Can a Texas state agency refuse to sign service contracts with its own former employees or their spouses?

Texas AG Opinion JM-1031: Can an Agency Refuse Contracts With Its Former Employees?

Plain-English summary

State agencies worry about the revolving door: an employee learns how the agency awards contracts, then leaves and comes back as a vendor with an inside track. This opinion asked whether the Texas Department of Mental Health and Mental Retardation (MHMR) could shut that door by rule, refusing to contract with its own recent former employees. The Attorney General said it could, as long as the rule stays reasonable.

The department buys a lot of community-based mental health and mental retardation services by contract, under a statute (section 2.13 of article 5547-202) that lets it cooperate, negotiate, and contract with hospitals, private organizations, community centers, physicians, and others. The department wanted a policy barring its facilities from signing those contracts with former employees, their spouses, or businesses in which a former employee or spouse holds a substantial financial interest, for a set time after the person leaves.

A threshold point cleared the way. Because these are negotiated service contracts, not competitively bid ones, the usual worry about a rule that would shrink the pool of bidders does not apply. The Attorney General found no statute requiring competitive bidding for section 2.13 contracts, and noted that the department's power to cooperate and negotiate is inconsistent with a bidding requirement in the first place. So the restriction did not run into any competitive-bidding law.

That left the real question: does the department have the authority to adopt such a rule at all? Yes. The Board of Mental Health and Mental Retardation has rulemaking power (section 2.11(a)) to set policies consistent with the Act's purposes, and a rule aimed at preventing former insiders from cashing in on their contacts fits those purposes. The Attorney General pointed to two earlier opinions on the same theme: one letting the Texas Employment Commission adopt a nepotism policy stricter than the general statute, and another letting the Department of Human Resources bar its child protective workers from moonlighting in ways that put them in competition with the agency. The through-line is that a state agency may adopt policies to prevent favoritism and conflicts of interest, including the conflict of an employee who, while still on staff, is angling for a future contract instead of serving the agency. The department may adopt restrictions to prevent that.

The answer to the second question followed the same logic. Community centers set up by counties, cities, hospital districts, or school districts under article 5547-203 receive department funds by contract, and section 4.01(a) of article 5547-204 gives the department broad authority to prescribe rules necessary and appropriate to insure adequate provision of services by centers receiving those contract funds. If the department reasonably decides such a rule is necessary and appropriate, it can require community centers to adopt the same kind of former-employee restriction.

The Attorney General attached the same caveat to both answers. The rule itself, how long the restriction lasts, how "substantial financial interest" is defined, and the other details all have to be reasonable in light of the facts and circumstances. Authority to make the rule is not authority to make an unreasonable one.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Texas has since reorganized its mental health and mental retardation laws. The old Mental Health and Mental Retardation Act articles cited here (the 5547-series in Vernon's Texas Civil Statutes) have been recodified into the Health and Safety Code, and the agency structure itself changed after MHMR was reorganized into successor health and human services agencies. Anyone dealing with a present-day contracting or conflict-of-interest rule in this area should check the current Health and Safety Code and Government Code rather than rely on the 1989 article numbers used here.

Who this opinion affected (as of 1989)

State agency boards and administrators: The opinion confirmed that an agency with general rulemaking authority may adopt reasonable revolving-door restrictions on contracting with its own former employees, as a conflict-of-interest measure, even without a specific statute authorizing that exact rule.

Former agency employees and their family members: The opinion put them on notice that an agency could lawfully close off contracts to recent departures, their spouses, and businesses they have a substantial financial interest in, for a defined period.

Community mental health centers: The opinion signaled that centers receiving department contract funds could be required by the department to adopt the same kind of former-employee contracting restriction.

Common questions

Can a Texas agency bar its former employees from getting agency contracts?
Yes, within reason. The Attorney General concluded MHMR could adopt reasonable rules prohibiting its facilities from contracting for community-based services with former officers and employees, their spouses, and business entities in which they have a substantial financial interest, for a specific period after they leave.

What gives the agency the power to do that?
The Board's general rulemaking authority under section 2.11(a) of article 5547-202, V.T.C.S., to adopt rules and policies consistent with the Act's purposes, applied to a policy aimed at preventing favoritism and conflicts of interest.

Did competitive-bidding law block the restriction?
No. The Attorney General found no competitive-bidding requirement for section 2.13 contracts and noted that the department's negotiate-and-cooperate authority is inconsistent with competitive bidding, so the restriction did not conflict with any bidding statute.

Can the department make community centers follow the same rule?
Yes. Under section 4.01(a) of article 5547-204, the department has broad authority to prescribe rules necessary and appropriate for community centers receiving its contract funds, and it could require a similar former-employee restriction if it reasonably determines that is necessary and appropriate.

Are there limits on how strict the rule can be?
Yes. The rule itself, the duration of the restriction, the definition of "substantial financial interest," and the other provisions must all be reasonable in light of the surrounding facts and circumstances.

Background and statutory framework

The Commissioner advised that the Texas Department of Mental Health and Mental Retardation enters into numerous contracts for community-based mental health and mental retardation services under section 2.13 of article 5547-202, V.T.C.S., which authorizes the department to cooperate, negotiate, and contract with local agencies, hospitals, private organizations and foundations, community centers, physicians, and persons to plan, develop, and provide such services. The department was considering a policy prohibiting its facilities (the central office and the state hospitals, state schools, and other institutions listed in section 2.01) from contracting under section 2.13 with former employees for a specific period, and a parallel prohibition for community centers. (For this opinion the AG presumed "employees" includes both employees and officers.)

The first question was whether the department could prohibit its facilities from contracting for community-based services with former employees, their spouses, or business entities in which the former employees or spouses have a substantial financial interest, for a specific period after termination. The Attorney General framed this as a restriction on the department's own authority to contract under section 2.13, not a restriction on former employees working for a third party the department regulates (unlike the post-employment restrictions of the Public Utility Regulatory Act, art. 1446c, § 6(i), (j)). The AG found no provision requiring section 2.13 contracts to be competitively bid, and observed that the authority to cooperate and negotiate is inconsistent with a competitive-bidding requirement (citing MW-296 (1981) and MW-55 (1979)), so it did not need to consider whether the restriction would impermissibly limit competition required by a bidding statute.

The Board of Mental Health and Mental Retardation has rulemaking authority under section 2.11(a) of article 5547-202 to formulate rules and basic and general policies, consistent with the Act's purposes, to guide the department. The Act's purpose is to provide for the effective administration and coordination of mental health services at the state and local levels (art. 5547-201, § 1.01(a)), to provide a comprehensive range of services for persons in need of publicly supported care (§ 1.01(b)), and to provide a continuum of services including community services provided through contracts with the department (§ 1.01(c)). The AG concluded the proposed policy is designed to prevent former employees from using their department contacts and insider knowledge to receive favored treatment in awarding section 2.13 contracts. If the Board determines such a policy would contribute to effective administration and be consistent with the Act, it could adopt a reasonable rule to that effect. The AG relied on Attorney General Opinion MW-540 (1982) (Texas Employment Commission had authority to adopt a nepotism policy stricter than the nepotism statute, article 5996a, because it merely prescribed the duties and limited the powers of those with delegated hiring authority) and Attorney General Opinion JM-188 (1984) (Department of Human Resources could prohibit child protective workers from performing court-ordered social studies on their own time when a conflict of interest resulted from competition with the department for the same appointments and fees). Those rulings show a state agency may adopt policies to prevent favoritism in hiring and conflicts of interest between the agency and its employees, so the Board may adopt restrictions to prevent favoritism of former employees in contracting and to ensure that a current employee serves the department's interests rather than his own anticipated interest in a future contract, provided the duration, the definition of "substantial financial interest," and other provisions are reasonable.

The second question was whether the department could require community centers established under article 5547-203, V.T.C.S., to implement a similar policy. Article 5547-203 authorizes a county, city, hospital district, school district, or a combination of them to establish and operate a community center. Such centers formerly received grants-in-aid, but in 1985 the Legislature replaced grants-in-aid with financing of community-based services through contracts with community centers and other local providers (Acts 1985, 69th Leg., ch. 496, at 4155), set out in article 5547-204. The department must insure specified services are available in each service area and contract with designated providers, with preference to a community center (art. 5547-204, § 4.03(a), (b)). Section 4.01(a) directs the department to prescribe rules, consistent with the Constitution and laws of Texas, necessary and appropriate to insure adequate provision of community-based services by departmental facility outreach programs or by community centers and other providers receiving contract funds as designated providers under section 4.03, and requires each designated-provider contract to give the department unrestricted access to records for auditing and monitoring. The AG concluded this gives the department broad authority to make rules applicable to community centers receiving contract funds under section 4.03 (the same rules applying to services provided by the department's own facilities, see § 4.03(c)). If the department reasonably determines it necessary and appropriate under the statutory standard, it could adopt a rule prohibiting community centers receiving state funds from contracting for community-based services in which former employees or their spouses have a substantial interest, again subject to the requirement that the rule and its terms be reasonable.

Citations

Statutory authority:

• V.T.C.S. art. 5547-202, § 2.13 (department may cooperate, negotiate, and contract for community-based services)
• V.T.C.S. art. 5547-202, § 2.11(a) (Board rulemaking authority consistent with the Act's purposes)
• V.T.C.S. art. 5547-202, § 2.01 (department "facilities" defined)
• V.T.C.S. art. 5547-201, § 1.01(a), (b), (c) (purposes of the Mental Health and Mental Retardation Act)
• V.T.C.S. art. 5547-203 (local establishment of community centers)
• V.T.C.S. art. 5547-204, § 4.01(a) (rules necessary and appropriate for providers receiving contract funds)
• V.T.C.S. art. 5547-204, § 4.03(a), (b), (c) (designated providers; preference to community centers)
• V.T.C.S. art. 1446c, § 6(i), (j) (contrasting Public Utility Regulatory Act post-employment restrictions)
• V.T.C.S. art. 5996a (general nepotism statute, referenced in MW-540)
• Acts 1985, 69th Leg., ch. 496, at 4155 (replaced grants-in-aid with contract financing)

Prior Attorney General opinions:

• MW-540 (1982) (agency may adopt a nepotism policy stricter than the statute)
• JM-188 (1984) (agency may bar dual employment that conflicts with its interests)
• MW-296 (1981); MW-55 (1979) (negotiate-and-cooperate authority is inconsistent with competitive bidding)
• JM-424 (1986) (1985 shift from grants-in-aid to contract financing of community centers)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1031
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1031.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain (one heavily garbled statutory quotation has been reconstructed from the opinion's own paraphrase); the linked PDF is authoritative.

March 23, 1989

Mr. Dennis R. Jones
Commissioner
Texas Department of Mental Health and Mental Retardation
P.O. Box 12668
Austin, Texas 78711-2668

Opinion No. JM-1031

Re: Authority of the Department of Mental Health and Mental Retardation to impose certain requirements on contracts for community-based mental health and mental retardation services (RQ-1599)

Dear Mr. Jones:

You inform us that the Texas Department of Mental Health and Mental Retardation enters into numerous contracts for community-based mental health and mental retardation services pursuant to section 2.13 of article 5547-202, V.T.C.S. This provision states as follows:

The Department may cooperate, negotiate and contract with local agencies, hospitals, private organizations and foundations, community centers, physicians and persons to plan, develop and provide community-based mental health and mental retardation services.

V.T.C.S. art. 5547-202, § 2.13.

The department is considering a policy which would prohibit its facilities from entering into such contracts with former employees of the department for a specific period of time.[1] The "facilities" of the department consist of the central office of the department and the state hospitals, state schools, and other institutions set out in section 2.01 of article 5547-202, V.T.C.S. The department is also considering prohibiting community mental health and mental retardation centers from entering into contracts for services with their former employees for a specific period of time. You first ask the following question:

Does the Texas Department of Mental Health and Mental Retardation have the authority to prohibit its facilities from entering into contracts for community-based mental health and mental retardation services with former employees, their spouses, or business entities in which the former employees or their spouses have a substantial financial interest for a specific period after the employees have terminated employment with the Department?

[1] You refer to "employees," but, for purposes of this opinion, we presume that "employees" includes both employees and officers.

What the department contemplates is a restriction on its own authority to contract under section 2.13 that would prohibit contracts in which former employees or their spouses have a substantial financial interest. It is not a proposal to restrict former employees from working for a third party that the department regulates. The contemplated policy is therefore unlike the post-employment restrictions of the Public Utility Regulatory Act, which bar former employees from working for certain public utilities or from representing certain business entities before the commission or a court. See V.T.C.S. art. 1446c, § 6(i), (j).

We find no provision requiring that contracts entered into under section 2.13 be awarded on competitive bids. The department's authority to cooperate and to negotiate with various entities for community-based services is inconsistent with a competitive bidding requirement. See generally Attorney General Opinion MW-296 (1981) (city may not negotiate contract terms with lowest bidder when statute requires competitive bidding); Attorney General Opinion MW-55 (1979) (discussing department's authority under section 2.13 of article 5547-202). Thus, we need not consider whether the proposed restriction would constitute an impermissible restriction on the competition required by a competitive bidding statute. See Texas Highway Comm'n v. Texas Ass'n of Steel Importers, Inc., 372 S.W.2d 525 (Tex. 1963); Sterrett v. Bell, 240 S.W.2d 416 (Tex. Civ. App. - Dallas 1951, no writ); Attorney General Opinions MW-440 (1982); MW-139 (1980); H-1219 (1978); H-1086, H-972 (1977).

The Board of Mental Health and Mental Retardation has the following rule-making authority:

The Board shall formulate the rules and the basic and general policies, consistent with the purposes, policies, principles, and standards stated in this Act, to guide the Department in administering this Act.

V.T.C.S. art. 5547-202, § 2.11(a).

The purpose of the Mental Health and Mental Retardation Act is to "provide for the effective administration and coordination of mental health services at the state and local levels." V.T.C.S. art. 5547-201, § 1.01(a). The state's goal in adopting the act is to provide a comprehensive range of services for mentally ill and mentally retarded persons "who are in need of publicly supported care, treatment, or habilitation." Id. § 1.01(b). It is also a purpose of the act to provide for a continuum of services, which is to include "community services provided by the department and other entities through contracts with the department." Id. § 1.01(c).

The proposed policy appears designed to prevent former employees of the department from using their contacts with the department and an insider's knowledge of its procedures to receive favored treatment in the award of contracts under section 2.13. If the board determines that adopting such a policy would contribute to the effective administration of mental health services and would otherwise be consistent with the purposes and policies of the Act, we believe it could adopt a reasonable policy or rule to that effect.

In Attorney General Opinion MW-540 (1982), this office determined that the Texas Employment Commission had authority to adopt a nepotism policy stricter than that set out in article 5996a, V.T.C.S., the nepotism statute. The opinion stated as follows:

The proposed nepotism policy . . . merely prescribes the duties and limits the powers of those persons to whom the commission has delegated authority to hire, promote, or approve the hiring or promotion of other persons.

Attorney General Opinion MW-540 (1982), at 2.

In Attorney General Opinion JM-188 (1984) we considered whether the Texas Department of Human Resources could prohibit its child protective service workers from performing court ordered social studies on their own time. We concluded that the department could adopt a rule prohibiting such dual employment when a conflict of interest resulted from employees' competition with the department for the same appointments and fees.

Thus, prior rulings of this office demonstrate that a state agency may adopt policies designed to prevent favoritism in hiring decisions and conflicts of interest between the agency and its employees. The Board of Mental Health and Mental Retardation may adopt restrictions necessary to prevent favoritism of former employees in contracting decisions and to ensure that while an employee is on the staff he will serve the department's interests, rather than his own anticipated interest in a future contract with the department. The duration of the restriction, the definition of "substantial financial interest," and other provisions of the rule must be reasonable in light of all the facts and circumstances.

Your second question is as follows:

Does the Texas Department of Mental Health and Mental Retardation have the authority to require by contract community centers established pursuant to Article 5547-203, V.T.C.S., to implement a policy similar to that in question number 1, above, regarding contracting for services with former employees of community centers?

Article 5547-203, V.T.C.S., authorizes a county, a city, a hospital district, a school district, or any organizational combination of two or more of these, to establish and operate a community center for mental health and mental retardation services. Such community centers formerly received grants-in-aid allocated by the Department of Mental Health and Mental Retardation from appropriated funds. See, e.g., Attorney General Opinions JM-424 (1986); JM-12 (1983); H-241 (1974); M-314 (1968); C-584 (1966). In 1985 the legislature replaced the authorization for grants-in-aid for community centers with provisions for financing community-based services through contracts with community centers and other local providers. Acts 1985, 69th Leg., ch. 496, at 4155; Attorney General Opinion JM-424 (1986). These provisions are set out in article 5547-204, V.T.C.S.

The department "shall insure" that specified community-based mental health and mental retardation services are available in each service area and shall identify and contract with one or more designated providers for each local service area. V.T.C.S. art. 5547-204, § 4.03(a), (b). Preference in identifying providers is to be given to a community center. Id. § 4.03(b).

Section 4.01(a) provides as follows:

The Department shall prescribe such rules, consistent with the Constitution and laws of this State, as [are necessary and appropriate] to [insure] adequate provision of community-based mental health and mental retardation services by departmental facility outreach programs or by community centers and other providers receiving contract funds as designated providers pursuant to Section 4.03 of this Act. Each designated provider contract shall contain a provision authorizing the Department to have unrestricted access to all facilities, records, data, and other information under the control of the designated provider or subcontractor of the designated provider as necessary to enable the Department to audit, monitor, and review all financial and programmatic activities and services associated with the contract. (Emphasis added.)

V.T.C.S. art. 5547-204, § 4.01(a).

This provision gives the department broad authority to make rules applicable to community centers that receive contract funds under section 4.03. The same rules that apply to community centers also apply to the provision of community-based services by the department's own facilities. See also V.T.C.S. art. 5547-204, § 4.03(c). Community centers and other providers are moreover fully accountable to the department for the use of the funds they receive under contract.

The department may adopt rules that are "necessary and appropriate to insure adequate provision of community-based mental health and mental retardation services" by community centers receiving contract funds. If the department reasonably determines that it would be necessary and appropriate under the statutory standard to adopt a rule prohibiting the community centers receiving state funds from making contracts for community-based services in which former employees or their spouses have a substantial interest, the department could adopt such a rule. The rule itself, the duration of the restriction, the definition of "substantial financial interest," and any other provisions of the rule must be reasonable in light of the surrounding facts and circumstances.

SUMMARY

The Texas Department of Mental Health and Mental Retardation has authority under section 2.11(a) of article 5547-202, V.T.C.S., to adopt reasonable rules prohibiting its facilities from entering into contracts for community-based mental health and mental retardation services with former officers and employees, their spouses, and business entities in which the former employees or their spouses have a substantial financial interest for a specific period after the employees have terminated employment with the department. The department also has authority to adopt such rules for community centers established under article 5547-203, V.T.C.S., that receive contract funds from the department under section 4.03 of article 5547-204, V.T.C.S.

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Susan L. Garrison
Assistant Attorney General