Putting it in writing
Offer letter clarifies the employment relationship
By Anne M. Hilbert
Starting a job can seem easy. However, legal ramifications
can complicate things. Unless they are spelled out —
in writing.
Unlike in most other countries, employment in the United
States is largely an at-will affair. Employers and employees
are free to begin or end an employment relationship with
few, if any, formalities. This informality frequently
extends to written documentation regarding the terms and
conditions of the relationship. All too frequently,
employees may work for an employer for years without any
form of offer letter, employment agreement or other
documentation setting forth the basic nature of the
relationship between the employer and employee.
However, the lack of an offer letter or an employment
agreement can be bad for both the employee and the employer.
For the employee, it can mean that there is no record of
employer promises regarding items such as commissions,
bonuses and guaranteed raises. For the employer, the lack of
any writing setting forth the terms and conditions of the
employment relationship can mean greater exposure to claims,
including wage and hour claims, claims that the employee can
only be terminated for cause, and bonus and commission
claims.
The potential for confusion and abuse by both employers and
employees means that, despite the informality of many
employment relationships in the United States, it is still
advisable to have some form of written document that
defines the nature of the employment relationship between
employer and employee.
This article summarizes matters that should be addressed in
basic offer letters. It is meant to serve simply as a basic
checklist reference to be used when considering offer
letters or employment agreements.
For many employment relationships, short and simple offer
letters should suffice. In fact, a one- to two-page offer
letter can be helpful to both the employer and employee.
Here are some issues to consider covering in the offer
letter:
Nature of the employment relationship —
An offer letter should plainly state the nature of the
employment relationship; specifically: Under what
circumstances can the parties end the relationship? While
many states presume employment to be at-will, with either
the employer or the employee being able to terminate the
employment relationship with or without cause, the offer
letter nevertheless should explicitly state the employment
relationship is at-will. Such a statement can be helpful
evidence if an employee subsequently brings an implied
contract claim premised on the argument that he or she could
only be terminated for cause.
In addition, the offer letter should limit the circumstances
under which the at-will relationship can be altered,
preferably only in a writing signed by a high-level
executive of the employer.
Reporting relationships — Establishing
the identity of the employee's supervisor is advisable not
only for practical reasons, but also for legal reasons.
Identifying the supervisor in the offer letter establishes
who is responsible for the employee's day-to-day
relationship with the employer, and to and from whom the
employee owes and is owed certain expected behaviors.
Ideally, the offer letter should provide the employer with
discretion to change the identity or position of the
supervisor, and any such changes subsequently should be
noted in a writing signed or acknowledged by the
employee.
Duties and responsibilities — While the
day-to-day world of what the employee actually does will
speak volumes in any subsequent disputes, it is still
helpful to outline generally an employee's duties and
responsibilities in an offer letter. Such a description can
help to set expectations for both parties and to delineate
what is and is not within the employee's responsibilities.
It can also be helpful with respect to disputes regarding
whether the employee is exempt or not from federal and state
wage-and-hour laws. Of course, a written job description
should be the ultimate guide in this area, and should be
reviewed at the time the offer letter is drafted to ensure
consistency.
Pay and benefits — Needless to say, pay
and benefits will be the most important issue between
employer and employee, although they frequently are not as
controversial as other issues since they are often addressed
in other documents. Nevertheless, pay and benefits should be
addressed in the offer letter. The letter should state the
total yearly expected base salary for the employee, or the
hourly rate if the employee is nonexempt. Though it should
be assumed by both the employee and the employer that
standard deductions from pay will be made, any unusual
deductions should be identified in the offer letter.
The offer letter also should indicate whether the employee
is to receive standard benefits and may list the major
benefits (such as, medical insurance, vacation leave, sick
leave, holidays) to be provided. To the extent that such
benefits are more fully described elsewhere — in the
employee handbook or summary plan descriptions — the
offer letter should reference these documents as governing
the relevant benefits.
The offer letter or handbook should provide basic details
regarding vacation or paid time off (PTO) benefits —
any eligibility limitations, the number of days, whether
vacation or PTO accrues or is fully vested at the beginning
of the year, and the number of maximum days and hours an
employee may hold before further vesting or accrual is
affected (such as capping).
The employer should reserve the right to modify salary and
benefits so that the employee may not claim an expectancy or
vested right to a set level of compensation or to certain
benefits.
Bonus/commission — Bonuses and
commissions are frequently the subject of disputes between
employees and employers. Differing expectations, the variety
of potential calculations, as well as changes in the
economic landscape can lead to very different ideas of what
an employee should receive in bonuses or commissions.
To avoid confusion, the best practice is to have a detailed
and well-defined bonus or commission plan. If the plan is a
separate document, then the offer letter should explicitly
reference this plan. In addition, the employer should
provide the employee a copy of the plan at the time the
offer is made to guard against potential claims that the
employer misrepresented the bonus or commission plan to the
employee.
Alternatively, if the bonus or commission plan is to be
described only in the offer letter, then such a description
should be thorough and detailed. For instance, the bonus or
commission description should set forth:
the beginning and ending period for eligibility; other eligibility factors; the included territory or products; any quotas; the date on which the bonus or commission is considered
"earned"; an explanation of how the bonus or commission is
calculated; the date on which payment will be made; and what happens to bonus or commission in the event of the
employee's termination
Stock — The offer letter should briefly
describe any initial stock or stock option grant(s) to the
employee, including information such as condition of grant,
number of shares, type of grant (incentive or nonqualified)
and vesting schedule. However, the offer letter also should
make clear that the terms and conditions of any stock grant
will be governed by the employer's stock plan and the
employee's stock grant agreement.
Other unusual benefits — Any unusual benefits
(such as relocation payments or educational stipends) should
be described in the offer letter, and reference should be
made to any other governing documents.
Company rules — Stating the requirement
that the employee will abide by company rules and policies,
including those policies in the employment handbook, can be
helpful in the event of subsequent infraction by the
employee. By making such a representation, the employee is
likely to be held on notice of company policies, even if the
employee has not signed an employee handbook acknowledgment
form.
Proprietary information protections or agreement
— Ideally, the employer should present the
employee with a proprietary information agreement at the
time the employer offers a job to the employee. The employer
should require that this document be executed before the
employee starts to work to ensure that the entire period of
the employee's employment relationship with the company is
protected by the proprietary information agreement.
Moreover, having the employee execute this agreement as a
condition of employment satisfies the necessity of
contractual consideration in many states.
If the employer has a standard proprietary information
agreement, the offer letter should merely indicate that the
employee will be expected to execute and abide by the
proprietary information agreement as a condition of
employment. Some employers also briefly summarize and
emphasize its proprietary information practices in the offer
letter. An employer who chooses to do so should make sure
that this summary does not conflict with or supersede the
proprietary information agreement.
While there is no substitute for a detailed and complete
proprietary information agreement (especially for technology-
based companies), those employers who do not have such a
standard agreement can at least build some protections into
the offer letter. These should include:
a brief definition of what the employer considers to be
"confidential" or "proprietary,"
prohibitions against unauthorized use or disclosure during
and after the employment relationship, an assignment of any right or interest in any proprietary
developments created by the employee relating to the
employer's actual or anticipated business, and a prohibition against the employee's use or disclosure of
third party (including former employer) proprietary
information.
Covenants not to compete/other competitive limitations
— The employment agreement is often an
appropriate place for addressing restrictions on post-
employment activities — covenants not to compete,
nonsolicitation, no-hire clauses — for both strategic
and practical reasons.
However, the extent to which courts will enforce such
restrictions (for instance, in California covenants not to
compete are enforceable only under extremely limited
circumstances and requiring an employee to agree to an
unenforceable covenant can be the grounds of a wrongful
termination claim) and the requirements for enforceability
vary tremendously from state to state. Therefore, an
employer considering incorporating these provisions in the
employment agreement will have to do its homework and should
not simply rely on prefabricated clauses.
Right to work — To help ensure that
potential employees do not have immigration matters that
would prevent them from beginning employment and to comply
with federal immigration law, the offer letter should state
that the employee will be required to provide the employer
with documents establishing the employee's eligibility to
work in the United States within three business days of the
employee's start date. The offer letter should also state
that failure to provide such documentation may result in the
termination of the employee's employment.
Integration language — To protect
against claims that the job the employee has is not the job
the employee was promised, employers should include
integration language in the offer letter. A statement at the
end of the letter that the document represents the complete
understanding between the parties regarding the employment
relationship and that it supersedes all prior oral and
written communications on the subject will make it difficult
for an employee to subsequently make a fraudulent inducement
claim, especially if the offer letter is given at or near
the time the offer is made.
Appropriate integration language can even be helpful when
the employment relationship is reduced to writing after the
employee has started on the job. If the employee executes
such an ex post facto document containing integration
language, he or she will be considered to have accepted the
employment relationship as indicated in the writing,
including any modifications to the original oral offer.
Acknowledgment — The employee's receipt
and acknowledgment of the terms set forth in the offer
letter or employment agreement should be documented. The
easiest and most preferable means of doing so is to require
the employee's signature on the document itself, in which
the employee attests that he or she has read, understood and
accepts the terms of the document. Alternatively, the
employer can have the employee sign a separate form
attesting to understanding and accepting the terms of the
offer letter or employment agreement.
As the above discussion makes clear, offer letters should be
recognized as complex and important documents. There are
numerous concerns that can and should be addressed in such
documents to the ultimate benefit of both the employer and
the employee. Hopefully, the checklist provided in this
article will provide both employers and employees with a
helpful start in fashioning a document that will serve the
needs of both parties in properly defining the employment
relationship.
However, both employers and employees should also realize
that, given the number of issues to be addressed at the
outset of the employment relationship, that
"canned" language can be dangerous, and that there
is no substitute for specific legal advice in crafting offer
letters.
Hilbert is the principal of Employment Matters Counseling & Consulting (EMC2), in Menlo Park, Calif.
Her e-mail is annehilbert@sbcglobal.net.
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