Offer Letters vs. Employment Agreements

Photo by Florian Klauer on Unsplash

Hiring a new employee is an exciting time for any business. But it can also be a legal minefield, especially when you don’t have a dedicated HR professional or department. Once you find your next great hire, should you send them an offer letter or an employment agreement? What’s the difference between the two? And what legal risks should you be aware of, regardless of whether you decide to send an offer letter or an employment agreement?

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Offer Letters

Tip #1: Don't Make Promises

An offer letter confirms an offer of employment but is generally not a binding contract. However, you can inadvertently turn an offer letter into a binding employment agreement by using language that suggests a promise. Often, this comes in the form of language suggesting the company intends to have a long relationship with the new employee or always pays a year-end bonus. These types of implied “promises” can create problems later if you find yourself needing to terminate the employee in question. It should come as no surprise that when money is on the line, a former disgruntled employee will try to claim that their offer letter was really a contract that promised some unpaid sum of money—a certain salary, an annual bonus, severance pay, or other monetary compensation (i.e., an equity interest in the business).

Tip #2: Keep It Simple

Offer letters typically only cover basic information: title, starting salary or rate of pay, general job description/duties, start date, and supervisor’s name. You might also include information regarding company benefits. However, you want to make it clear that benefits are not promised, but instead are subject to change at any time (and often are subject to the terms of a contract with the insurance carrier or other benefit provider). Lastly, if applicable, you should mention any conditions the potential new hire still has to satisfy (i.e., background checks or reference checks).

Tip #3: Maintain Employment-At-Will Status

Most importantly, an offer letter should clearly emphasize the employment-at-will nature of the new employee’s job. Employment-at-will simply means that either the employee or the company can end their relationship at any time. As the employer, you can fire an at-will employee for any reason or even no reason, as long as the reason for the termination is not illegal. Your offer letter should not say anything that might imply something other than at-will employment.

Employment Agreements

Tip #1: Know Why You Are Using a Binding Contract

Unlike offer letters, an employment agreement is a legally binding contract. These are often used for very specific reasons:

• Setting performance metrics that must be met in order to maintain employment or achieve certain incentives (i.e., bonus pay, equity interest in the business)
• Protecting confidential or sensitive business information with confidentiality and non-disclosure provisions
• Establish binding non-compete and non-solicitation obligations
• Confirming that anything developed by the employee will belong to the company and making sure intellectual property rights are properly transferred and documented

Tip #2: Plan for the End of the Relationship

Unlike offer letters, employment agreements usually are binding for a certain term or period of time. However, the employment agreement should carve out the ability to terminate the employee for cause (and specifically define what constitutes “cause”). For even greater flexibility, you might even consider maintaining the employment at will status, but this is usually offset by including a provision for severance pay if the employee is terminated or let go for something other than cause.

Tip #3: Tie Up Loose Ends

Every contract should have an integration or entire agreement clause. This provision, usually found at the end of a contract in the miscellaneous or legal terms section, makes it clear that the written contract is the entire agreement between the parties. This is especially important in employment agreements because it makes it clear that the prior discussions, negotiations, or alleged verbal promises are not part of the contract and therefore not binding on the employer. This avoids a great deal of he-said-she-said if a dispute does arise.

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So when should you use an employment agreement instead of an offer letter? Typically, employment agreements are reserved for high level employees, employees who will have access to confidential information, those who will have a special relationship with clients or customers (and therefore need to be subject to non-solicitation provisions), and employees who will contribute valuable intellectual property that should belong to the company.

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