Offer Letters Explained
An offer letter is a document that is sent to a candidate once they have successfully passed the various stages of the hiring process. By offering them the position, the employer is informing the candidate that they have completed their screening and that they accept the offered terms of employment. The purpose of an offer letter is to give a candidate written confirmation that they have been offered the job at the company. It can also be used to outline the terms of employment that the candidate has been offered. Generally speaking, terms include basic details such as the date your new employee is expected to start, basic company policies and procedures (such as dress code) , an outline of the pay and benefits the employee will be offered, and any employment contingencies which could be otherwise focused on in a separate offer letter contingent on the completion of a background check.
The offer letter is just that, an offer to extend employment. While it can potentially serve as an employment agreement, in most cases, the language of an offer letter is used to simply offer employment, and does not establish the employee as an at-will employee. This is why so many organizations hire employment lawyers to review their offer letters before they can be sent out and signed by a candidate, so that issues can be raised and thoroughly discussed prior to extending the terms.
Employment Agreements Defined
An employment agreement is a written agreement between the employer and the employee that sets forth the terms and conditions when an individual is hired, or the terms and conditions that apply when an employee is promoted or transferred. Employment agreements are legally enforceable in the employment arena, and as a general rule, govern the relationship between the employee and employer, not the other employees of the employer. There are also rules for how employment agreements can be handled once an employment relationship has started. For example, you cannot add new terms to an employment agreement (such as re-instating the employment agreement that expired) to an employment relationship without meeting certain requirements under state and federal law. An employment agreement should be reviewed by an attorney to ensure that it contains the proper language to comply with relevant law, and that it accurately reflects the terms and conditions of the employment relationship.
While all employment agreements are different, the following are the sections that are usually included in an employment agreement:
While these are the most common topics covered by an employment agreement, the parties are free to include any other topic into the employment agreement, including confidentiality obligations, non-compete covenants, and non-solicitation covenants (for instance, covering the rights and obligations of the parties with regard to the company’s customer base).
Differences Between Offer Letters and Employment Agreements
One of the most vital differences between an employment agreement and an offer letter is that an employment agreement should make clear that it is legally binding in all respects. A well-drafted employment agreement will include a paragraph, signed and dated by the employee, to the effect that, among other things, the employee has read the entire agreement, has had a full opportunity to consult with counsel of his or her choice, understands that this agreement will have a legally binding effect, and agrees to be bound by its terms. A qualified employment attorney should be able to draft such an agreement for a reasonable fee.
An offer letter is not legally binding and is simply an offer from the employer of employment in the future. An employment agreement is intended to be binding on both the employer and the employee upon signature by both parties. This is the case even when the employee’s start date is sometime in the future, e.g., the first day of the next month or the first day of the next quarter in January, April, July, or October.
A well-drafted employment agreement will also clearly define other key terms of employment, such as job duties, report(s) to whom the employee will report, salary, bonus, commission, vacation, sick leave, holidays, dress code, paid and unpaid time off, and termination of employment.
An offer letter, by contrast, will generally be vague in all those areas, as well as in areas such as who controls the employee’s services during the term of employment and to what extent the employee will use his or her own tools, equipment, and facilities, if permitted.
Legal Risks of Offering Letters
In addition to lacking formalities, offer letters may not meet an essential legal requirement to be binding. Courts have sometimes recognized the risk of enforceability when an offer letter includes ambiguous terms, such as an employment starting date. For instance, a Pennsylvania federal court has ruled that an offer letter that mentions a salary, commencement of employment, and a non-compete agreement was uncertain, contradictory, and therefore unenforceable. The court stated that in order to create a binding agreement, an offer letter must contain definite terms or reasonably certain methods of determining terms.
Evidence or reference to a formal employment agreement could also undermine an offer letter as a legally binding instrument. This is true because existing or future agreements between the employer and employee might revoke or supersede a prior offer letter. For example, a federal court in Wisconsin ruled that an offer letter was unenforceable because it did not bestow benefits equal to those that accrued under a subsequent employment contract.
Distinct Terms Typically Included in Employment Agreements
The required terms for an enforceable employment contract include: consideration, the employee’s obligations to perform certain job duties and the company’s obligations to pay wages and other benefits, all for a specified duration. As mentioned above, the contract also defines the rights of both the employer and the employee upon termination.
In some cases, companies will require employment agreements to contain the following additional terms: Confidentiality: Although many employers include a confidentiality clause in their offer letters, it is often limited to the information that is specifically enumerated within the contract. An employment agreement may go into detail about the types of confidential information the employer considers privileged and private, from customer lists to private sales data. In some cases, the contract will even stipulate that the employee agrees to return company property at the end of his or her employment . Non-Compete: Your offer letter may stipulate that you cannot work for a competing company for six months or one year, but an employment agreement may go further by detailing the types of companies that can be considered competitors. It may also specify that the company can take legal action against you along with a specific amount of liquidated damages. Dispute Resolution: A company may require an employment agreement to stipulate a specific dispute resolution policy, such as requiring claims to go to arbitration rather than court. The company may also stipulate through an employment contract that both sides will bear the cost of arbitration equally. The company cannot force you to waive your right to sue or participate in a class or collective action, however, so these clauses are limited to enforcing individual arbitration only.
When to Utilize Each Contract
Both offer letters and employment agreements have valuable roles within your employment practices. However, when you need to use one over the other usually comes down to the specific position for which you are hiring.
Offer Letters
For positions that are entry level or non-exempt, it may only be necessary to issue an offer letter. An offer letter provides the employee with a general overview of his or her job duties, compensation, and expectations. It also provides the employee with basic information about the Company and employment process. An offer letter is not an employment contract. It generally includes an at-will disclaimer which makes it clear the letter does not create a contract of employment or alter the at-will nature of employment.
Employment Agreements
Executive level employees should usually receive an employment agreement. Employment agreements provide a greater level of detail than offer letters which allows the company and the employee to better understand their mutual obligations under the employment relationship. For example, an employment agreement or other similar document can provide for a putative term of employment and can include post-termination obligations such as non-competition, confidentiality, and non-solicitation obligations. It can also void the at-will employment nature of the relationship.
Industry Practice
In some industries, like professional services or technology, a fully executed employment agreement may be the norm, and employees with significant pay ought to have a more complete understanding of their rights and responsibilities.
Company Policy
Company policy can also dictate whether an offer letter or employment agreement is used. For example, if your company has a policy to enter into agreements with its executive team members, or to provide contracts to key employees, this policy should be followed uniformly.
Employer Best Practices
When drafting offer letters and employment agreements, employers should always seek to use the most effective and appropriate document for their specific situation. At the earliest stages of the hiring process, an offer letter is a simple and effective document for communicating employment terms to potential new hires. To make any offer letter effective, it is a best practice to: In drafting comprehensive employment agreements, it is a best practice to: If the role is manager level or above , including compensatory time off in the offer letter may be a best practice in order to further reduce the likelihood that the employee will be asserted to be exempt. Unlike offer letters, employment agreements are not limited to at-will employment terms. While they are more effective and appropriate for certain employees who are not at-will, employment agreements are not for everyone. The employer must consider the personality fit of the candidate, and whether, in the future, the arrangement will be viewed by the candidate as unfair or a bait and switch because an agreement was presented where one was not previously promised.