By Peter B. Kelman, Esq.
Danielle N. Cannito, Esq.
This article appeared in substantially the same form in the Boston Business Journal, August 25, 2000.
Our parents’ dream was to have one job for life and then collect pension for retirement. How times have changed. Today the prospective employee targets the “pre-ipo” employer and hopes to remain for the public offering, or until the employee’s stock options vest and stock restrictions lapse. Perhaps we have not quite gotten to where everyone has fifteen minutes of fame; but it seems that we are moving to a job market of the fifteen minute employee. As the cycle of hiring and termination compresses, the frequency with which employers either hire or attempt to hire prospective employees has greatly multiplied.
In this environment, it is not surprising that the preliminaries to employment matter as much as the job itself. Employers are learning that the “offer letter,” the final carrot placed before the prospective hire, is a crucial document which needs careful attention. When well-crafted, an offer letter can communicate information to a prospective employee and make the candidate feel “coveted” by the employer, while protecting the employer from unanticipated claims later in the process. When poorly drafted, an offer letter can feel more like a slap on the wrist to a candidate and expose an employer to unintended contractual obligations, thereby leaving the employer open to lawsuits.
Like most communications, the offer letter serves several functions. Don’t let the legal dimensions of an offer letter overwhelm the fact that it should make the candidate feel good about joining the company. If it is difficult to combine the multiple messages in one communication, prepare two letters. One can be a “feel good” letter from the company’s president that refers to a letter from “legal” or “human resources” with all the dry, but important, terms discussed below. Whichever approach you take, be careful to say what you mean and mean what you say. Assume that whatever you offer an employee upon joining your company, an employee will demand upon leaving your company.
Employer beware! Spoken words can create a contract. Although job offers can be extended verbally, it is preferable to communicate an offer in writing to prevent misunderstandings about issues described below.
Here are some tips to handle the more important issues in an offer letter.
Most employers want an “at-will” relationship with their employees. This means that the employer is not obligated to retain the employee for a specific length of time; theoretically, an employer may terminate an at-will employee for any legitimate business reason without incurring liability. Your employment letter is the document that creates this at-will relationship. You do not want your offer letter to inadvertently create an employment contract. It is especially important that a signed offer letter contain an “at-will” disclaimer so as not to be misconstrued as creating an employment contract for a definite period of time or a contractual entitlement to the compensations and benefits described in the letter. Your offer letter should include an “at-will” disclaimer that employment is not for a definite duration, and is terminable by either the employer or the employee at any time, for any reason. You can introduce at-will language with a positive spin by stating that the employer looks forward to a mutually beneficial employment relationship. While it is important that these magic words are included in the offer letter, you do not have to go overboard.
Expression of Compensation
To avoid the inference that you guarantee employment for one year, the offer letter should not reference a candidate’s annual salary. Rather, the reference to compensation should reflect the amount of compensation based on the employer’s payroll schedule (e.g., weekly or bi-weekly). Massachusetts law requires that employees be paid no less often than bi-weekly or semi-monthly. Executive, administrative and professional employees (i.e., exempt employees under the Fair Labor Standards Act) may elect to be paid monthly; non-exempt employees cannot make such an election. If you intend to pay an exempt employee monthly, you should say so in the offer letter as evidence that the employee has agreed to such a payment schedule.
If a candidate for employment will be eligible for a bonus, the offer letter should clearly state the amount and date of payment of the bonus. If the bonus is discretionary, the offer letter should state that in no uncertain terms. In addition, if the bonus is contingent upon certain performance criteria such as achieving a sales quota, or the company earning certain revenues, the offer letter should explicitly define the metrics for such performance targets.
Grants of Stock or Options
Stock options are a typical component of an employee’s compensation “package” in high-tech companies and should be addressed in the offer letter. Any grant of stock or stock options should state the following: (a) price of the stock or options; (b) whether the grant is subject to approval of an administrator (e.g., Board of Directors); (c) whether the grant is contingent upon certain performance criteria; (d) any vesting schedule; (e) whether the grant is contingent upon signing standard agreements; and (f) that any grant of options is subject to the terms of the company’s stock option plan. Options and stock should not be awarded in advance of the company setting up appropriate plans with sufficient shares of stock to cover employee grants.
Employee benefits, such as health insurance, retirement plans and tuition reimbursement, should not be described in detail in an offer letter. Rather, advise new hires that eligibility for such benefits is subject to the conditions of the particular benefit plan or contract.
Conditions of Employment
Employers should include all conditions of employment (e.g., reference checks, post-offer medical examinations, proof of eligibility to be employed in the United States (I-9 process), etc.) in the offer letter. If you require a candidate for employment to sign a confidentiality or non-competition agreement, enclose the agreement and refer to it in the offer letter.
Increasingly, employers require employees to sign confidentiality agreements and employment agreements that restrict an employee’s subsequent employment options. So as not to become a party to a lawsuit alleging that you, as a subsequent employer, have abetted violation of such a restriction and engaged in unfair competition, include a statement in your offer letter to the following effect. Candidates should represent that they are not bound to a contract that would prohibit or restrict their employment with you and they should agree not to disclose any confidential or proprietary information obtained from a prior employer.
Duration of the Offer and Start Date
You should request that candidates notify you of their decision by a certain date. It is inadvisable to provide an open-ended offer of employment. Do not forget to include in your letter the date you expect the new hire to start work.
The well-drafted offer letter clearly states all terms and conditions of employment. You want to avoid the scenario where a new hire, after starting with your company, approaches you and asks about certain benefits promised in a conversation with so-and-so. To create closure in the process, include an integration clause in your offer letter that states the offer letter contains all the terms and conditions of employment and that it supersedes any other written documents or conversations about such terms.
Miscellaneous Legal Provisions
You may want to include so-call legal “boilerplate” to address certain details of the employment relationship. Depending on the specifics of your business, it might be wise to take care of some items before an employment dispute poisons the spirit of cooperation. For example, if you employ out-of-state or foreign workers, you may want to include choice of law and choice of forum provisions. In addition, you may want to stipulate an alternative dispute resolution mechanism, other than litigation in a public court, to resolve disagreements with your employees.
To Sign or Not to Sign?
It is not necessary for a candidate to sign an offer letter to indicate acceptance. However, if your offer letter contains any representations of the candidate, for example, with respect to conditions of prior employment, or any consents of the candidate, for example, that monthly pay is acceptable, the candidate’s signature will indicate his or her agreement to such terms.
Who Should Extend The Offer?
The same person should extend all written offers to candidates for employment. If this is not possible, all offers should be extended by managers who understand the implications of such letters. This will ensure consistency in the offer process, and minimize the likelihood that casual conversations create an employment contract. If there is any question with respect to the content of an appropriate offer letter, legal counsel should review the offer letter. Ideally your company should develop a standard template offer letter that necessitates changing only a few variables with each offer extended.
Copyright 2001, Peter Kelman, Danielle Cannito. All rights reserved.