What is an Offer Letter?
An offer letter is a document that employers use to officially communicate an applicant’s acceptance of an offer of employment. Often the terms and conditions of employment that employers offer are verbal. An offer letter is a good way to ensure that the terms and conditions of employment are clearly and unequivocally understood by the employee.
Offer letters are particularly useful for, and commonly used in, the at-will employment context . An offer letter can clearly spelling out the terms of the offer, such as start date, starting pay, employment classification and duties, confidentiality agreements, and/or non-compete obligations. It is key, however, that each of these items is carefully reviewed so that the offer letter accurately reflects the terms of employment.
Although lawyers often recommend offering employment under an employment contract rather than with an offer letter, offer letters are preferred because they are shorter and it may be appropriate for an employer intending to hire or employ an employee for a limited purpose or length of time.
Legal Binding Nature of Offer Letters
In short, an offer letter is not a legally-binding employment contract. The Federal Court of Australia has considered the circumstances in which a person may be bound by an offer letter, and has found that an offer letter is not a contract of employment with binding effect.
At common law, in order to form a contract, there must be an offer open for acceptance and acceptance of that offer. An offer letter signed by an intended employee will not create a contract of employment if the employee is not at the same time offered employment (that is, if the offer remains conditional at the time it is accepted).
In Gaudet v Ramsay Pharmacy Pty Limited [2012] FCA 270 an offer of employment was made in writing to an employee of a pharmacy which included an expiry period of seven days to accept the offer. The offer was conditional on the employee providing Ramsay with an Australian work visa, acceptable references and previous salary details as well as signing the acceptance document. The employee subsequently provided all of these documents. However, on day 4, Ramsay withdrew the offer, claiming it was at liberty to do so as the employee had accepted an offer of employment with a competitor. The employee commenced Federal Court proceedings alleging that Ramsay had breached its contract of employment.
The Federal Court held that there was no contract formed, as the offer was clearly subject to a four step process. This decision is consistent with other decisions in respect of offer letters which have been found not to be legally-binding contracts.
Factors that Influence Legal Binding Nature of Offer Letters
Certain common elements in an offer letter can help – or prevent – creation of a contract. For example, inclusion of language that the individual is an "at will" employee and that the terms are not binding on the employer unless and until explicitly set forth in a definitive form signed by management with authority on behalf of the entity that would be the employer can go a long way toward ensuring that an offer letter does not bind the company to additional obligations not intended. Nonetheless, many "contract" clauses are included in an offer letter that may still be interpreted to mean that the employee is entering into a contractual obligation. Some of these are:
Acceptance
If an offer letter states that the employee will have [X] days to accept the offer, if he/she fails to return a signed copy of the offer letter within that time, then the offer is deemed to have been rescinded. However, if the letter does not clearly state a time frame for acceptance, the offer will generally remain open for a reasonable time, which is subject to interpretation.
Terms of Employment
Although a number of companies include terms of employment (with the possible exception of "at will") in their offer letters, it is likely that many courts would interpret such terms to be part of a contract. For example, if you were to say in an offer letter that the employee will be promoted to Sr. Director after six months of satisfactory work performance plus a raise in base salary, the court may be of the opinion that the employee has a contractual obligation to work six months. You may wish to delete such clauses from your offer letters.
Disclaimers
Disclaimers in offer letters are intended to avoid the impression that an employment contract has been created. However, in some instances, courts have viewed such disclaimers to mean that the employee is giving up some other rights in exchange for the benefits being offered. Be careful to ensure that any disclaimers you include do not restrict rights in excessive ways.
Effect On Other Policies
If the employee handbook is being replaced by the offer letter or modifications will be made to the handbook, state that clearly in the offer letter and indicate when any such changes will become effective as to the employee who is receiving the offer letter.
Case Studies: Offer Letters that Became Legally Binding
To illustrate when offer letters have become legally binding, here are a few real-life examples and the fallout:
ISS Facility: In California, ISS Facility Services, Inc. was sued when an employee claimed that she had relied on a representation during the hiring process that her 10-week maternity leave would not count against any six-week leaves of absence under the Family and Medical Leave Act (FMLA). Specifically, the candidate alleged that she looked into this issue because she was a new single mother who needed to take FMLA leave to care for her child and she wanted a specific assurance that the employer would not count the 10 weeks she would take under the company’s maternity leave policy against the 12 weeks available under the FMLA. She alleged that she was told to put the maternity leave language in her offer letter, and that she did so. She alleged that she obtained the assurances she requested in her offer letter when her manager told her that the 10-week leave "would not count against" her 12-week FMLA leave.
The employee sued ISS and the company’s client when it became clear that ISS’s actual maternity leave policy did not comport with those representations. The employee settled with the client under a straightforward confidential settlement agreement. ISS, however, may not be so lucky. The court refused to dismiss the case and found that the company’s own policies and California state law supported the alleged representations.
Prudential Financial: In Prudential Financial, Prudential Insurance Co., Prudential Securities Group, and Prudential Financial, LLC (collectively, "Prudential"), the plaintiffs were seven sophisticated former executive employees. At Prudential, they executed modified employment agreements in favorable circumstances, on terms that mirrored draft agreements originally proposed by Prudential.
Prudential offered the employees enhanced severance packages contingent upon execution of new modified employment agreements. The plaintiffs all accepted the offer and executed the agreements to obtain the enhanced severance package. When Prudential later sought to terminate those modified agreements without providing the enhanced severance packages, Prudential took the position that the plaintiffs were rejecting the agreements by accepting the severance package, thereby giving Prudential an out from its contractual obligations.
The court rejected Prudential’s position and found that Prudential intended to be bound by those modified agreements, and that the plaintiffs were not rejecting the agreements by accepting the severance packages.
Clearly, offer letters become a legally binding contract when they include sufficient and specific terms generally reserved for contractual agreements, such as large severance packages and specific commitments not to count certain leaves against FMLA leave. Companies should evaluate these issues when drafting and sending out offer letters, and managers who may verbally represent terms that are inconsistent with the offer letter language should exercise caution.
Legal Guidance for Employers and Employees
Best Practices and Legal Advice for Both Employers and Employees
The above scenario is one of the examples of why it is very important for both employers and employees to understand the legal implications of an offer letter. When creating an offer letter employers should always include a clause that states the letter does not constitute an employment contract, and that the employment relationship is being entered voluntarily. It is important to understand that in the United States, while Canada has a uniform system of employment, in the United States there is a patchwork of state and federal labor laws . It would be a good idea to reach out to a lawyer with experience in dealing with employment law, to ensure that the offer letter has all the disclaimers required under state law. Such an attorney can also ensure that the offer letter does not contain any language that could be construed as misleading or illegal. Employees should also have an attorney look over job offers to ensure that they are not putting themselves in a worse situation than they are currently in. If you are an independent contractor, it is especially important that you have an offer letter drafted at the beginning of your relationship with the employer or client because the scope of employment may never be clearly defined without a written offer letter.
Jurisdictional Impact on Offer Letter Validity
The law applicable to each offer letter and acceptance will dictate whether and to what extent a party can be held to its terms. For example, under the common law (generally unless the parties have agreed otherwise) an offer remains open until the offeror revokes it or is otherwise legally bound by it. In some jurisdictions, state statutes governing deceptive trade practices may also apply to employment transactions and afford a greater level of protection to employees (for example, those based on the notion that misrepresentation by an employer may prevent an unequal bargaining relationship from overriding other enforcement principles).
State choice of law rules typically require a court to examine with which jurisdiction a contract has the closest connection and then apply the laws of that jurisdiction. If there are multiple offer letters with interrelated choices of law concerns, determining which one is effective can be difficult. To seek to avoid these issues, many employers apply the same law to all employee offer letters and make those offer letters subject to their internal policies and procedures, which usually set out in detail its offer letters and the law that will govern.
Conclusion: What You Should Take Away
In reviewing the above considerations, it becomes clear that offer letters can be fraught with legal pitfalls for employers. That said , a well-drafted offer letter can help protect you from later surprises and disputes. A well-crafted offer letter is one that both parties can look to for resolution of many of the questions and uncertainties that may come up during the course of an employment relationship. It does not require the employee to spend the first year of employment hiring an employment attorney to conduct an onslaught of legal research to try and make heads or tails out of what is and is not included in the employment relationship. Employers should remember the legal significance of offer letters, and take extra care to ensure that what is included in the letter, as well as what is omitted, is intended.