Hiring a new employee is an exciting time for any business. But it can also be a legal minefield for small businesses, especially when you don’t have a dedicated HR department. Once you find your next great hire, should you send them an offer letter or an employment agreement?
Offer Letters
Rule 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.
Rule 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. Lastly, if applicable, you should mention any conditions the potential new hire still has to satisfy (i.e., background checks or references).
Rule 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 the relationship at any time. Your offer letter should not say anything that might imply something other than at-will employment.
Employment Agreements
Rule 1: Know Why You Are Using a Binding Contract
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.
Rule 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.
Rule 3: Tie Up Loose Ends
Every contract should have an integration or entire agreement clause. This provision, usually found at the end of the contract, 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 any prior discussions, negotiations, or alleged verbal promises are not part of the contract and therefore not binding on the employer.
Please reach out to our office if you have any questions regarding offer letters or employment agreements.
