Five Tips for More Effective Offer Letters

Most seasoned HR professionals and employment lawyers give little thought to offer letters. This isn’t because they’re not important; it’s because the organizations with which we work have developed forms designed to standardize the recruitment process and to minimize the administrative burden associated with onboarding a new hire. While these are worthy objectives, it’s key to keep in mind that even an employer’s most basic form employment documents, like offer letters, may give rise to trouble when they are not reviewed and refreshed on a periodic basis.

Here are five advanced-level tips for employment-law professionals seeking to ensure that offers letters are as effective as they can be:

  1. Include an at-will employment disclaimer, and avoid other promises that may be construed as creating a contract. All of us know that we should state directly in our offer letters that employment is at-will and may be terminated by either the employer or the employee at any time, for any reason, with or without notice. Even so, I still encounter in my practice a surprising number of offer letters that omit this disclaimer, or that otherwise describe the concept of at-will employment in muddy, confusing terms. More nuanced, though, is the fact that an at-will employment disclaimer, even an indisputably clear one, does not foreclose other language in an offer letter from being construed as a contract. I often spot this issue when reviewing bonus-related language in offer letters. Employers should be aware that what seems like efficient shorthand—e.g., “Employee will be eligible for an annual bonus with a target of 15% of base salary”—typically is not adequately descriptive to convey important terms and conditions. Does being “eligible” for a bonus mean that it’s non-discretionary? And is a bonus “target” a guaranteed amount, or are there criteria that are used to determine whether the full “target” amount will be paid?
  2. Describe compensation terms carefully, and with wage-and-hour compliance in mind. An effective offer letter states clearly the manner in which an employee will be paid (e.g., hourly, salary) and whether the employee is entitled to overtime pay. I sometimes encounter letters that state that an employee will be classified as “non-exempt” or “exempt” without further description. There’s nothing legally wrong with this approach, but since much of an offer letter’s value is derived from the fact that it clearly explains to a candidate the key terms and conditions of employment, it makes sense for an employer to explain in its letters more about what “non-exempt” or “exempt” status means (e.g., “You will be entitled to overtime pay of 1.5 times your regular rate for all hours that you work in excess of 40 in a workweek.”). For exempt employees, the best practice is to express salary consistent with the Fair Labor Standards Act—on a weekly basis (e.g., “Employee’s base salary shall be $2,500 per week, which is $130,000 on an annualized basis.”), eliminating the possibility of an employee’s asserting that salary expressed only as an annual sum implies a contract for one year of employment. Wage-and-hour savvy employers also state in offer letters for exempt employees that base salary is intended to compensate the employee for all hours worked, limiting such employees’ ability to later assert in connection with a wage-and-hour claim that salary was intended to cover only a set number of hours (e.g., 40 per week).
  3. Require the employee to acknowledge that she does not have any contractual obligations to any prior employer. Numerous recent surveys of employers demonstrate that the use of non-compete agreements (including agreements that contain post-employment non-disclosure and non-solicitation covenants) is on the rise. These agreements are now being used in industries in which they were previously unheard of, and employers generally are rolling such agreements out more expansively, including to non-executive and non-managerial employees. I have written before about the virtues of investigating, before an employee is hired, whether the employee is party to a non-compete agreement—most significantly, avoiding the surprise and disruption that comes from being notified of the existence of such agreement by phone call on a Friday afternoon when the former employer’s lawyer is waiting at the courthouse to have her application for temporary restraining order heard. To this end, an offer letter is a perfect place to have a candidate to confirm in writing, before employment has commenced, that she is not party to any agreement with a former employer that purports to impose post-employment obligations. The letter should state that, if such agreement exists and has not previously been disclosed, the offer is contingent on the employer’s review and consideration of the agreement in issue. It also is prudent to memorialize in an offer letter instructions about the candidate’s use of other employers’ confidential information during employment—i.e., “Employee is not permitted to bring any former employer’s confidential information (including electronically stored information) onto Company premises or to transfer such information onto any Company computer or information system. Employee is not permitted to use or disclose any former employer’s confidential information in connection with Employee’s employment with the Company.”
  4. Remember that less is often more when describing employment policies and benefits. There is danger in treating an offer letter as a compressed digest of all applicable employment policies and benefits. The trouble with this approach is that it creates the opportunity for ambiguity, especially when the way policies and benefits are described in an offer letter appear to conflict with employee handbooks and benefit plans. This ambiguity can give rise to legal trouble: Which document controls—the offer letter or the formal policy or plan? Some of this trouble can be controlled by stating clearly in an offer letter that, in the event of any conflict between the letter and a policy or plan, the policy or plan will control. But a more effective way to eliminate ambiguity is to avoid creating it in the first place. In most cases, it is adequate to state in an offer letter that an employee’s employment will be subject to all company policies and procedures. This puts the employee on notice that she will be required to comply with such policies and procedures without the necessity of having to summarize the policies and procedures in the offer letter. The same goes for benefits—it is often adequate to state in an offer letter that an employee will be eligible to participate, subject to plan eligibility requirements, in all employee benefit programs offered by the company without having to summarize such programs and, in some cases, without having to detail premiums or how premiums will be split between the employee and the employer.
  5. Clearly identify any contingencies on which the offer is based. Every offer of employment issued in the United States is, as required by law, contingent on the employee’s providing proof of her authorization to work in the United States. Many offers are made subject to other contingencies: satisfactory clearance of a background check, satisfactory completion of a pre-employment drug and alcohol screen, and, in some cases, completion of a pre-employment medical examination. An effective offer letter identifies these and any other applicable contingencies directly. And though they may not qualify as contingencies in the strict legal sense, it is most effective to identify in an offer letter any agreements that a newly hired employee must sign as a condition of continued employment. If, for example, your organization will not allow continued employment of any employee who refuses to enter an agreement to resolve all employment-related dispute through binding arbitration, it is wise to state this condition of employment in the organization’s offer letter. The same logic applies to standard confidentiality and non-compete agreements. And in most cases, the best practice is to provide such agreements to a candidate to review and consider at the time the offer letter is issued. An added benefit to this approach is that it helps to curtail sometimes troublesome hiccups in the hiring process (e.g., on her first day of employment a new hire asserts that she will not sign a standard non-compete agreement and that she was never told during recruitment that she would be required to sign one), and it limits fairness-based arguments that former employees sometimes try to advance to challenge the validity of such agreements (e.g., arbitration agreement is an unenforceable contract of adhesion that was sprung on the employee after employment commenced, and only after her negotiating leverage had evaporated).