Human Resources HandBook: The Basics on Offer Letters

By Peter Ennis, Buchanan Ingersoll & Rooney

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How can a simple offer letter be one of the top ten employment documents employers should consider?  To answer this question, I will refer to one of the points I made in my original post, which is that there are generally four underlying reasons that employees sue their employer: (1) they are surprised by the decision; (2) they feel the employer has treated them unfairly; (3) they feel they have no choice because they have no income; and (4), they are malcontents and would sue under any circumstances.  What is important about these factors is that employers substantially control the first two.  Therefore, employers can reduce legal risks by preventing surprise and treating employees fairly.  That is where a good offer letter is critical.  If it sets forth the employer’s expectations and some the key aspects of the job, it will make it more difficult for the applicant/employee to subsequently claim surprise or unfairness.  For an employer that does not utilize many other employment documents, the offer letter becomes even more important.

Information Which Employers Should Consider Including in Offer Letters

Among the issues employers can or should address in an offer letter are the following:

Job title/Responsibilities.  Particularly for employers that do not have job descriptions, stating the job title in the letter at least sets forth some expectation of the parties’ agreement regarding the employee’s duties.  Including a basic description of job duties or responsibilities will make the expectations even clearer.

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 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.

Compensation.  This not only could involve describing an hourly pay rate, monthly salary, etc., but can also include the basic elements of any bonus or commission system that was discussed.  Because bonuses and commission often lead to disagreements with employees, the more accurately it is described in writing, the better.

Benefits.  Is the applicant going to receive (a) the standard benefit package for someone at 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.

Classification.  If the applicant is going to be treated as exempt from overtime, that should be stated in the offer letter to avoid the applicant from expecting to receive overtime when he ends up regularly working over forty hours per week.

Employment at will.  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 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 she has returned all material belonging to the former employer, prohibit the applicant from violating her prior agreements and restrictions, and tell the applicant who 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 she is going to have to sign it on her first day of work, or the terms of the restrictive covenant can actually be included in the offer letter.

For the foregoing 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 Downsides 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 subsequently meet.  For example, an offer letter might say that the applicant is “entitled” to an “annual” bonus or commission calculated in a particular manner.  If the employer subsequently runs into financial difficulties, it might be difficult to avoid paying the employee what he was “promised” in the offer letter.  That type of problem could arise in any of the categories set forth above.  What if the employee was told she could work at home “x” days per week, but then a new boss comes in and requires everyone to work in the office (as was done by Yahoo)?  What if the employee is told that he will be employed for three years, but the employer becomes dissatisfied with the employee’s work prior to the expiration of the three year period?

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

Offer letters are one document where it would benefit the employer to create a “fill-in-the-blank” form.  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 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 she was hired.

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