For many companies, recruiting an employee may involve drafting an offer letter and/or employment contract – and for good reason. These two HR documents can help organizations minimize the risks associated with hiring, like losing a candidate to the competition or even legal action due to wrongful termination. These are serious concerns considering employment lawsuits are up, thanks in large part to the COVID-19 pandemic. But these two HR documents aren’t interchangeable, especially when it comes to legalities. There are serious differences between an offer letter and an employment contract that all companies should understand.
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 you want the relationship to be legally binding. Whereas 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
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 – start date, title, salary, onboarding information – 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 by 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.
Some important details about an offer letter are:
- It is NOT a legally binding contract
- It does NOT include promises of future employment or wages
- It includes an employment “at-will” statement. 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.
An Employment Contract
An employment contract is similar to an offer letter. An employment contract is a signed agreement between an 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.
Details to consider about an employment contract include:
- It IS a legally binding contract between employer and employee
- It includes specific details about employment
- It may make specific stipulations on employment conditions that differ from “at will”
- Employers and employees cannot break the contract without consequences
- It promises employment for a set amount of time and set wages
Best Practices for Drafting Offer Letters
According to SHRM, when writing an offer letter, you should:
- 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.
Best Practices for an Employment Contract
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.
- Don’t forget to add essential clauses. An employment contract should include salary information but also clauses about the duration of employment, especially when dealing with union contracts, confidentiality, future competition like noncompete agreements and ownership agreements. Ownership agreements may apply to the employer owning any work-related materials produced by the employee, or perhaps communication devices and/or work equipment.
- Clearly define responsibilities and benefits. One of the biggest benefits to an employment contract is that it doesn’t leave any wiggle room for interpretation about pay benefits, length of employment or even what happens if the contract is broken. Make sure your employment contracts are drafted with this in mean, laying out responsibilities in print so all parties involved – employees and employers – are protected.
- Check and double-check. Once a contract is signed, there’s no going back. The stipulations written in must be met. Because an employee contract is binding, there are legal consequences for breaking the terms, on both sides. Make sure everything you want included about the working relationship of your employee(s) is included in the contract and anything you don’t want, isn’t.
A great offer letter can help companies seal the deal when recruiting a new employee. Arcoro’s Applicant Tracking System allows HR managers to automate the offer letter process so they can send customized offers directly to the applicant with all the information they need to accept your offer through electronic signature.
Once the letter is signed, a copy can be stored in 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.