Is your offer letter helping or hurting you?

Posted 2 years ago by GoCo

A job offer letter is different from an employment agreement, but when the offer letter is poorly written, or issued in certain jurisdictions, it can become a contract that binds the parties.

In a perfect world, an employer would give a candidate a verbal offer of employment, without committing to any terms. They would bypass issuing an offer letter altogether and, instead, put everything into an employment agreement. This allows for a single document to act as the final word on the employment relationship.

Unfortunately we don’t live in a perfect world and, occasionally, it may be necessary to send along an offer letter, like when you have a high-value candidate that you really want to join your company.

Maybe they’ve told you that they want to ‘get something in writing’ from you before they’ll consider leaving their current employer. In such instances it’s important to ensure that the offer letter not appear to be a contract, but only an overview of what the new recruit could receive if she were to join your company.


Below, we go over some tips and clauses to include when you’re putting together that offer.

Developing Language and Using a Template

The goal of the offer letter is to set out both the employer’s and employee’s expectations for the job and the employment relationship. But it also needs to manage risks, such as provide protection of the employer’s confidential information and business interests.

As with any document that could be contractual, be sure you know the laws in your jurisdiction before drafting the text for your template(s) since legalities can vary from state to state. Better yet, have your lawyer review any templates before using them.

Usually, the contents of the offer letter go on to form the contents of the employment agreement which outlines in greater detail your rules around such topics as non-disclosure, non-compete, termination, rights to intellectual property, etc. One size doesn’t fit all when it comes to offer letters as there is often a need to customize certain aspects of the contents to match the individual and the role they’ll be performing.

Sure, having a template (ideally a few) you can work from is handy, but you’ll still need to maintain a level of professionalism that sends a positive message to your potential new recruit, seals the deal, and starts them off with a positive onboarding experience.

In order to do that, it’s best to avoid the fill-in-the-blank templates that can make your potential employee feel like they’re just another hire. (Once they’ve agreed to join you, having good HR software, like GoCo’s onboarding module can make the next part of the onboarding experience painless.)

First and foremost, ensure that it’s clear in your offer letter that it is conditional on the candidate meeting your requirements (that you’ll outline clearly in the offer), and that the offer may be rescinded if these contingencies are not met.

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Typically, both formal and informal offer letters include at least the following:

  • The candidate’s name and your company name
  • Job title and status (e.g., full-time, temporary, non-exempt, task-based, etc.)
  • Duration of the employment relationship (e.g., fixed term contract or open)
  • At-will employment status meaning they can be terminated at any time without cause or warning (except when deemed discriminatory), and are also free to end the relationship without notice
  • Reporting structure (their manager’s name and title)
  • Start date and work location
  • Hours of work or job schedule
  • Rate of pay, pay period frequency, and bonus/commission entitlement
  • Entitlement of health and related benefits
  • Retirement benefits and company contributions
  • Paid and unpaid leave, vacation, sick day entitlements
  • Confidentiality/non-disclosure (to protect your company’s trade secrets and proprietary information such as client details, financials, and other sensitive data. In the employment agreement, a separate non-disclosure clause or stand-alone document may be used.)
  • Termination of employment (the rules around either party ending the employment relationship, and applicable payouts/severances, time frames, return of company property)
  • Contingencies of employment (reference checks, probationary period, drug testing, ability to travel, security check, signed employment agreement, signed confidentiality agreement, etc. These are all non-negotiable terms that could result in discontinuing the recruitment process or ending an existing employment relationship if they’re not upheld.)
  • Date the offer of employment expires

 

 

Offers to Skilled Workers, Senior Employees and Executives

When a company in a highly-competitive industry is recruiting skilled and senior candidates they need to up the ante and offer benefits beyond bonuses that their competitors might not be able to in order to persuade them to join. Similarly, there are significant risks associated with the departure of skilled workers, senior employees, and/or executives.

Offer letters need to include language that helps mitigate these risks and outlines bonuses and caveats—leaving specific details to the employment agreement—such as:

Reimbursement of travel, tuition, professional fees, relocation expenses: Enticing a candidate to join your company by agreeing to pay for their various existing or ongoing expenses is increasingly popular. Payments spread out over an extended period of time also encourages long-term employment.

Stock options: This is a less popular form of remuneration for employees than it used to be back in the early 2000s when the tech boom was in its heyday. But with a growing number of start-ups in the marketplace stock options are making a comeback though typically only offered to company executives. The benefit for an employer to offer stock options is that discounted company stock provides compensation without negatively impacting profits, and it can help build long-term, loyal employees who have a vested interest in the company’s success.

Rights to intellectual property: The candidate should know who will own the rights to works and processes created by them during their employment. They will also need to know the penalties for misappropriation and infringement of company intellectual property.

Early termination entitlements/penalties: Should the employer end the relationship earlier than the contract’s end date (or guaranteed term of employment), outline what reimbursement the employee is entitled to (e.g., moving costs, a certain number of weeks’ severance, continued salary for a time, benefits and retirement contributions, etc).

If the employee ends the relationship early, outline what they will forfeit or be required to refund to the company (e.g. stock options, salary, technology, etc).

Non-solicit, non-compete: This complex, but popular clause appears in many offer letters and employment agreements. It details your company’s policy around whether the employee can directly solicit your customers for business, or directly work for competitors, during or after the relationship ends.

Be cautious when using this clause though because, in many jurisdictions, non-compete clauses can be unenforceable when they are considered to limit an employee’s right to earn a living by being:

  • too geographically broad
  • applicable for an unusually long time (more than 6 to 12 months)
  • applicable to junior employees whose move to a competitor would not harm your company
  • unreasonable when it concerns a very narrow field of industry where working for competitors may be the only place an employee can take her skills.

Again, your lawyer will know what’s generally acceptable in your state so be sure to have them develop a clause that will be viewed as fair and enforceable.

Change in Control (CIC or “golden parachute”): When company ownership is transferred to another entity the existing employment agreement may no longer be valid. It’s not uncommon for senior employees to insist on a CIC provision that would entitle them to compensation if their job is negatively impacted by the change. In the case of a publicly-traded company that is undergoing a change of ownership, the Securities and Exchange Commission dictates methods, payouts and other forms of compensation to executives, in the interest of protecting shareholder security. Seek advice from your lawyer before writing language around this provision.

Non-moonlighting: The expectation that employees won’t moonlight or freelance while employed by your company. This belief being that the employee has a conflict of interest, will use your company’s resources, or their job performance will be negatively impacted. This policy is more likely to be enforceable when it applies to full-time salaried employees and not part-timers. Consider that more than 5% of the US workforce holds down multiple jobs for a variety of reasons. Instead of restricting your employees, you could make it a policy that any employee working outside of regular office hours needs to inform you of their side gig, and can be terminated if they’re doing it during regular work hours.

Dispute resolution: Insisting that any employment-related disputes between your company and an employee will be handled by a mediator or arbitrator instead of through the court system can significantly contain such unexpected legal fees, manage risk and promote confidentiality.

All offer letters (and employment agreements) should give candidates a reasonable amount of time to consider the offer (at least three business days) and should encourage them to seek legal advice prior to signing. This helps reinforce the belief that they were well-informed of all terms outlined by the employer, and limits their future recourse.

Ultimately, it’s usually best to avoid an offer letter and just go for the employment agreement, when necessary. If you have to send along a formal offer inviting a recruit to join your company, try to ensure that the contents outline the benefits that that go with the position and not with the individual, and includes contingencies.


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