If you have selected a candidate for employment, you can reduce legal risks by clearly defining the terms and conditions of employment in an offer letter. Below are some tips for drafting an effective offer letter.

What Is An Offer Letter?

An offer letter is a basic employment agreement in which, as the employer, you inform the candidate that he or she is being offered the position for which he or she applied and it contains the basic terms and conditions of employment.

What Should An Offer Letter Contain?

An offer letter should contain the following key components:

  • Basic Job Information. An offer letter should contain the job title, job responsibilities, reporting structure and start date.
  • Compensation. An offer letter should contain the proposed rate of pay (either an hourly rate or salary) and describe the basic elements of any additional compensation, such as a commission or bonus. It is imperative to accurately state the compensation terms in adequate detail to avoid ambiguities down the road.  If any of that compensation is discretionary, or subject to board approval (such as equity incentives), that should be clear too.
  • Classification. An offer letter should indicate if the candidate is exempt from overtime or if the candidate will be paid overtime at a premium rate.  As the employer, you should work with an employment lawyer to analyze whether the position fits within the narrow exemptions to the general rule that employees are entitled to overtime pursuant to applicable state and federal law.
  • Job Location/Work Hours. If the employee is (a) expected to travel for substantial amounts of time, (b) planning to work some or all of his or her time from home, or (c) expected to work non-traditional hours (i.e., nights or weekends), those are all expectations that should be addressed in the offer letter.
  • Start Date. If either the employer or applicant wants an immediate start date or wants to put it off, that needs to be included in the offer letter.  Otherwise, the parties’ expectations will be frustrated from the beginning of the relationship.
  • Benefits. Is the applicant going to receive (a) the standard benefit package for someone at his or her level, (b) no benefits, or (c) special additional benefits not offered to all employees (e.g., extra vacation, a car allowance, laptop, computer, etc.)?  If so, the basics of the parties’ deal should be described in the letter.
  • At-Will Employment. Most offer letters contain a statement confirming that employment is at will, pursuant to which the employer or employee can terminate the relationship at any time for any reason.
  • Restrictions on the Applicant from Prior Employment. If an applicant is subject to a non-compete or non-solicitation agreement from a prior employer, or is otherwise restricted in what he or she may be able to do (e.g., using a former employer’s trade secrets), an offer letter can protect the new employer by having the applicant affirm in writing that he or she has returned all material belonging to the former employer, prohibit the applicant from violating his or her prior agreements and restrictions, and tell the applicant who he or she is to inform in the event of a potential future violation.
  • Restrictions on the Applicant by the Employer. If the new employer wants the applicant to sign a restrictive covenant, the applicant has to agree to such restrictions before or at the time of becoming employed.  If it is done after the employee begins employment, then the employer is probably going to be required to pay the employee additional consideration for signing the agreement to make the restrictions enforceable (at least in Pennsylvania).  Therefore, the offer letter can enclose the agreement, tell the applicant that he or she is going to have to sign it on his or her first day of work, or the terms of the restrictive covenant can actually be included in the offer letter.

For all of these reasons, offer letters can have a substantial impact on reducing an employer’s potential legal liability. At the same time, they can substantially help the employment relationship and the employee’s productivity by setting forth in advance the employer’s basic expectations for the employee.

Are There Drawbacks to Offer Letters?

The only real downside to an offer letter is where it does not say what the employer intended, or if it makes a commitment that the employer cannot (or does not want to) subsequently meet. For example, an offer letter might promise an “annual” bonus but provides no parameters or details as to how and when the bonus is earned or what happens upon termination from employment (i.e. whether the employee is entitled to a pro-rata share upon termination).  Without these details, an employer who fails to pay the annual bonus is exposed to a wage claim for failure to pay an earned bonus.  Another example, common for startup businesses, is an offer letter that promises stock options when a plan is developed.  If the employer never develops a stock option plan, the employee may claim that he or she did not receive a benefit that he or she was promised, exposing the employer to a potential wage claim.  Similarly, any discussion of equity incentive awards should avoid speaking in terms of a percentage of the company and should refer to a specific amount of options or other equity.

Avoiding the foregoing problems is a matter of careful drafting by the employer. Unless the employer has made a particular promise to an applicant, an offer letter can be written to give the employer discretion to make changes to the relationship if circumstances change.

Best Practices in Drafting Offer Letters

Employers should consider having a form offer letter to use for hourly employees and a form to use for salaried employees who do not receive an employment agreement.   The form does not have to be the same for every employee, as long as each candidate for a particular position receives the same basic form.  This will enable employers to consider, in advance, how much they want to put into offer letters and to draft them using language that meets the employer’s needs.

If a “form” document is used, then it should be reviewed by a human resource professional or employment lawyer to avoid the pitfalls described in the preceding section.

Finally, it is a good practice to have the applicant sign and date the letter under a line stating that the he or she has read the letter and is accepting the offer on the terms stated. This helps reduce future disagreements over what the applicant was told when he or she was hired.

Stay tuned for topics related to hiring your team, including employment contracts, protecting your information and intellectual property, personnel policies and employee benefits.