There are numerous legal decisions that have to be made when your business or nonprofit begins to hire and employ people. One of the most critical decisions you will make is whether to use formal employment contracts, and if so, what should be included in those agreements.
Small businesses and nonprofits often make the mistake of hiring their first few employees or even independent contractors without any formal documentation. Depending on where your employee is located, state and local employment laws may require certain types of employment agreements to be in writing. State and local laws may also require a written notice to new employees that communicates their rate of pay and regular payday. Since the pandemic, it has become almost the norm for small businesses and nonprofits, especially service businesses, to cast a wide net when hiring and to consider remote employees from all over the country. So, while Ohio law does not require a formal offer letter, it’s important to consider the law of the jurisdiction where the worker is located.
Regardless of which laws apply, we frequently recommend documenting the basic terms and conditions of a new hire’s employment in the form of an offer letter. Offer letters typically spell out the new hire’s position, who they will report to, their start date, when and how much they will be paid, whether the person is exempt or nonexempt from overtime requirements, their schedule and work location (including whether the new hire can work remotely), and any benefits for which the new employee might be eligible.
In addition, a well-written offer letter (at least from an attorney’s perspective) will cover certain conditions that you, as the employer, may be required to impose or may at least want to consider:
The offer letter should also confirm and reiterate that the person will be an at-will employee, meaning that either you as the employer or the employee can end the employment relationship at any time, for any reason (just not an illegal reason).
Finally, you should not use the same offer letter for both employees and independent contractors. Independent contractor agreements should emphasize the legal factors that you used to determine the worker should be classified as an independent contractor.
When should you use a more formal employment agreement?
Formal employment agreements are not used as frequently as offer letters. For a standard at-will employee, a formal employment agreement is often overkill. However, a more formal agreement might make sense when you begin hiring executive or management-level employees, especially if you and the potential new employee are negotiating terms such as:
These terms can raise complicated legal and tax questions. For example, granting equity in the company may trigger securities law issues that need to be addressed.