Offer Letters Explained
An offer letter outlines the terms of employment for a new hire. It serves to convey the company’s offer and the candidate’s acceptance in writing. By signing an offer letter, both the company and the new hire acknowledge the critical elements of the employment relationship before the start of employment.
Most offer letters include the name and address of the new hire, a job title or position description, details regarding the compensation offered, the anticipated start date, information about relocation assistance, if applicable, and information about what should happen if the written offer is not accepted (e.g., could the offer be given to the next candidate on the list). The offer letter should make clear that the employment is "at will," meaning the employer or new hire may terminate the employment relationship at any time (in the absence of a workplace policy that has the effect of creating an implied contract or an express written contract) . This is important because if a new hire engages in reliance on the offer letter (such as by resigning from his or her current role), it may be difficult for the employer to fire the new hire if the company no longer needs the new hire’s services prior to the date he or she is supposed to start. If an offer letter is contingent on future events (such as, for example, successful completion of background checks, I-9 processing, reference checks, drug testing), the candidate should be informed that no employment relationship has been created until the contingencies have been met. If a counteroffer is made, legal consideration (such as a temporary employment arrangement) generally will not exist. This means that an offer letter could create an implied contract, limiting the at-will nature of the employment relationship. In lieu of an offer letter, employers may wish to send a simple letter confirming the discussion with the candidate, stating the position offered, the start date, and how the candidate can follow up. This will avoid the unintended implications of a more formal document that may, given its contents, create an implied contract with the new hire.
Employment Agreements Explained
Employers seeking certainty with respect to new hires and the employment relationship should consider an employment agreement. An employment agreement is generally more binding in its content than an offer letter because it tends to be comprehensive in nature and covers many important aspects of the employer-employee relationship. In addition, an offer letter is often a separate document from the employee handbook. That is, upon termination, the employer must look to two sources to find the employee’s rights – the offer letter and the employee handbook, whereas if the relationship is governed by an employment agreement, the employer will only need to look to that agreement.
An employment agreement may stipulate a number of key elements of the employment relationship, such as: The law requires an agreement to create an employment relationship (i.e., it’s not enough to have an employee merely accept an offer letter without more). Just having an employee sign an offer letter, even if it contains similar terms as an employment agreement, does not create an enforceable contract as it does not necessarily contemplate consideration. Consideration is what one party to the agreement is getting out of the deal. For example, for an employment contract, the employee may be getting the benefit of job security and the employer is getting the benefit of the employee’s continued services. As noted above, the employee handbook is often a separate document containing some aspects of the employment relationship by setting out the employer’s policies and procedures. The employee handbook is not a stand-alone employment agreement. Rather, the employer may incorporate into its employment agreement certain key terms that are also found in the employee handbook (such as termination notice requirements). This way, the agreement will be binding upon the employee at time of termination, but if the employer wishes to amend any policy contained in the handbook, the amendment will only affect the employee handbook, not the employment agreement, thereby deterring the employee from seeking to have the employment agreement enforceable against the employer.
Comparing Offer Letters and Employment Agreements
• Offer letters typically do not contain a non-compete, while employment agreements usually do. For example, in the case of a job offer made to an entry level accountant by a local CPA firm, the offer letter could expressly state that the employee agrees not to disclose or use company information for a time period after termination, but the letter will not likely contain a non-compete. An employment agreement between a regional bank and its loan officers, on the other hand, may include a non-compete provision that limits the officer’s ability to solicit loans from the Bank’s customers for a certain period of time after termination.
• Similarly, an offer letter may contain a non-interference provision, while an employment agreement may contain the same or, more typically, a non-solicitation provision. For example, if a temporary employee is offered a regular position with a company, it would be advisable to include a non-interference provision in the offer letter, which might state that the employee agrees not to induce other employees to resign from the company for one year after termination. (Note that this is often duplicative of the employer’s handbook policy.) The above-mentioned regional bank offer, on the other hand, may include a non-solicitation provision that restricts the officer’s ability to solicit loans to the Bank’s customers for a certain period of time after termination.
• Offer letters rarely include arbitration provisions. While a lot of employers have adopted the employer friendly dispute resolution forum of arbitration, this practice is often better suited for employment agreements than offer letters. This type of provisions tends to be imposed on all employees, so it is not necessary for an offer letter made to a prospective employee.
• Offer letters should contain language regarding at-will employment, whereas employment agreements should include the term of employment (e.g. "The Employer employs the Employee for a term of three years"). For example, a non-exempt employee who is being hired for seasonal work as a tour guide for a company should receive a short offer letter with a statement that the employment is at-will and can be terminated by either party at any time, with or without cause. Conversely, another company may offer a contract to an at-will employee for a set term of three years.
• Offer letters should be limited in scope to the most important terms of employment, such as salary, position, start date, etc. In contrast, employment agreements often contain a laundry list of terms and conditions. For example, the offer letter for that temporary tour guide position should include language regarding the position, days and hours of work, pay, benefits, etc. The offer letter may also include that the employee past employment references have been verified and that the offer is subject to a satisfactory background check. On the other hand, a corporate employment agreement will typically address non-competition, work performance, non-discrimination, grievance procedures, etc.
When Do You Need an Offer Letter?
So when should a company use an offer letter? Corporately, if you otherwise have no consistent employment agreement policy, are not currently negotiating terms, and the compensation is relatively straightforward, an offer letter is appropriate.
For example, you are hiring an industry veteran with a predetermined salary, some traditional stock compensation, and some predictable IP issues. You do not need to negotiate with this candidate over each of these terms. A persuasive (but brief) email should suffice. After all, you will enter into a company-wide agreement in order to address these relationships.
However, if there are any material issues that require discussion or negotiation, it is more appropriate for the parties to enter into an offer letter that reflects the just-concluded deal terms. For example, are the employee terms different? Is the stock compensation vehicle (such as a phantom equity plan) different than your stock equity plan?
In addition, an employer may want to use an offer letter when a position is particularly important. In that case, the mere offer of employment may be inadequate. A more detailed, carefully drafted offer letter will allow the employee understand carefully the offer and any contingencies.
Employees should be cautious about "just accepting" an offer, without taking the time to fully consider its implications. For example, one company recently gave a new employee the opportunity to select between two offer letters for his position. One offer letter included a mandatory arbitration provision while the other did not. If the employee failed to recognize this implication of his employment, the employee would find himself with no opportunity to plead his case outside of a mandatory arbitration.
In sum, an offer letter is appropriate when the terms are straightforward, or when there are no material terms that require discussion. In particular, it will be useful where the employee and employer can discuss the terms during the interview process, and the employer can provide the employee with a final offer letter that captures the deal terms. An offer letter should also be used when the employer believes the position is particularly important, and the employer wants to emphasize the deal terms, contemplated provisions, and contingencies.
When Do You Need an Employment Agreement?
When an employment agreement is appropriate for a newly hired employee as opposed to an offer letter typically depends on the particular job they will be filling and the strength of the new hire. It is usually recommended to use an employment agreement or a well-written offer letter when it is critical or desirable to set forth in writing important deal points for the company in a legally binding manner.
In general, situations where it is preferred to use an employment agreement are:
- it is critical to protect the company’s intellectual property, confidential information, proprietary information and business relationships – these all can be difficult to protect under state law if no written contract is in place in many states, including California.
- it is important to have a strong employee non-competition , non-solicitation and/or non-recruitment of employees clause.
- the new hire is an executive with hiring and firing and/or signing authority.
- the new hire has access to email and other electronic communications.
- the new hire is a salesperson or can otherwise substantially impact revenue.
- the new hire is receiving salary or equity compensation.
- he/she is being offered a minimum or guaranteed amount of base compensation.
- he/she will receive a sign on bonus or other bonus based on performance.
- he/she will receive a guaranteed severance payment in the event of a termination.
- he/she will receive a guaranteed benefit and/or insurance premium.
- it is important to have a strong arbitration and/or forum selection clause.
- it is important to have a strong waiver of jury trial clause.
- the new hire is relocating and relocating expenses are being provided.
- it is important to require a note to be taken if/when the employee attends training programs, seminars, conferences, etc.
- the employee will have a corporate credit card, cell phone, laptop/desktop, paid insurance.
- the employees has access to company vehicles or in-home visits.
Important Legal Considerations and Common Mistakes
Both offer letters and employment agreements can create legal obligations for both employers and employees, so it is important that you understand those obligations and the legal ramifications of your language. A few things to keep in mind:
- At Will Employment: If your offer letter or employment agreement states that employment with the employer is "at will," the agreement should also explain what that means (e.g., employment at will means that either the employer or employee may terminate the employment relationship at any time and for any reason, with or without prior notice). If you do not want the employment relationship to be at will, you need to make that clear in your offer letter or employment agreement.
- Implied Contracts: Whenever an offer letter or employment agreement is sent to an employee, you run the risk that the language will be construed as creating a contract between you and the employee. Therefore, phrase your offer letters and employment agreements carefully and include express disclaimers that state the letter or agreement is not intended to create an employment contract but simply outlines conditions of employment.
- Exempt Employees: Be clear if you are offering an exempt position, as this will determine if the employee is entitled to overtime pay under the Fair Labor Standards Act.
- Compensation Changes: Be clear about how and when your compensation policies apply to the employee and whether such policies may be changed at any time and/or are merely subject to the employee’s satisfaction of certain conditions.
- Acceptances: If you provide an employment agreement and require a formal acceptance by the employee to finalize, you run the risk of having to deal with unforeseen issues such as renegotiating the terms in light of changes in market conditions, etc. in the future. If you avoid using formal employment agreements altogether and instead use offer letters that do not require an acceptance, you can avoid these issues but run, of course, into some of the concerns mentioned above.
- Deliverability: Make sure the contact information for both the employee and employer are clearly stated on the offer letter/employment agreement and avoid sending late-night or weekend emails to employees with offers. This shows a blatant disregard for work/life balance and may ultimately backfire on you.
These Tips for Employment Documents Will Help
Attention to detail is crucial in preparing offer letters and employment agreements, as mistakes can inadvertently shift the employer’s legal obligations. The following are some tips for drafting effective employment documents:
• Be sure to obtain the necessary information from prospective employees.
• Ensure that the required information is included in both the offer letter and employment agreement, and ensure that both documents are consistent.
• Make sure that you are using the correct template/form, as there are vast differences between employment documents used by different employers, even if the same template/form is used.
• Be careful in choosing the form to use in an offer letter vs. employment agreement. For example, an offer letter should not contain legal terms such as an employee’s starting compensation being contingent upon successfully negotiating the employment agreement.
• Make sure the document reflects current or relevant employment laws. For example, California has a very precise definition for exempt employees, and failing to comply with the definition can have legal ramifications if the employee later challenges their exempt status.
• Label the document (e.g., offer letter or employment agreement) correctly. Employers may mean to issue a document as an offer letter , but mistakenly issue it as an employment agreement, which could render it an employment agreement.
• Include any special requirements for the position, such as confidentiality, non-solicitation, non-competition, etc.
• Be sure to include a job description with the offer letter or employment agreement.
• Be sensitive to the timing of the step or action that will be taken after issuing an offer letter or employment agreement. For example, a prospective employee should not start working for the employer until the employment agreement is executed, and this should be reflected in the offer letter.
• Leave some room to negotiate. Employers make a mistake when they allow little to no room for prospective employees to bargain with them on the terms of the offer letter or employment agreement. Make sure you have the authority to negotiate on behalf of the company.
• Update templates/forms regularly and as necessary, and seek legal counsel when revisions to the document are required or you are unsure if you have included all of the necessary provisions.
Professional resources for creating offer letters and employment agreements include payroll companies (Ascend), human resources consulting firms (Valiant), and employment law attorneys (Fenwick).