<PAGE>

                                                                   EXHIBIT 10.31


                                                                  CONFORMED COPY


                              EMPLOYMENT AGREEMENT



          THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 26th day of
February, 1998, between SMARTALK TELESERVICES, INC., a California corporation
(the "Company") and ROBERT H. LORSCH (the "Executive").


          WHEREAS, the parties hereto previously have entered into that certain
Employment Agreement, dated July 16, 1996 (the "1996 Employment Agreement"),
with respect to,  among other things, employment of Executive as the President,
Chief Executive Officer and Chairman of the Board of the Company (the "Board");
and

          WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive as Chairman of the Board  and to set forth certain
additional agreements between the Executive and the Company.


          NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:


          1.   Term.
               ----

          The Company will employ the Executive, and the Executive will serve
the Company, under the terms of this Agreement for an initial term of three
years, commencing on February 26, 1998.  Effective as of the expiration of such
initial three-year term and as of each anniversary date thereof, the term of
this Agreement shall be extended for an additional one-year period unless, not
later than twelve months prior to each such respective date, either party hereto
shall have given notice to the other that the term shall not be so extended.
Notwithstanding the foregoing, the Executive's employment hereunder may be
earlier terminated, as provided in Section 4 hereof.  The term of this
Agreement, as in effect from time to time in accordance with the foregoing,
shall be referred to herein as the "Term".  The period of time between the
commencement and the termination of the Executive's employment hereunder shall
be referred to herein as the "Employment Period."


          2.  Employment.
              ----------

              (a) Positions and Reporting.  The Company hereby employs the
                  -----------------------
Executive for the Employment Period as its Chairman of the Board on the terms
and conditions set forth in this Agreement. During the Employment Period, the
Executive shall report directly to the Board of Directors of the Company (the
"Board").

              (b) Authority and Duties. During the Employment Period, the
                  --------------------
Executive shall devote such time, skill and efforts to the business of the
Company as may be reasonably be requested by the Board and the Chief Executive
Officer, and as are commensurate with his position as Chairman of the Board.
Executive shall be based in Southern California (or such other location as
Executive may elect). Notwithstanding the foregoing, the Executive may
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(i) make and manage personal business investments of his choice, (ii) provide
consulting or similar services to persons or entities not engaged in a
Competitive Business, (iii) serve in any capacity with any civic, educational or
charitable organization, or any trade association and (iv) serve on the boards
of directors of other corporations that are not engaged in a Competitive
Business. The Company agrees to provide sales support representation to the
extent that the duties undertaken by Executive involve customer arrangements.


          3.  Compensation and Benefits.
              -------------------------

              (a) Salary.  During the Employment Period, the Company shall pay
                  ------
to the Executive, as compensation for the performance of his duties and
obligations under this Agreement, a base salary at the rate of $310,000 per
annum, payable in arrears not less frequently than monthly in accordance with
the normal payroll practices of the Company (the "Base Salary"). Such Base
Salary shall be subject to review each year for possible increase by the Board
in its sole discretion, but shall in no event be decreased from its then-
existing level during the Employment Period. In addition, Executive shall be
eligible for such bonus amounts, if any, as may from time to time be awarded by
action of the Board.

              (b) Insurance Policies.   The Company shall purchase for up to an
                  ------------------
annual premium amount of $20,000 and maintain in force during the Employment
Period, life and disability insurance on the Executive, the beneficiary of which
shall be designated by the Executive (the "Executive Policies").  In the event
that the Company cancels the Executive Policies, the Executive shall have the
option to continue them in force at his own expense.  The Executive Policies
shall be assigned to the Executive upon the termination of this Agreement.  In
addition,  at his option and to the extent permitted by the terms of such
policy,  Executive may elect to assume payment of the premiums under any
existing "key-man" life insurance policy and to designate the beneficiary
thereof.

              (c) Secretarial Arrangements.  During the Employment Period, the
                  ------------------------
Executive shall be entitled to the services of a secretary or other assistant
selected by Executive, who shall be employed by and at the expense of the
Company; provided, that the Company shall not be responsible for a salary in
excess of $54,000 per year plus the cost of benefits currently provided by the
Company to Executive's secretary.

              (d) Office Space and Furnishings.  During the initial three years
                  ----------------------------
of the Employment Period, Executive shall be provided with a non-accountable
office space and furnishings allowance of $5,000 per month, payable not later
than the fifth day of each calendar month. In addition, the Company shall
provide Executive, for the duration of the Employment Period, with the use of
the office furnishings currently utilized by Executive and his secretary. During
the Employment Period, the Executive shall be provided with access to
telecommunications and e-mail services substantially similar to those currently
provided to Executive at no cost to Executive.


              (f) Other Benefits.  During the Employment Period, the Executive
                  --------------
shall receive such other life insurance, pension, disability insurance, health
insurance, holiday, vacation and sick pay benefits and other benefits which the
Company extends, as a matter of

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policy, to its executive employees and, except as otherwise provided herein,
shall be entitled to participate in all deferred compensation and other
incentive plans of the Company on the same basis as other like employees or the
Company. Without limiting the generality of the foregoing, the Executive shall
be entitled to four (4) weeks vacation during each year of the Employment
Period, which shall be scheduled in the Executive's discretion, subject to and
taking into account the business exigencies of the Company. Unused vacation may
be accrued up to a maximum of six (6) weeks of unused vacation, and thereafter
the Executive shall cease to accrue vacation thereafter until used.

          (g) Miscellaneous Expenses.  During the Employment Period, that
              ----------------------
Company shall provide Executive with a non-accountable expense allowance of
$10,500 per month, payable not later than the fifth day of each calendar month,
which allowance may be utilized by Executive for such purposes as Executive in
his sole discretion may deem necessary or desirable.


          (h) Business Expenses.  During the Employment Period, the Company
              -----------------
shall promptly reimburse the Executive for all documented reasonable business
expenses incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's policies and standards of similar or
comparable companies.

      4.  Termination of Employment.
          -------------------------

          (a) Termination for Cause.  The Company may terminate the Executive's
              ---------------------
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4(c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder
only if the Executive is convicted of or pleads guilty to a felony involving
financial misconduct or moral turpitude.


          (b) Termination for Good Reason.  The Executive shall have the right
              ---------------------------
at any time to terminate his employment with the Company at any time and for any
reason.  For purposes of this Agreement and subject to the Company's opportunity
to cure as provided in Section 4(c) hereof, the Executive shall have "good
reason" to terminate his employment hereunder if such termination shall be the
result of:


                    (i)    a breach by the Company of the compensation and
          benefits provisions set forth in Section 3 hereof;

                    (ii)   notice of non-renewal of the Agreement by the Company
          in accordance with Section 1 hereof;

                    (iii)  notice of termination by the Executive under Section
          4(c) hereof within 12 months following the occurrence of a Change in
          Control (as defined in Section 4(e) hereof); or

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                    (iv) a material breach by the Company of any material terms
          of this Agreement.


          (c) Notice and Opportunity to Cure.  Notwithstanding the foregoing, it
              ------------------------------
shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach") and (2) if such breach is susceptible of
cure or remedy, a period of 30 days from and after the giving of such notice
shall have elapsed without the breaching party having effectively cured or
remedied such breach during such 30-day period, unless such breach cannot be
cured or remedied within 30 days, in which case the period for remedy or cure
shall be extended for a reasonable time (not to exceed 30 days) provided the
breaching party has made and continues to make a diligent effort to effect such
remedy or cure.

          (d) Termination Upon Death or Permanent and Total Disability.  The
              --------------------------------------------------------
Employment Period shall be terminated by the death of the Executive.  The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of any
medically determined physical or mental impairment that can be expected to
result in death or that can be expected to last for a period of six or more
consecutive months from the first date of the disability ("Disability").  If the
Employment Period is terminated by reason of Disability of the Executive, the
Company shall give 30-days' advance written notice to that effect to the
Executive.

          (e) Definition of Change in Control.  A "Change in Control" shall
              -------------------------------
be deemed to have taken place if:


                    (i) there shall be consummated any consolidation or merger
          of the Company in which the Company is not the continuing or surviving
          corporation or pursuant to which shares of the Company's capital stock
          are converted into cash, securities or other property, other than a
          consolidation or merger of the Company in which the holders of the
          Company's voting stock immediately prior to the consolidation or
          merger shall, upon consummation of the consolidation or merger, own at
          least 50% of the voting stock, or any sale, lease, exchange or other
          transfer (in one transaction or a series of transactions contemplated
          or arranged by any party as a single plan) of all or substantially all
          of the assets of the Company; or

                    (ii) any person (as such term is used in Sections 13(d) and
          14(d)(2) of the Securities Exchange Act of 1934, as amended (the
          "Exchange Act")) shall, after the date hereof, become the beneficial
          owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
          directly or indirectly, of securities of the Company representing 35%
          or more of the voting power of all of the then outstanding securities
          of the Company having the right under ordinary circumstances to vote
          in an election of the Board (including, without limitation, any
          securities of the Company that any such person has the right to
          acquire

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          pursuant to any agreement, or upon exercise of conversion rights,
          warrants or options, or otherwise, shall be deemed beneficially owned
          by such person); or

                    (iii)  individuals who as of the date hereof constitute the
          entire Board and any new directors whose election by the Company's
          shareholders, or whose nomination for election by the Company's board,
          shall have been approved by a vote of at least a majority of the
          directors then in office who either were directors at the date hereof
          or whose election or nomination for election shall have been so
          approved (the "Continuing Directors") shall cease for any reason to
          constitute a majority of the members of the Board.


          5.  Consequences of Termination.
              ---------------------------

              (a) Termination Without Cause or for Good Reason.  In the event of
                  --------------------------------------------
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for "good
reason" (each as defined in Section 4 hereof), the Executive shall be entitled
to the following severance pay and benefits:


                  (i) Severance Pay - severance payments in the form of
          continuation of payments of the Executive's Base Salary as in effect
          immediately prior to such termination , as well as the other amounts
          payable pursuant to Section 3, over the longer of (A) the then
          remainder of the Term (as if a timely non-renewal notice has been
          given) and (B) 24 months (the "Severance Period").

                 (ii) Benefits Continuation - continuation for the Severance
          Period of coverage under the group medical care, disability and life
          insurance benefit plans or arrangements in which the Executive is
          participating at the time of termination; provided, however, that the
          Company's obligation to provide such coverages shall be terminated if
          the Executive obtains comparable substitute coverage from another
          employer at any time during the Severance Period.  The Executive shall
          be entitled, at the expiration of the Severance Period, to elect
          continued medical coverage in accordance with Section 4980B of the
          Internal Revenue Code of 1986, as amended (or any successor provision
          thereto).


              (b) Termination Upon Disability.  In the event of termination of
                  ---------------------------
the Executive's employment hereunder by the Company on account of Disability,
the Executive shall be entitled to the following severance pay and benefits:


                  (i) Severance Pay - severance payments in the form of
          continuation of the Executive's Base Salary as in effect immediately
          prior to such termination, as well as the other amounts payable
          pursuant to Section 3, for a period of the longer of 12 months
          following the first date of Disability and the then remainder of the
          Term (as if a timely non-renewal notice has been given);

                 (ii) Benefits Continuation - the same benefits as provided
          in Section 5(a)(ii) above, to be provided during the Employment Period
          while the

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<PAGE>

          Executive is suffering from Disability and for a period of 12 months
          following the effective date of termination of employment by reason of
          Disability.


          In addition to the foregoing, the Company shall remit to the Executive
any benefits received by the Company, as beneficiary, pursuant to any additional
disability insurance policy which was maintained by the Executive prior to his
employment with the Company.


          (c) Termination Upon Death.  In the event of termination of the
              ----------------------
Executive's employment hereunder on account of the Executive's death, the
Executive's heirs, estate or personal representatives under law, as applicable,
shall be entitled to the payment of the Executive's Base Salary as in effect
immediately prior to death for a period of not less than two calendar months and
not more than the earlier of six calendar months or the payment of benefits
pursuant to the Executive's life insurance policy, as provided for in Section
3(d) above.  The Executive's beneficiary or estate shall not be required to
remit to the Company any payments received pursuant to any life insurance policy
purchased pursuant to Section 3(d) above.

          (d) Other Terminations.  In the event of termination of the
              ------------------
Executive's employment hereunder for any reason other than those specified in
subsection (a) through (c) of this Section 5, the Executive shall not be
entitled to any severance pay or benefits continuation contemplated by the
foregoing, except as may otherwise be provided under the applicable benefit
plans or award agreements relating to the Executive.

          (e) Accrued Rights.  Notwithstanding the foregoing provisions of this
              --------------
Section 5, in the event of termination of the Executive's employment hereunder
for any reason, the Executive shall be entitled to payment of any unpaid portion
of his Base Salary through the effective date of termination, and payment of any
accrued but unpaid rights solely in accordance with the terms of any incentive
bonus or employee benefit plan or program of the Company.

          (f) Conditions to Severance Benefits.  (i) The Company shall have the
              --------------------------------
right to seek repayment of the severance payments and benefits provided by this
Section 5 in the event that the Executive fails to honor in accordance with
their terms the provisions of Sections 6, 7 and 8 hereof.

              (ii) For purposes only of this Section, Employee shall be treated
          as having failed to honor the provisions of Sections 6, 7 or 8 hereof
          only upon the vote of two-thirds of the Board following notice of the
          alleged failure by the Company to the Executive, an opportunity for
          the Executive to cure the alleged failure for a period of 30 days from
          the date of such notice and the Executive's opportunity to be heard on
          the issue by the Board.


          6.  Confidentiality.  The Executive agrees that he will not at any
              ---------------
time during the Employment Period or at any time thereafter for any reason, in
any fashion, form or manner, either directly or indirectly, divulge, disclose or
communicate to any person, firm, corporation or other business entity, in any
manner whatsoever, any confidential information or trade secrets concerning the
business of the Company, including, without limiting the generality of the
foregoing, the techniques, methods or systems of its operation or management,
any information


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<PAGE>

regarding its financial matters, or any other material information concerning
the business of the Company (including customer lists), its manner of operation,
its plans or other material data (the "Business"). The provisions of this
Section 6 shall not apply to (i) information disclosed in the performance of the
Executive's duties to the Company based on his good faith belief that such a
disclosure is in the best interests of Company; (ii) information that is, at the
time of the disclosure, public knowledge; (iii) information disseminated by the
Company to third parties in the ordinary course of business; (iv) information
lawfully received by the Executive from a third party who, based upon inquiry by
the Executive, is not bound by a confidential relationship to the Company; or
(v) information disclosed under a requirement of law or as directed by
applicable legal authority having jurisdiction over the Executive.

          7.  Inventions.  The Executive is hereby retained in a capacity such
              ----------
that the Executive's responsibilities may include the making of technical and
managerial contributions of value to Company.  The Executive hereby assigns to
Company all rights, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period which relate to the Business.  This assignment shall include (a) the
right to file and prosecute patent applications on such inventions in any and
all countries, (b) the patent applications filed and patents issuing thereon,
and (c) the right to obtain copyright, trademark or trade name protection for
any such work product.  The Executive shall promptly and fully disclose all such
contributions and inventions to Company and assist Company in obtaining and
protecting the rights therein (including patents thereon), in any and all
countries; provided, however, that said contributions and inventions will be the
property of Company, whether or not patented or registered for copyright,
trademark or trade name protection, as the case may be.  Inventions conceived by
the Executive which are not related to the Business, will remain the property of
the Executive.

          8.  Non-Competition. The Executive agrees that he shall not during
              ---------------
the Employment Period and for a period of one (1) year thereafter, without the
approval of the Board, directly or indirectly, alone or as partner, joint
venturer, officer, director, employee, consultant, agent, independent contractor
or stockholder (other than as provided below) of any company or business, engage
in any "Competitive Business" within the United States.  For purposes of the
foregoing, the term "Competitive Business" shall mean any business directly
involved in prepaid telecommunications services industry.  Notwithstanding the
foregoing, the Executive shall not be prohibited during the non-competition
period applicable above from acting as a passive investor where he owns not more
than five percent (5%) of the issued and outstanding capital stock of any
publicly-held company.  During the period that the above non-competition
restriction applies, the Executive shall not, without the written consent of the
Company, solicit any employee who is under contract with the Company or any
current or future subsidiary or affiliate thereof to terminate his or her
employment; nor shall the Executive solicit employees for any enterprise that
competes with Company; but shall have the right to solicit employees not under
contract with the Company for an enterprise that does not compete with the
Company.

          9.  Breach of Restrictive Covenants.  The parties agree that a breach
              -------------------------------
or violation of Sections 6, 7 or 8 hereof will result in immediate and
irreparable injury and harm to

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<PAGE>

the innocent party, and that such innocent party shall have, in addition to any
and all remedies of law and other consequences under this Agreement, the right
to seek an injunction, specific performance or other equitable relief to prevent
the violation of the obligations hereunder.

          10.  Notice.  For the purposes of this Agreement, notices, demands
               ------
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) three days after being mailed by United States certified or
registered mail, return receipt requested, postage prepaid, addressed as
follows:

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<PAGE>

               (a)  If to the Company, to:


                    SmarTalk TeleServices, Inc.
                    1640 South Sepulveda Blvd., Suite 500
                    Los Angeles, CA 90025
                    Attn:  Chief Executive Officer


               with a copy to:


                    Robert M. Smith
                    Dewey Ballantine LLP
                    333 S. Hope Street
                    Los Angeles, CA 90071-1406


               (b)  If to the Executive, to:
                    Robert H. Lorsch
                    3188 Kings Court
                    Los Angeles, CA 90077


               with a facsimile copy thereof to Executive at (310) 471-9653

               and with a further copy to:



                    Robert Thau
                    Rosenfeld, Meyer & Susman
                    9601 Wilshire Blvd.
                    Beverly Hills, CA  90210


or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.


          11.  Excise Tax Limit.  Notwithstanding anything in this Agreement to
               ----------------
the contrary, in the event it shall be determined that any payment or
distribution by the Company or any other person or entity to or for the benefit
of the Executive is a "parachute payment" (within the meaning of Section 280G of
the Code, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment") in connection with, or
arising out of, his employment with the Company or a change in ownership or
effective control of the Company (within the meaning of Section 280G of the
Code, and would be subject to the excise tax imposed by Section 4999 of the
Code) (the "Excise Tax"), the Payments shall be reduced to the extent necessary
so that such remaining Payment would not be subject to the excise tax imposed by
Section 4999 of the Code.

          12.  Arbitration; Legal Fees.  Except as provided in Section 9 hereof,
               -----------------------
any dispute or controversy arising under or in connection with this Agreement
shall be (i) submitted

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<PAGE>

to mediation for resolution within a period of 30 days and (ii) if such
mediation shall not result in a mutually agreeable settlement, shall be settled
exclusively by arbitration in Los Angeles County, California in accordance with
the rules of the American Arbitration Association then in effect, provided that
the arbitrators shall be bound by the terms of this agreement and the law of
California. Judgment may be entered on the arbitrator's award (which shall be
final and non-appealable) in any court within Los Angeles County. The Company
shall reimburse Executive for all reasonable legal fees and costs and other fees
and expenses which Executive may incur in respect of any dispute or controversy
arising under or in connection with this Agreement; provided, however, that the
Company shall not reimburse any such fees costs and expenses if the fact finder
determines that the action brought by the Executive was frivolous.

          13.  Waiver of Breach.  Any waiver of any breach of this Agreement
               ----------------
shall not be construed to be a continuing waiver or consent to any subsequent
breach on the part either of the Executive or of the Company.

          14.  Non-Assignment; Successors.  Neither party hereto may assign his
               --------------------------
or its rights or delegate his or its duties under this Agreement without the
prior written consent of the other party; provided, however, that: (i) this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Company upon any sale of all or substantially all of the
Company's assets, or upon any merger, consolidation or reorganization of the
Company with or into any other corporation, all as though such successors and
assigns of the Company and their respective successors and assigns were the
Company; and (ii) this Agreement shall inure to the benefit of and be binding
upon the heirs, assigns or designees of the Executive to the extent of any
payments due to them hereunder.  As used in this Agreement, the term "Company"
shall be deemed to refer to any such successor or assign of the Company referred
to in the preceding sentence.

          15.  Withholding of Taxes.  All payments required to be made by the
               --------------------
Company to the Executive under Section 3(a) of this Agreement shall be subject
to the withholding of such amounts, if any, relating to tax, and other payroll
deductions as the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.

          16.  Severability.  To the extent any provision of this Agreement or
               ------------
portion thereof shall be invalid or unenforceable, it shall be considered
deleted therefrom and the remainder of such provision and of this Agreement
shall be unaffected and shall continue in full force and effect.

          17.  Director and Officer Insurance.  The Company shall use its best
               ------------------------------
efforts to obtain and maintain director's and officer's insurance for the
Executive (in such amounts as are appropriate for executives of businesses
comparable to that of the Company) pursuant to Board of Directors indemnity
agreements then in force and shall give (and shall require the insurance carrier
to give) timely notice to the Executive of termination of any such insurance
policy.

          18.  Counterparts.  This Agreement may be executed in one or more
               ------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

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<PAGE>

          19.  Governing Law.  This Agreement shall be construed, interpreted
               -------------
and enforced in accordance with the laws of the State of California, without
giving effect to the choice of law principles thereof.

          20.  Entire Agreement.  This Agreement constitutes the entire
               ----------------
agreement by the Company and the Executive with respect to the subject matter
hereof and supersedes any and all prior agreements or understandings between the
Executive and the Company with respect to the subject matter hereof, whether
written or oral, including without limitation the 1996 Employment Agreement;
provided, however, that all stock option agreements between the Company and the
Executive shall remain in full force and effect and provided, further, that
Executive shall be entitled to all amounts payable or reimbursable under the
1996 Employment Agreement for periods ending on or prior to the date hereof.
This Agreement may be amended or modified only by a written instrument executed
by the Executive and the Company.


          IN WITNESS WHEREOF, the parties have executed this Agreement as of
February 26, 1998.




                                           SMARTALK TELESERVICES, INC.


                                           By:  /s/ Erich L. Spangenberg
                                                ________________________
                                                Erich L. Spangenberg


                                                /s/ Robert H. Lorsch
                                                ________________________
                                                Robert H. Lorsch





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