An effective offer letter succinctly sets forth the material terms of an employee's employment and makes clear that no other "unwritten" terms are part of the agreement. This article highlights a few key terms that any offer letter should address.
Term Employment Versus At-Will Employment
An offer letter should set forth in clear terms whether the employment will be for a specified term or at will.
Employment is at will by default in all states (with the slight exception of Montana). But including an express clause confirming that the employment is at will makes the intention of the employer and employee explicit. Employers may also wish to specify who is authorized to change that at-will arrangement—for example, if the employee's at-will status can be modified only in a writing signed by a specific company representative.
If the employment will be at will, the offer letter should clearly state that the employee is being hired as an at-will employee and that their employment may be terminated by either party, with or without notice, and with or without cause.
If the employment will be for a specified term, the offer letter should not only identify the duration of the term, but should also address the consequences of termination prior to the expiration of the term. For example:
- Under what circumstances can the employment relationship be terminated early for "cause"?
- If the employment relationship is terminated by the employer early without cause, is the employee entitled to any severance payment? And is that payment conditioned on signing a release?
- Must one side or the other give advance notice of their intention to renew? (Or not to renew?)
- What happens if the term is not renewed? Does the employment become at will, or month to month?
An offer letter must clearly describe all compensation and how it is calculated. For example:
- If hourly, the applicable hourly wage and applicable overtime rate(s)
- If salaried, the per annum rate
Don't assume that salaried workers are ineligible for overtime. Analyze each position to determine if they qualify as exempt from overtime rules under both federal and state law. For a description of some of the common mistakes employers make when classifying employees as exempt, see FLSA Misclassification: Common Mistakes That Employers Make When Classifying Their Employees as "Exempt" from Overtime Requirements.
For commissioned workers, the offer letter should either include all details of the commission plan or reference the employer's commission plan. Some jurisdictions, including California, require commission agreements to be in writing with all material terms. But in all jurisdictions, it is best practice to reduce the commission terms to writing. For example:
- When are commissions earned? (Upon a sale? Upon the employer being paid for the sale?)
- When are commissions calculated/paid?
- What are the consequences of termination of the employment relationship before a commission is fully earned?
If the position is eligible for bonus compensation, the offer letter should state whether the bonus is discretionary or nondiscretionary, and the time frame for payment.
Offer letters should summarize key employment benefits for which the employee may be eligible, but it should be clear that eligibility is subject to the terms of the benefit plans themselves, and that such benefits are subject to change.
Conditions of Offer
The offer letter should make any preconditions to employment clear, including whether the offer is conditioned upon the applicant's legal entitlement to work in the United States and the employer's satisfactory verification of any employment references.
The offer letter can be kept concise if terms such as confidentiality, ownership of intellectual property, and alternative dispute resolution are addressed in accompanying agreements executed upon hire. Any confidentiality agreement attached to an offer letter should include, among other things, a definition of confidential information and the employee's obligation to safeguard such confidentiality information, both during the employment relationship and after it has ended. In addition, the confidentiality agreement should also confirm that the applicant does not have any agreements with prior employers that would otherwise interfere with their duties and that the applicant will not use any confidential information that belongs to any prior employer.
To the extent an employer wants all disputes that may arise to be subject to arbitration, a mutual arbitration agreement may be appended.
The offer letter can and should reference those documents.
Last, an offer letter should also include an integration clause that clarifies that the letter constitutes the entire agreement between the employer and the applicant (i.e., there no oral or written "side deals" beyond what is stated in the letter). It should also clarify that neither party is relying on any representations of the other not stated in the offer.
Clear terms coupled with a clear integration clause make for a clear offer.