences include back pay for all unpaid overtime (going back two years, or three years if the violation was willful), liquidated damages (an additional amount equal to the back pay), and the employer's attorney's fees. A single misclassified employee can produce a five-figure liability. A class of misclassified employees can produce a six-figure or seven-figure exposure.

Texas doesn't have its own state overtime law. FLSA controls entirely. Texas also doesn't require meal or rest breaks for adult employees, though employers who provide short breaks (under 20 minutes) must compensate employees for that time.

Independent Contractor Versus Employee

Classifying a worker as an independent contractor rather than an employee has significant consequences. Contractors don't receive overtime, benefits, workers' compensation coverage, or unemployment insurance. The company doesn't withhold income taxes or pay the employer's share of FICA. If the classification is wrong and the worker is reclassified as an employee, the company owes back employment taxes, potential penalties, unpaid overtime (if the worker was non-exempt), and any benefits the worker should have received.

Texas uses a common-law test similar to the IRS's multi-factor analysis. The central question is the degree of control the company exercises over how the work is performed, not just what work is performed. Factors that indicate employee status include the company controlling when, where, and how the worker performs the work, the company providing tools and equipment, the worker performing services exclusively for the company, the worker being integrated into the company's operations, and the company setting the worker's schedule and pay rate. Factors that indicate contractor status include the worker controlling how the work is performed, the worker providing their own tools and equipment, the worker serving multiple clients, the worker bearing the risk of profit or loss, and the relationship being governed by a written contract that specifies independent contractor status.

Under TWC guidance, a worker is presumed to be an employee unless the company can prove otherwise. If there's any doubt about classification, the safer approach is to classify the worker as an employee. The cost of paying employment taxes and providing benefits is less than the cost of defending a misclassification claim.

Employee Handbooks

An employee handbook communicates the company's policies, procedures, and expectations to employees. It isn't legally required in Texas, but having one reduces disputes, provides a defense in employment claims ("the employee was informed of the policy and violated it"), and creates consistency in how the company treats its workforce.

A Texas employee handbook should include an at-will employment disclaimer (conspicuous, preferably requiring the employee's signature acknowledging receipt), equal employment opportunity and anti-discrimination policies, anti-harassment policy with a reporting procedure, attendance and timekeeping policies, compensation and pay practices (pay schedule, overtime policy, timekeeping requirements), leave policies (vacation, sick leave, FMLA if the company has 50 or more employees), workplace safety and drug-free workplace policies, confidentiality and company property policies, social media and electronic communications policies, and a disciplinary process (with a disclaimer that the process doesn't create a contractual obligation and that the company reserves the right to skip steps or terminate immediately).

What not to include in a handbook is as important as what to include. Avoid language that creates implied contract obligations. "Employees will receive three written warnings before termination" can be construed as a promise that limits the company's at-will termination rights. Use "may" instead of "will" and include a disclaimer that the handbook doesn't constitute a contract of employment.

Termination Procedures

How you execute a termination affects your legal exposure. A well-documented termination reduces the risk of a wrongful termination claim. A poorly executed one invites it.

Before terminating, review the employee's file for documentation of performance issues, policy violations, or other legitimate business reasons for the decision. If the employee is in a protected class (race, gender, age, disability), confirm that the stated reason for termination is supported by documentation and that similarly situated employees outside the protected class have been treated the same way. Inconsistent treatment is the most common basis for a discrimination claim.

Under the Texas Payday Law (Texas Labor Code Chapter 61), an employer must pay a terminated employee all wages owed within six calendar days of the termination date. § 61.014. If the employee voluntarily resigns, payment is due on the next regularly scheduled payday. "Wages" includes salary, hourly pay, commissions, bonuses, and any other compensation the employer has agreed to pay (whether in the employment agreement, the handbook, or through established practice). Vacation pay is owed at termination only if the employer's written policy or agreement provides for it.

At termination, provide the employee with COBRA notice (if the company has 20 or more employees and offers group health insurance), information about unemployment insurance eligibility, instructions for returning company property (keys, equipment, laptops, access badges), and a reminder of any post-employment obligations (non-compete, non-solicitation, confidentiality) that survive termination.

If you're offering severance in exchange for a release of claims, have the severance agreement drafted or reviewed by your attorney. For employees over 40, the Older Workers Benefit Protection Act (OWBPA) requires specific language, a 21-day consideration period (45 days in a group termination), and a 7-day revocation period. Failing to comply with OWBPA makes the release of age discrimination claims unenforceable.

When You Need a Specialist

Outside general counsel handles the employment questions that arise in the normal course of operating a business. Offer letter drafting, handbook review, classification analysis, routine terminations, and policy questions are core OGC functions.

Some employment situations require a specialist. EEOC charges and discrimination complaints should be handled by an employment litigator who regularly defends Title VII, ADA, and ADEA claims. Wage and hour class actions or collective actions require an attorney experienced in FLSA litigation. Union organizing and collective bargaining (uncommon in Texas but not nonexistent) require a labor law specialist. And executive compensation arrangements (equity plans, deferred compensation, golden parachutes) may require a tax attorney or an ERISA specialist in addition to employment counsel.

Your OGC's role in these situations is to recognize when the question has crossed from routine advisory into specialist territory, coordinate the referral, provide the specialist with institutional knowledge about the company, and manage cost.

Practical Recommendations

Include an at-will disclaimer in every offer letter, employment agreement, and handbook. Make the disclaimer conspicuous and require the employee's written acknowledgment. Don't undermine the disclaimer with handbook language that creates implied contractual obligations.

Classify every worker correctly from the first day. If the worker controls how the work is performed, serves multiple clients, and bears the risk of profit or loss, contractor classification may be appropriate. If there's any doubt, classify as an employee. The cost of classification is lower than the cost of reclassification.

Pay terminated employees within six calendar days. The Texas Payday Law creates a specific deadline, and missing it produces a TWC complaint that's simple to avoid by paying on time.

Document every performance issue, policy violation, and disciplinary action as it occurs, not at the point of termination. A termination file assembled the day before the termination looks manufactured. A file that reflects contemporaneous documentation over months or years supports the employer's stated reason for the decision.

Review your handbook annually. Employment law changes, and a handbook that was compliant when it was written may contain outdated policies or provisions that no longer reflect the law. Your OGC should review the handbook at least once a year and update it as needed.