After months of recruiting, you’ve finally found the perfect candidate to hire. Your hiring manager is ready to send an offer letter, or maybe an employment contract. It doesn’t much matter, because they’re essentially the same thing, right?
Actually, no. A job offer letter and an employment contract are two completely different HR documents. Below are the ins and outs of both, including legal ramifications to be aware of.
What is an Offer Letter?
An offer letter is a formal document sent to a candidate offering them a job at a company. It includes basic information about the position and offers written confirmation that an employer is selecting the candidate for the job. A job offer letter typically is sent after the offer is made over the phone or email. But even at the point of offer letter receipt, the job offer isn’t necessarily set in stone. Many companies set contingencies before employment begins, like a completed background check or drug screening.
What Does an Offer Letter Entail?
An offer letter should contain basic information that the candidate needs to know if they accept the position. This includes:
- Start date
- Full or part-time status
- Salary or hourly wage, including FLSA exempt or non-exempt status as it pertains to overtime
- Shift or hours the employee will be expected to work
- Pay periods
- Job title
- Job responsibilities (the original job ad can also be included as an attachment)
- Benefits when applicable, such as healthcare, 401(k), life insurance, tuition assistance, flexible spending and so on.
- Paid time off policy, paid holidays, etc.
- Onboarding and first-day instructions
- Additional configurable items as needed
Plan to get an internal review of an offer letter before sending it to the candidate. Also, make sure any letter you email a candidate can be signed electronically, or if the candidate chooses, can be printed, signed and scanned. Candidates can also review details and request changes.
How to Write an Offer Letter that Avoids Contractual Implications
Once a candidate signs an offer letter, it confirms the candidate has accepted the position, which is an important step. However, if the language of the letter implies an employment contract or agreement, you may be legally bound to provide certain benefits even if the relationship is short-lived.
According to SHRM, when writing an offer letter, you should:
- Include a statement that the employment is at will. Every state, except Montana, presumes at-will employment. At-will means that an employer can terminate an employee at any time for any reason, except an illegal one, or for no reason without incurring legal liability. In turn, an employee is free to leave a job at any time for any or no reason with no adverse legal consequences.
- Avoid using phrases that imply an indefinite future of employment. Statements such as this can include “job security,” “we’re a family company” or “in the future.” Your offer letter should include language conveying that the company can alter or rescind any information contained within the letter when needed. For example, if you hire an employee to work a day shift, you may want to allow for the possibility that you will require him or her to work after hours or on weekends if needed.
- Eliminate verbiage that makes promises about future earnings. Don’t promise consistent bonuses or raises. If these conditions can’t be met in the future, i.e., your company earnings don’t support an annual bonus this year, you could open the door to lawsuits from your employees.
- Let your legal department review it. Before sending a job offer letter, let a legal expert review it for language or statements that could lead to a potential lawsuit. Consider creating an offer letter template. Using the same template will save time and ensure every offer meets your legal standards.
What is an Employment Contract?
An employment contract is similar to an offer letter. An employment contract is a signed agreement between employee and employer or labor union. It establishes the rights and responsibilities of both parties. Where an offer letter can be vague about future statements, an employee contract puts them front and center.
According to The Balance Careers, an employment contract can include:
- Salary or wages. An employment contract will itemize everything the employee could earn, including commissions.
- Duration of employment. Unlike an offer letter, which should keep employment duration vague, an employment contract will specify the length of time the employee will work for the company, or how long the current contract remains valid. In terms of a union contract, the union might negotiate labor contracts every year, two years, etc. Executives are also often given terms of employment with clauses to extend.
- Confidentiality. Employment contracts can include clauses about confidentiality or even parts relating to non-disclosure.
- Future competition. Employment contracts may include a noncompete agreement or a noncompete clause. A noncompete states that if the employee leaves the company, he or she will not enter into a job with a competing company. Typically, noncompete clauses have a time limit, like six months or a year.
- Ownership agreement. Ownership agreements included in employment contracts may apply to the employer owning any work-related materials produced by the employee, or perhaps communication devices and/or work equipment.
How Does an Employment Contract Work?
The purpose behind employment contracts is to clearly define the role and responsibilities of both the employer and employee. A written employment contract is just that: a contract that must be upheld by all parties. Breaking the contract could lead to legal consequences. Companies that draft employment contracts have the employee sign off on all the details. Yet there are also implied employee contracts.
Implied employee contracts are not written, but inferred during the job interview or from something that’s written in the employee handbook. According to The Balance Careers, implied employee contracts can be inferred from:
- Actions, statements or past employment history of the employer
- Seen or recorded history of promotions, raises and annual reviews
- Statements made during an interview that imply the job is long-term or permanent
Employment contracts are commonly negotiated between companies and labor unions. The contracts specifically describe wages, benefits, scheduling and working conditions for employees in the union. These contracts also outline how the union can address grievances if workers believe the contract hasn’t been upheld on the employer’s end.
Why Would You Want an Employee Contract?
Just like every other aspect of HR, there are pros and cons to drafting employee contracts. On the pro side, an employee contract:
- Clearly defines responsibilities and benefits. An employee contract does not leave any wiggle room for interpretation about pay, benefits, length of employment or even what happens if the contract is broken. Both the employer and employee know exactly what’s expected of them.
- All parties are covered. Because responsibilities and benefits are laid out in print, both parties are protected. The employer can expect employees to work a set number of hours and days, fulfilling an essential need or task. The employee is protected because if they perform their responsibilities, they receive promised wages and benefits. Neither can go back on their promises without facing legal action.
- Creates a stable work environment. When employees are obligated to perform their responsibilities, employers can count on a certain level of productivity. Employees benefit by knowing they will be employed for a foreseeable amount of time, unless of course they violate the contract.
On the cons’ side, an employment contract may not be right for every employer-employee situation. Employment contracts:
- Seriously limit flexibility. Once the contract is signed, there’s no going back. Stipulations must be met if they are written into the contract.
- Have consequences. While ensuring employees are legally obligated to perform certain work functions is positive, it can also be negative. Because an employee contract is binding, there are legal consequences for breaking the terms, on both sides.
- Are set in stone. An employment contract can only be changed through negotiation with both sides agreeing to the changes. If negotiations don’t go well, your worker base could go on strike, halting all production.
Offer Letter Vs. Employment Contract
Deciding between presenting a candidate or employee with a job offer letter or an employment contract comes down to whether or not you want the relationship to be legally binding. Where an offer letter is unofficial (avoiding statements that promise future wages or employment), an employment contract is exactly the opposite, setting wages and length of employment in legally binding stone.
An Offer Letter
- Isn’t a legally binding contract
- Includes basic information
- Includes an employment “at-will” statement
- Does not include promises of future employment or wages
An Employment Contract
- Is a legally binding contract between employer and employee
- Includes specific details about employment
- May make specific stipulations on employment conditions that differ from “at will”
- Employers and employees cannot break the contract without consequences
- Promises employment for a set amount of time and set wages
Job Offer Example & Template
Creating a template that everyone in the company can use ensures compliance. Here is a sample, taken from SHRM, of a conditional offer letter:
[City, State, Zip code]
Dear [Candidate Name]:
It is with great pleasure that [Company Name] offers you the position of [job title]. You will be reporting to [Name, Title], and your start date is scheduled for [date].
This is a full-time [exempt position that is not eligible for overtime/non exempt position eligible for overtime pay after 40 hours in a workweek (include any relevant state daily OT requirements here)]. We are offering you a starting base wage of $______ [per hour, week] paid [biweekly, semimonthly, etc.].
In addition, your compensation package includes the following (these details are for information purposes and are subject to any policy or plan changes) options:
Eligibility to participate in the company incentive bonus program, subject to the terms and conditions specified in the incentive bonus plan document.
An option for company stock, subject to approval by the Board of Directors and the terms of the company’s stock option plan.
Eligibility for health and dental coverage, 401(k) plan and flexible spending accounts, subject to plan terms.
Eligibility for company-paid benefits such as life insurance, short- and long-term disability and long-term care, subject to applicable waiting periods.
Paid time off (PTO) earned on an accrual basis.
This job offer is contingent upon the following:
[insert any or all of the following:]
Completion of a satisfactory background check.
Passing a drug test.
Satisfactory reference checks.
Execution of an employment/non compete/confidentiality agreement.
Obtaining _____ level security clearance.
Obtaining ____ certification/licensure.
[If applicable, add:
Once the above contingencies are successfully completed, this job offer will also be contingent upon receipt of results of a satisfactory physical examination designed solely to determine your physical ability to perform the duties of the position being offered to you.]
On your first day, you will be given an orientation by Human Resources. This orientation will include completing employment forms, reviewing fringe benefits, introduction to management and touring the premises. Please bring appropriate documentation for the completion of your new-hire forms, including proof that you are presently eligible to work in the United States for I-9 Form purposes. Failure to provide appropriate documentation within three days of hire will result in immediate termination of employment in accordance with the terms of the Immigration Reform and Control Act.
Please indicate your acceptance of our offer by signing below and returning one copy of the letter, with your original signature, to me no later than [date]. If you have any questions about this offer, please contact [Name, Title] at [phone and email].
We look forward to having you as part of our team and believe you will find this opportunity both challenging and rewarding.
I have read and understood the provisions of this offer of employment, and I accept the above conditional job offer. I understand that my employment with [Company Name] is considered at will, meaning that either the company or I may terminate this employment relationship at any time with or without cause or notice.
This offer shall remain open until [date]. Any acceptance postmarked after this date will be considered invalid.
Hire The Right People Fast
It can take months to recruit a new employee, and you don’t want a poorly-written offer letter to stall the process right when you’re at the finish line. Arcoro’s ATS allows HR managers to automate the offer letter process. The letters can be customized, automatically including information provided by the applicant in the ATS, and sent to the new employee for acceptance and an electronic signature.
Once the letter is signed, a copy is stored in our Onboarding module’s electronic filing cabinet. Arcoro’s Onboarding system not only makes a great impression with a smooth, stress-free system, but it is 100% paperless and cloud-based, giving HR departments the ability to streamline the process and eliminate data input errors. Sign up for our Free HR Assessment to see how Arcoro’s modular solutions can improve your recruitment process.