What is an Employment Agreement?
An employment agreement is a binding contract between the employer and the employee, and in the normal course an employee is required to sign the employment agreement before any work is performed. In addition to the particulars found in the agreement itself, the signature of the employee will create a prima facie rebuttable presumption of the parties’ intent to enter into the agreement. Generally , terms that might be included in an employment agreement include the nature and scope of the employee’s responsibilities, the term of employment, the remuneration, confidentiality obligations, non-compete obligations, termination provisions and post-employment benefits.
Offer Letters Defined
An offer letter is a written document that officially notifies a candidate of the position he or she is being hired for. It also typically outlines the basic employment conditions, like the job title, pay, schedule and starting date for the most part. Everything listed in an offer letter is negotiable, just as it is in an employment agreement. However, it is generally used for non-management hires and is not as formal as an employment agreement, which usually includes much more detail about the obligations of the employee and the company. If you are hiring for an executive-level or management position, a more formal employment agreement is almost always preferred by companies because it covers a wider range of topics that affect the company.
Employment Agreements v. Offer Letters
Both employment agreements and offer letters are written documents to confirm the terms of employment between an employer and employee. While both documents typically outline duties, compensation and termination provisions, there are many differences between the two that can significantly impact an employee’s expectations of the employment relationship.
Employment agreements tend to be very formal documents that treat various aspects of the employment relationship as legally enforceable contractual obligations. In contrast, offer letters are much less formal documents that often contain vague or ambiguous language, which places more authority in the employer’s hands to unilaterally alter the terms of employment (e.g., termination provisions).
Further, most employment agreements require signatures from both the employer and employee, whereas offer letters are typically signed only by the employee.
Finally, many employment agreements address non-competition and/or non-solicitation obligations of the employee, whereas offer letters do not.
Legal Significance of Employment Agreements
Employment agreements are a contract: An employment agreement is not just a letter saying you’ve been hired. It’s a contract with all the traditional rules and requirements that contracts have. That means it’s likely to create binding obligations. If someone enters into an employment agreement, he or she likely will be obligated to live up to its terms, even if they are harsh or unfair. The employer likely has obligations too. If the agreement obligates the employer to provide severance or healthcare or other benefits, for example, the employer likely will be obligated under the agreement to provide those benefits.
Employment agreements can help resolve legal conflicts. The discussions of an employment agreement can lead to a contractual relationship that may prevent litigation. See, for example, what happens when a candidate for employment accepts an offer of employment in California: "But once an offer has been made and accepted, the employer may not unilaterally revoke it." As a result, if there’s a dispute over whether an agreement was reached, a court may be able to resolve that question using the contract law principles applicable to all contracts.
Employment agreements can create obligations under law. Even if an employment agreement doesn’t involve an "offer" of employment, it may create obligations under substantive laws such as California’s Fair Employment and Housing Act, for example.
Employment agreements often are required under law. Some governmental agencies require agreements with employees describing various aspects of the employment relationship. See, for example, California Labor Code Section 3558, which requires employers in several specific categories to have agreements with employees specifying the nature and scope of the employment.
When Offer Letters Are Enough
Obviously, there are circumstances where an offer letter would be sufficient. For example, there are times when an individual is offered at-will employment. In that case, probably suffice to say, a simple employment offer letter should be enough to seal the deal and create an enforceable agreement. Another example is if a company hires someone for a non-technical job requiring no special skill and no unique training. In that case, a lengthy employment agreement is likely not necessary . Other times, like when you or a company hires someone who is taking over for someone else, there is probably no need for a detailed, formal agreement. In that case, the offer letter can do the heavy lifting. But, of course, this will depend on the facts and circumstances of your unique situation. For example, does the person have a non-compete agreement in place from a previous employer, does he or she require a specific title or designation, need special training, or hold a unique job? If so, then you may want an employment agreement with a little meat on its bones. The same may hold true for management level employees.
Benefits of Employment Agreements
In contrast to a "letter offer," a formal employment agreement is far superior because it provides all of the terms and conditions of employment in a single document, but also-more importantly-because the corresponding consideration afforded to the employee typically requires a legally binding contract. In other words, if an employee signed a contract in exchange for the job (or some tangible benefit), then a court is reluctant to find it unenforceable unless it contains terms that are otherwise illegal, not minor, or in conflict with existing law.
This is the key! In almost every case, the relationship between employer and employee will be one that involves certain terms and conditions of employment that may be quite long. An offer letter, provided that it does not violate any law, is the least legally binding form of agreement that they can make. It does have some enforceability (the mere fact that there is a transparent meeting of the minds between the parties creates a binding contract), but by itself it is really no different from other documents.
To illustrate, if I offered you a job in a letter along with a handwritten ink signing, instead of a proper employment contract, then you might want that job so badly that you agree to the job on the spot. Now let’s hypothetically say that you got hurt and you wanted workers’ compensation. In that situation, the large liability insurance company (in California) would try to obtain a quick, cheap, one-way indemnity. Why? Because it can.
Consequently, the employee would be forced to work for two years without pay before s/he would be vested (and even then, it is unlikely that s/he would receive anything beyond vesting, a purely speculative and uncertain benefit). If termination occurred (as it likely would after just two years of free labor), then the termination would be unfair (absent an at-will arrangement), and the resulting debt from the company would be that much greater. In other words, the employee would be forced to work under material terms that were not clearly defined, for less pay, and with no recourse to pursue the terms of a normal, binding, unilateral employment contract.
In conclusion, a formal employment agreement, even one that is carefully thought out, will not prevent all future claims and adverse events. But the real effect of a formal employment agreement is that it provides some measure of risk mitigation when legal enforcement is required. And many companies find this to be of value.
Frequently Misunderstood
Some of the most common misconceptions we come across regarding employment agreements and offer letters are either that they have been issued or executed absent the parties really understanding the strong legal language in the document(s) or that these documents do not hold any legal power and come back to bite the issuing company later.
The first misconception is of course the most scary for a young or growing business, whose management has put a lot of time into drafting these two important documents, reflects a very common state of affairs. Offer letters and employment agreements are very easy to put together piece meal by Inc. magazine or some employee management website, but many of the examples online simply do not address what you really want or need for your business. When a document leaves a key provision unexplained, omitted or improperly qualified, that failure puts the entire enforcement of the agreement at risk. Why? Because an ambiguous clause such as a choice of law or jurisdiction clause or a provision relating to the duration of the non-compete period standing alone may be legally enforceable, but when combined into a larger context, may fail to provide the results the parties expect.
The second misconception is pretty straightforward. Employment agreements and offer letters are legally binding under New York state law and the doctrine of equitable estoppel will ensure that entitlements or obligations under those agreements will be upheld if a party elects to make one element of an agreement mandatory while effectively violating another key point of the same agreement. While our courts may be growing increasingly conservative and may look askance at employment agreements in the context of an employer’s ability to walk away from the costs of enforcing the same, that particular argument goes more towards interpretation than to the general enforceability of the agreement.
Closing Thoughts for Employers
Employers should not take too lightly the decision to use an employment agreement or offer letter, or reviewing a current format. The consequences of an inappropriate document can be significant. Carefully consider using an agreement and an offer letter together. The risk may not be worth the perceived ease of an offer letter. Both types of documents are valuable to employers for different reasons.
For example, a well-drafted employment agreement can create clarity and limit long-term liability in situations where the relationship could last for years or decades. An offer letter is usually less valuable than an agreement, but is also usually less expensive , and can help with hiring under tight deadlines.
Employers considering these documents should also keep in mind their ultimate goal. Is there a need to strengthen the relationship from both an employment law perspective and from an internal process perspective? Or do you want the flexibility and cost effective nature of an employment offer? There is no one size fits all answer.
Employers that already have both types of documents in place should not overlook the value of an internal audit. Reviewing a current employment agreement or offer letter may save money over the course of the relationship. Spending time up front reviewing and modifying a document can pay dividends down the road.