<PAGE>
 
                                                                   EXHIBIT 10.37


                              EMPLOYMENT AGREEMENT


          This Employment Agreement shall commence on the 1st day of January,
1997, between Greenbriar Corporation, a Nevada corporation (hereinafter referred
to as "Employer"), and GENE S. BERTCHER (hereinafter referred to as "Employee").

          In consideration of the mutual promises hereinafter set forth, the
parties hereto agree as follows:

1.      EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to
serve Employer, upon the terms and conditions hereinafter set forth.

1.      TERM.  The employment of Employee hereunder and this Employment
Agreement shall commence the date hereof and shall be deemed to recommence on
each day of the term hereof, and shall continue in effect for a period of two
years from the date of each commencement or recommencement or until terminated
sooner pursuant to Section 7 hereof.
 
1.      DUTIES.  During the term of this Agreement, Employee shall be engaged as
an executive employee of Employer and shall  report to the Board of Directors
and Executive Committee of Employer.  Employee's  title shall be Executive Vice
President of Employer, with such powers and duties in those capacities as are
set forth in the Bylaws of Employer. If Employee is elected or appointed with
the Employee's consent to an office with any of Employer's subsidiaries or
affiliates during the term of this Agreement, the Employee will serve in such
capacity or capacities without additional compensation. Employee shall perform
his duties from the Employer's main office in Addison, Texas.

1.      EXTENT OF SERVICES.  During the term of this Agreement, Employee shall
devote substantially his entire working time, attention, and energies to the
business of Employer, consistent with the time and effort he has devoted to the
business of Employer in the past, and shall not during the term of service be
actively engaged in any other business activities.  However, this shall not be
construed as preventing Employee from investing the Employee's personal assets
in such form or manner as may require occasional or incidental services on the
part of Employee in the management, conservation and protection of such
investments and provided that such investments cannot be construed as being
competitive or in conflict with the business of Employer.

1.      COMPENSATION.

1.1.    Base Salary.  Employer will pay Employee during the Employee's term of
service hereunder, as compensation for the Employee's services, the sum of
$180,000 per year (sometimes hereinafter referred to as the "Base Salary"),
payable in biweekly or other installments in accordance with the general
practices of the Employer.  Employee shall be entitled to participate in any and
all executive bonus programs at levels equal to those of employees in comparable
executive positions.  Any bonus compensation shall be payable in the discretion
of the Board of Directors of the Employer.

1.2.    Benefits.

1.1.1.  The Employee shall be entitled to the same benefits generally provided
to other executives of Employer of comparable rank and responsibility as well as
to those generally provided to all officers of Employer in accordance with the
policies of the Employer from time to time. These are to include, but not be
limited to, health insurance and vacation pursuant to the Employer's standard
policy.

1.1.1.  The Employer shall compensate or provide the designated beneficiaries of
Employee with the benefits accrued or vested under any compensation and/or other
benefit plan of the Employer in which Employee was a participant as of the date
of his death.
<PAGE>
 
1.      EXPENSES.  During the term of employment provided for herein, Employer
shall pay or reimburse Employee, in accordance with its standard policy, upon
submission of vouchers by the Employee for all expenses incurred by the Employee
in the interest of Employer's business.

1.      TERMINATION.

1.1.    Termination Events. Subject to the provisions of Paragraph 7.2 of this
Section, this Agreement shall terminate:

1.1.1.  Upon death of Employee.

1.1.1.  At the option of the Employer if Employee shall become disabled and
remain disabled for a period of six (6) months.  Disability shall be defined as
Employee's inability through illness or other cause to perform his normal work
load as measured by the twelve (12) months preceding the commencement of such
disability.  During such disability, Employee shall be compensated in accordance
with Employer's standard policy regarding disability.

1.1.1.  Upon mutual agreement.

1.1.1.  At any time at the option of Employee.

          7.1.5.  At the Employer's option for any good cause.  For purposes of
this Section, "good cause" for termination shall mean: (a) the conviction of
Employee of any act involving moral turpitude, or (b) any material breach by
Employee of any of the terms of, or the failure to perform any covenant
contained in, this Agreement.

          7.1.6.  By the Employee for "Good Reason."  For purposes of this
Agreement, "Good Reason" shall mean the occurrence after a Change in Control of
any of the events or conditions described in Subsections (1) through (9) hereof:

                         (1) a change in the Employee's status, title, position
               or responsibilities (including reporting responsibilities) which,
               in the Employee's reasonable judgment, represents an adverse
               change from his status, title, position or responsibilities as in
               effect immediately prior thereto; the assignment to the Employee
               of any duties or responsibilities which, in the Employee's
               reasonable judgment, are inconsistent with his status, title,
               position or responsibilities; or any removal of the Employee from
               or failure to reappoint or reelect him to any of such offices or
               positions, except in connection with the termination of his
               employment pursuant to Sections 7.1.1, 7.1.2, 7.1.3, 7.1.4 or
               7.1.5, other than Good Reason;

                         (2) a reduction in the Employee's base salary or any
               failure to pay the Employee any compensation or benefits to which
               he is entitled within five days of the date due;

                         (3) a failure to increase the Employee's base salary at
               least annually at a percentage of base salary no less than the
               average percentage increases (other than increases resulting from
               the Employee's promotion) granted to the Employee during the
               three full years ended prior to a Change in Control (or such
               lesser number of full years during which the Executive was
               employed);

                         (4) the Employer's requiring the Employee to be based
               at any place outside 50 miles from Dallas, Texas, except for
               reasonably required travel on the Employer's business which is
               not greater than such travel requirements prior to the Change in
               Control;

                         (5) the failure by the Employer to (a) continue in
               effect (without reduction in benefit level, and/or reward
               opportunities) any material compensation or employee 
<PAGE>
 
               benefit plan in which the Employee was participating immediately
               prior to the Change in Control, unless a substitute or
               replacement plan has been implemented which provides
               substantially identical compensation and benefits to the Employee
               or (b) provide the Employee with compensation and benefits, in
               the aggregate, at least equal (in terms of benefit levels and/or
               reward opportunities) to those provided for under each other
               compensation or employee benefit plan, program and practice as in
               effect at any time within ninety (90) days preceding the Change
               in Control Date or at any time thereafter;

                         (6) the insolvency or the filing (by any party,
               including the Employer) of a petition for the bankruptcy of the
               Employer;

                         (7) any material breach by the Employer of any
               provisions of this Agreement;

                         (8) any purported termination of the Employee's
               employment for Cause by the Company which does not comply with
               the terms of Section 7.1.5.; or

                         (9) the failure of the Employer to obtain an agreement,
               satisfactory to the Employee, from any successor or assign of the
               Employer to assume and agree to perform this Agreement, as
               contemplated in Section 9.2.

          Any event or condition described in Section 7.1.6 (1)-(9) which occurs
prior to a Change in Control but which the Employee reasonably demonstrates (a)
was at the request of a third party who had indicated an intention or taken
steps reasonably calculated to effect a Change in Control (a "Third Party"), or
(b) otherwise arose in connection with, or in anticipation of a Change in
Control, shall constitute Good Reason for purposes of this Agreement
notwithstanding that it occurred prior to the Change in Control.  The
Executive's right to terminate his employment pursuant to Section 7.1.6 shall
not ve affected by his incapacity due to physical or mental illness.

          7.1.7.   For any reason other than those set forth in Sections 7.1.1.,
7.1.2., 7.1.3., 7.1.4, 7.1.5 or 7.1.6.

1.1.    Consequences of Termination.

 
1.1.1.  Upon termination by mutual agreement under Section 7.1.3, by the
Employee under Section 7.1.4., or for good cause under Section 7.1.5, the
Employee shall be paid all salary prorated to the date of termination.

1.1.1.  Upon termination under Section 7.1.1., 7.1.2., 7.1.6. or 7.1.7,
Employee (or his estate) shall be entitled to receive  (1) severance
compensation in lieu of any further compensation after the termination date in a
single payment in cash in an amount equal to two times the Employee's base
salary at the highest rate in effect at any time subsequent to the 90th day
prior to the termination date; and (2) for eighteen (18) months, the Employer's
current cost sharing shall continue on behalf of the Employee and his dependents
and beneficiaries in regard to the life insurance, disability, medical, dental
and hospitalization benefits provided to the Employee at any time during the 90-
day period prior to the termination date.

        The amounts provided for in Section 7.2 shall be paid within five days
after the Employee's Termination Date.  The Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Employee in any
subsequent employment.  The severance pay and benefits provided for in Sections
7.2.4 shall be in lieu of any other severance pay to which the Executive may be
entitled under any Company severance plan, program or arrangement.

        8.  TRADE SECRETS AND CONFIDENTIAL INFORMATION. During the term of this
Agreement, Employee will have access to customer lists and compilations of
information and records specific to and regularly used in the operation of the
business of Employer. Employee acknowledges that such information constitutes
valuable and 
<PAGE>
 
confidential information of the Employer. Employee shall not disclose any of the
aforesaid private company secrets, directly or indirectly, nor use them in any
way, either during the term of this Agreement or after termination of
employment. All files, records, electronic and magnetic files, documents,
specifications, equipment and similar information relating to the business of
Employer, whether prepared by Employee or otherwise coming into Employee's
possession, shall remain the exclusive property of Employer and shall not be
removed from the premises of Employer except as shall be necessary for Employee
to perform Employee's duties under this Agreement. Upon termination of this
Agreement for any reason, Employee will deliver all such materials in his
possession and all copies thereof to Employer.

        9.   GENERAL PROVISIONS.

        9.1  Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by certified mail by
Employer to the residence of Employee, or by Employee to Employer's principal
office.

        9.2. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Employer, its successors and assigns, and the
Employer shall require any successor or assign to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Employer would be required to perform if no such succession or assignment had
taken place. The term "Employer" as used herein shall include successors and
assigns. The term "successors and assigns" as used herein shall mean a
corporation or other entity acquiring all or substantially all the assets and
business of the Employer (including this Agreement) whether by operation of law
or otherwise. Neither this Agreement nor any right or interest hereunder shall
be assignable or transferable by the Employee, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Employee's
legal personal representative.

        9.3. Waiver of Breach. The waiver by Employer or Employee of a breach of
any provisions of this Agreement by the other shall not operate or be construed
as a waiver of any subsequent breach.

        9.4. Entire Agreement. This instrument contains the entire agreement of
the parties. It may not be changed orally, but only by an agreement in writing,
signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.

        9.5. Attorneys' Fees. In the event that there shall be any litigation or
court proceeding with respect to this Agreement or the obligations of the
parties hereunder, the prevailing party shall be entitled to recover reasonable
attorneys' fees and costs from the other party.

        9.6. Governing Law. This Employment Agreement shall be governed by the
laws of the State of Texas.

       10.   Definitions.

       10.1. Change in Control. For purposes of this Agreement, a "Change in
Control" shall mean any one or more of the following events:

          (a) An acquisition (other than directly from the Employer) of any
          voting securities of the Employer (the "Voting Securities") by any
          "Person" (the term person is used for the purposes of Section 13(d) of
          the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
          immediately after which such Person has "Beneficial Ownership" (within
          the meaning of Rule 13d-3 promulgated under the Exchange Act) of
          twenty-five percent (25%) or more of the combined voting power of the
          Employer's then outstanding Voting Securities; provided, however, in
          determining whether a Change in Control has occurred, Voting
          Securities which are acquired in a "Non-Control Acquisition" (as
          hereinafter defined) shall not constitute an acquisition which would
          cause a Change in Control. A "Non-Control Acquisition" shall mean an
          acquisition by (i) an employee benefit plan (or trust forming a part
          thereof) maintained by (A) the Employer or (B) any corporation or
          other Person of which a majority of its voting power or its voting
          equity
<PAGE>
 
          securities or equity interest is owned, directly or indirectly, by the
          Employer (for purposes of this definition, a "Subsidiary" (ii) the
          Employer or its Subsidiaries, or (iii) any Person in connection with a
          "Non-Control Transaction" (as hereinafter defined);

          (b) The Individuals who, as of December 30, 1996, are members of the
          Board (the "Incumbent Board"), cease to constitute at least two-third
          of the members of the Board. Provided, however, that if after the
          election, or nomination for election by the Employer's common
          stockholders, if any new director was approved by a vote of at least
          two-thirds of the Incumbent Board, such new director shall, for
          purposes of this Plan, be considered as a member of the Incumbent
          Board; provided further, however, that no individual shall be
          considered a member of the Incumbent Board if such individual
          initially assumed office as a result of either an actual or threatened
          "Election Contest" (as described in Rule 14a-11 promulgated under the
          Exchange Act) or other actual or threatened solicitation of proxies or
          consents by or on behalf of a Person other than the board (a "Proxy
          Contest") including by reason of any agreement intended to avoid or
          settle any Election Contest or Proxy Contest; or

          (c)  Approval by stockholders of the Employer of:

               (1)  a merger, consolidation or reorganization involving the
                    Employer, unless such a merger, consolidation or
                    reorganization is a "Non-Control Transaction." A "Non-
                    Control Transaction" shall mean a merger, consolidation or
                    reorganization of the Employer where:

                              (i) the stockholders of the Employer, immediately
                    before such merger, consolidation or reorganization, own
                    directly or indirectly immediately following such merger,
                    consolidation or reorganization, seventy percent (70%) of
                    the combined voting power of the outstanding Voting
                    Securities of the corporation resulting from such merger or
                    consolidation or reorganization (the "Surviving
                    Corporation") in substantially the same proportion as their
                    ownership of the Voting Securities immediately before such
                    merger, consolidation or reorganization,

                              (ii) the individuals who were members of the
                    Incumbent Board immediately prior to the execution of the
                    agreement providing for such merger, consolidation or
                    reorganization constitute at least two-third of the members
                    of the board of directors of the Surviving Corporation, or a
                    corporation beneficially directly or indirectly owning a
                    majority of the Voting Securities of the Surviving
                    Corporation, and

                              (iii)  no Person other than (a) the Employer, (b)
                    any Subsidiary, (c) any employee benefit plan (or any trust
                    forming a part thereof) maintained by the Employer, the
                    Surviving Company, the Surviving Corporation, or any
                    Subsidiary, or (d) any Person who, immediately prior to such
                    merger, consolidation or reorganization had Beneficial
                    Ownership of fifty-one percent (51%) or more of the then
                    outstanding Voting Securities, has Beneficial Ownership of
                    fifty-percent (51%) or more of the combined voting power of
                    the Surviving Corporation's then outstanding Voting
                    Securities.

               (2)  A plan of complete liquidation or dissolution of the 
                    Company, or

               (3)  An agreement for the sale or other disposition of all or
                    substantially all of the assets of the Employer to any 
                    Person (other than a transfer to a Subsidiary):

          (d) Notwithstanding the foregoing, a Change in Control shall
          not be deemed to occur solely because any Person (the "Subject
          Person") acquired Beneficial Ownership of more than the permitted
          amount of the then outstanding Voting Securities as a result of the
          acquisition of Voting 
<PAGE>
 
          Securities by the Employer which, by reducing the number of shares
          Beneficially Owned by Subject Persons, provided that if a Change in
          Control would occur (but for the operation of this sentence) as a
          result of the acquisition of Voting Securities by the Employer, and
          after such share acquisition by the Employer, the Subject Person
          becomes the Beneficial Owner of any additional Voting Securities which
          increases the percentage of the then outstanding Voting Securities
          Beneficially Owned by the Subject Person, then a Change in Control
          shall occur.

          IN WITNESS WHEREOF, Employer has caused this Employment Agreement to
be executed in its corporate name by its corporate officers thereunto duly
authorized, and Employee has executed this Employment Agreement.

                                          EMPLOYEE:
 
                                          /s/ Gene S. Bertcher
                                          -------------------------------------
                                          GENE S. BERTCHER
                          
                                          EMPLOYER:
                          
                                          GREENBRIAR CORPORATION
                           
                                          By: /s/ James R. Gilley
                                             -----------------------------------
                                             Name:     James R. Gilley
                                             -----------------------------------
                                             Title:    Chairman, President & CEO
                                             -----------------------------------
 
 By: /s/ Michael E. McMurray
     ----------------------------------------
     Name:  Michael E. McMurray
            ---------------------------------
     Title: Chairman, Compensation Committee
            ---------------------------------
<PAGE>
 
                             EMPLOYMENT AGREEMENT


          This Employment Agreement shall commence on the 1st day of January,
1997, between Greenbriar Corporation, a Nevada corporation (hereinafter referred
to as "Employer"), and JAMES R. GILLEY (hereinafter referred to as "Employee").

          In consideration of the mutual promises hereinafter set forth, the
parties hereto agree as follows:

1.        EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to
serve Employer, upon the terms and conditions hereinafter set forth.

1.        TERM.  The employment of Employee hereunder and this Employment
Agreement shall commence the date hereof and shall be deemed to recommence on
each day of the term hereof, and shall continue in effect for a period of three
years from the date of each commencement or recommencement or until terminated
sooner pursuant to Section 7 hereof.
 
1.        DUTIES. During the term of this Agreement, Employee shall be engaged
as an executive employee of Employer and shall report to the Board of Directors
and Executive Committee of Employer. Employee's title shall be Chairman of the
Board of Directors of Employer, with such powers and duties in those capacities
as are set forth in the Bylaws of Employer. If Employee is elected or appointed
with the Employee's consent to an office with any of Employer's subsidiaries or
affiliates during the term of this Agreement, the Employee will serve in such
capacity or capacities without additional compensation. Employee shall continue
to serve as a member of the Board of Directors and as a member of the Executive
Committee of Employer. Employee shall perform his duties from the Employer's
main office in Addison, Texas.

1.      EXTENT OF SERVICES.  During the term of this Agreement, Employee shall
devote substantially his entire working time, attention, and energies to the
business of Employer, consistent with the time and effort he has devoted to the
business of Employer in the past, and shall not during the term of service be
actively engaged in any other business activities.  However, this shall not be
construed as preventing Employee from investing the Employee's personal assets
in such form or manner as may require occasional or incidental services on the
part of Employee in the management, conservation and protection of such
investments and provided that such investments cannot be construed as being
competitive or in conflict with the business of Employer.

1.      COMPENSATION.

1.1.    Base Salary.  Employer will pay Employee during the Employee's term of
service hereunder, as compensation for the Employee's services, the sum of
$460,000 per year (sometimes hereinafter referred to as the "Base Salary"),
payable in biweekly or other installments in accordance with the general
practices of the Employer.  Employee shall receive fully vested nonqualified
stock options for 200,000 shares of common stock on December 31 of each year of
the term hereof in lieu of any cash bonus, with such options to be issued with
exercise prices equal to the average closing price of the common stock for the
ten trading days preceding December 31 and for terms of ten years each.

1.1.    Benefits.

1.1.1.  The Employee shall be entitled to the same benefits generally
provided to other executives of Employer of comparable rank and responsibility
as well as to those generally provided to all officers of Employer in accordance
with the policies of the Employer from time to time.  These are to include, but
not be limited to, health insurance and vacation pursuant to the Employer's
standard policy.

1.1.1.  The Employer shall compensate or provide the designated
beneficiaries of Employee with the benefits accrued or vested under any
compensation and/or other benefit plan of the Employer in which Employee was a
participant as of the date of his death.
<PAGE>
 
1.      EXPENSES.  During the term of employment provided for herein, Employer
shall pay or reimburse Employee, in accordance with its standard policy, upon
submission of vouchers by the Employee for all expenses incurred by the Employee
in the interest of Employer's Business.

1.      TERMINATION.

1.1.    Termination Events. Subject to the provisions of Paragraph 7.2 of this
Section, this Agreement shall terminate:

1.1.1.  Upon death of Employee.

1.1.1.  At the option of the Employer if Employee shall become disabled and
remain disabled for a period of six (6) months.  Disability shall be defined as
Employee's inability through illness or other cause to perform his normal work
load as measured by the twelve (12) months preceding the commencement of such
disability.  During such disability, Employee shall be compensated in accordance
with Employer's standard policy regarding disability.

1.1.1.  Upon mutual agreement.

1.1.1.  At any time at the option of Employee.

        7.1.5.  At the Employer's option for any good cause.  For purposes of
this Section, "good cause" for termination shall mean: (a) the conviction of
Employee of any act involving moral turpitude, or (b) any material breach by
Employee of any of the terms of, or the failure to perform any covenant
contained in, this Agreement.

        7.1.6.  By the Employee for "Good Reason."  For purposes of this
Agreement, "Good Reason" shall mean the occurrence after a Change in Control of
any of the events or conditions described in Subsections (1) through (9) hereof:

                         (1) a change in the Employee's status, title, position
               or responsibilities (including reporting responsibilities) which,
               in the Employee's reasonable judgment, represents an adverse
               change from his status, title, position or responsibilities as in
               effect immediately prior thereto; the assignment to the Employee
               of any duties or responsibilities which, in the Employee's
               reasonable judgment, are inconsistent with his status, title,
               position or responsibilities; or any removal of the Employee from
               or failure to reappoint or reelect him to any of such offices or
               positions, except in connection with the termination of his
               employment pursuant to Sections 7.1.1, 7.1.2, 7.1.3, 7.1.4 or
               7.1.5, other than Good Reason;

                         (2) a reduction in the Employee's base salary or any
               failure to pay the Employee any compensation or benefits to which
               he is entitled within five days of the date due;

                         (3) a failure to increase the Employee's base salary at
               least annually at a percentage of base salary no less than the
               average percentage increases (other than increases resulting from
               the Employee's promotion) granted to the Employee during the
               three full years ended prior to a Change in Control (or such
               lesser number of full years during which the Executive was
               employed);

                         (4) the Employer's requiring the Employee to be based
               at any place outside 50 miles from Dallas, Texas, except for
               reasonably required travel on the Employer's business which is
               not greater than such travel requirements prior to the Change in
               Control;

                         (5) the failure by the Employer to (a) continue in
               effect (without reduction in benefit level, and/or reward
               opportunities) any material compensation or employee benefit plan
               in which the Employee was participating immediately prior to the
               Change in 
<PAGE>
 
               Control, unless a substitute or replacement plan has
               been implemented which provides substantially identical
               compensation and benefits to the Employee or (b) provide the
               Employee with compensation and benefits, in the aggregate, at
               least equal (in terms of benefit levels and/or reward
               opportunities) to those provided for under each other
               compensation or employee benefit plan, program and practice as in
               effect at any time within ninety (90) days preceding the Change
               in Control Date or at any time thereafter;

                         (6) the insolvency or the filing (by any party,
               including the Employer) of a petition for the bankruptcy of the
               Employer;

                         (7) any material breach by the Employer of any
               provisions of this Agreement;

                         (8) any purported termination of the Employee's
               employment for Cause by the Company which does not comply with
               the terms of Section 7.1.5.; or

                         (9) the failure of the Employer to obtain an agreement,
               satisfactory to the Employee, from any successor or assign of the
               Employer to assume and agree to perform this Agreement, as
               contemplated in Section 9.2.

          Any event or condition described in Section 7.1.6 (1)-(9) which occurs
prior to a Change in Control but which the Employee reasonably demonstrates (a)
was at the request of a third party who had indicated an intention or taken
steps reasonably calculated to effect a Change in Control (a "Third Party"), or
(b) otherwise arose in connection with, or in anticipation of a Change in
Control, shall constitute Good Reason for purposes of this Agreement
notwithstanding that it occurred prior to the Change in Control.  The
Executive's right to terminate his employment pursuant to Section 7.1.6 shall
not ve affected by his incapacity due to physical or mental illness.

          7.1.7.  For any reason other than those set forth in Sections 7.1.1.,
7.1.2., 7.1.3., 7.1.4, 7.1.5 or 7.1.6.

1.1.      Consequences of Termination.

 
1.1.1.    Upon termination by mutual agreement under Section 7.1.3, by the
Employee under Section 7.1.4., or for good cause under Section 7.1.5, the
Employee shall be paid all salary prorated to the date of termination.

1.1.1.    Upon termination under Section 7.1.1., 7.1.2., 7.1.6. or 7.1.7,
Employee (or his estate) shall be entitled to receive  (1) severance
compensation in lieu of any further compensation after the termination date in a
single payment in cash in an amount equal to three times the Employee's base
salary at the highest rate in effect at any time subsequent to the 90th day
prior to the termination date; and (2) for eighteen (18) months, the Employer's
current cost sharing shall continue on behalf of the Employee and his dependents
and beneficiaries in regard to the life insurance, disability, medical, dental
and hospitalization benefits provided to the Employee at any time during the 90-
day period prior to the termination date.

          The amounts provided for in Section 7.2 shall be paid within five days
after the Employee's Termination Date.  The Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Employee in any
subsequent employment.  The severance pay and benefits provided for in Sections
7.2.4 shall be in lieu of any other severance pay to which the Executive may be
entitled under any Company severance plan, program or arrangement.

          8.  TRADE SECRETS AND CONFIDENTIAL INFORMATION. During the term of
this Agreement, Employee will have access to customer lists and compilations of
information and records specific to and regularly used in the operation of the
business of Employer. Employee acknowledges that such information constitutes
valuable and confidential information of the Employer. Employee shall not
disclose any of the aforesaid private company secrets, directly or indirectly,
nor use them in any way, either during the term of this Agreement or after
termination of employment. All files, records, electronic and magnetic files,
documents, specifications, equipment and similar 
<PAGE>
 
information relating to the business of Employer, whether prepared by Employee
or otherwise coming into Employee's possession, shall remain the exclusive
property of Employer and shall not be removed from the premises of Employer
except as shall be necessary for Employee to perform Employee's duties under
this Agreement. Upon termination of this Agreement for any reason, Employee will
deliver all such materials in his possession and all copies thereof to Employer.

          9.   GENERAL PROVISIONS.

          9.1  Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by certified mail by
Employer to the residence of Employee, or by Employee to Employer's principal
office.

          9.2. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Employer, its successors and assigns, and the
Employer shall require any successor or assign to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Employer would be required to perform if no such succession or assignment had
taken place. The term "Employer" as used herein shall include successors and
assigns. The term "successors and assigns" as used herein shall mean a
corporation or other entity acquiring all or substantially all the assets and
business of the Employer (including this Agreement) whether by operation of law
or otherwise. Neither this Agreement nor any right or interest hereunder shall
be assignable or transferable by the Employee, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Employee's
legal personal representative.

          9.3. Waiver of Breach. The waiver by Employer or Employee of a breach
of any provisions of this Agreement by the other shall not operate or be
construed as a waiver of any subsequent breach.

          9.4. Entire Agreement. This instrument contains the entire agreement
of the parties. It may not be changed orally, but only by an agreement in
writing, signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.

          9.5. Attorneys' Fees. In the event that there shall be any litigation
or court proceeding with respect to this Agreement or the obligations of the
parties hereunder, the prevailing party shall be entitled to recover reasonable
attorneys' fees and costs from the other party.

          9.6. Governing Law. This Employment Agreement shall be governed by the
laws of the State of Texas.

         10.   Definitions.

         10.1. Change in Control. For purposes of this Agreement, a "Change in
Control" shall mean any one or more of the following events:

               (a) An acquisition (other than directly from the Employer) of any
               voting securities of the Employer (the "Voting Securities") by
               any "Person" (the term person is used for the purposes of Section
               13(d) of the Securities Exchange Act of 1934, as amended (the
               "Exchange Act"), immediately after which such Person has
               "Beneficial Ownership" (within the meaning of Rule 13d-3
               promulgated under the Exchange Act) of twenty-five percent (25%)
               or more of the combined voting power of the Employer's then
               outstanding Voting Securities; provided, however, in determining
               whether a Change in Control has occurred, Voting Securities which
               are acquired in a "Non-Control Acquisition" (as hereinafter
               defined) shall not constitute an acquisition which would cause a
               Change in Control. A "Non-Control Acquisition" shall mean an
               acquisition by (i) an employee benefit plan (or trust forming a
               part thereof) maintained by (A) the Employer or (B) any
               corporation or other Person of which a majority of its voting
               power or its voting equity securities or equity interest is
               owned, directly or indirectly, by the Employer (for purposes of
               this definition, a "Subsidiary" (ii) the Employer or its
               Subsidiaries, or (iii) any Person in connection with a "Non-
               Control Transaction" (as hereinafter defined);

<PAGE>
 
          (b) The Individuals who, as of December 30, 1996, are members of the
          Board (the "Incumbent Board"), cease to constitute at least two-third
          of the members of the Board. Provided, however, that if after the
          election, or nomination for election by the Employer's common
          stockholders, if any new director was approved by a vote of at least
          two-thirds of the Incumbent Board, such new director shall, for
          purposes of this Plan, be considered as a member of the Incumbent
          Board; provided further, however, that no individual shall be
          considered a member of the Incumbent Board if such individual
          initially assumed office as a result of either an actual or threatened
          "Election Contest" (as described in Rule 14a-11 promulgated under the
          Exchange Act) or other actual or threatened solicitation of proxies or
          consents by or on behalf of a Person other than the board (a "Proxy
          Contest") including by reason of any agreement intended to avoid or
          settle any Election Contest or Proxy Contest; or

          (c) Approval by stockholders of the Employer of:

              (1)  a merger, consolidation or reorganization involving the
                   Employer, unless such a merger, consolidation or
                   reorganization is a "Non-Control Transaction." A "Non-Control
                   Transaction" shall mean a merger, consolidation or
                   reorganization of the Employer where:

                              (i) the stockholders of the Employer, immediately
                      before such merger, consolidation or reorganization, own
                      directly or indirectly immediately following such merger,
                      consolidation or reorganization, seventy percent (70%) of
                      the combined voting power of the outstanding Voting
                      Securities of the corporation resulting from such merger
                      or consolidation or reorganization (the "Surviving
                      Corporation") in substantially the same proportion as
                      their ownership of the Voting Securities immediately
                      before such merger, consolidation or reorganization,

                              (ii) the individuals who were members of the
                      Incumbent Board immediately prior to the execution of the
                      agreement providing for such merger, consolidation or
                      reorganization constitute at least two-third of the
                      members of the board of directors of the Surviving
                      Corporation, or a corporation beneficially directly or
                      indirectly owning a majority of the Voting Securities of
                      the Surviving Corporation, and

                              (iii)  no Person other than (a) the Employer, (b)
                      any Subsidiary, (c) any employee benefit plan (or any
                      trust forming a part thereof) maintained by the Employer,
                      the Surviving Company, the Surviving Corporation, or any
                      Subsidiary, or (d) any Person who, immediately prior to
                      such merger, consolidation or reorganization had
                      Beneficial Ownership of fifty-one percent (51%) or more of
                      the then outstanding Voting Securities, has Beneficial
                      Ownership of fifty-percent (51%) or more of the combined
                      voting power of the Surviving Corporation's then
                      outstanding Voting Securities.

              (2) A plan of complete liquidation or dissolution of the Company,
                  or

              (3) An agreement for the sale or other disposition of all or
                  substantially all of the assets of the Employer to any Person
                  (other than a transfer to a Subsidiary):

          (d) Notwithstanding the foregoing, a Change in Control shall not be
          deemed to occur solely because any Person (the "Subject Person")
          acquired Beneficial Ownership of more than the permitted amount of the
          then outstanding Voting Securities as a result of the acquisition of
          Voting Securities by the Employer which, by reducing the number of
          shares Beneficially Owned by Subject Persons, provided that if a
          Change in Control would occur (but for the operation of this sentence)
          as a result of the acquisition of Voting Securities by the Employer,
          and after such share acquisition by the Employer, the Subject Person
          becomes the Beneficial Owner of any additional Voting Securities which
          increases the percentage of the then outstanding Voting Securities
          Beneficially Owned by the Subject Person, then a Change in Control
          shall occur.
<PAGE>
 
          IN WITNESS WHEREOF, Employer has caused this Employment Agreement to
be executed in its corporate name by its corporate officers thereunto duly
authorized, and Employee has executed this Employment Agreement.

                                       EMPLOYEE:

                                       /s/ James R. Gilley 
                                       -----------------------------------------
                                       JAMES R. GILLEY 
 
                                       EMPLOYER:
                                       
                                       GREENBRIAR CORPORATION
                                       
                                       By:  /s/ Gene S. Bertcher
                                          --------------------------------------
                                       Name:  Gene S. Bertcher
                                             -----------------------------------
                                       Title: Executive Vice President & CFO  
                                              ----------------------------------
                                       
By:  /s/ Michael E. McMurray
   --------------------------------------
Name:  Michael E. McMurray
     ------------------------------------
Title: Chairman, Compensation Committee
      -----------------------------------