Are Job Offer Letters Legally Required?
It is often considered common courtesy to present new hires with formal job offers in writing. Many employers will extend a verbal offer and follow this with written documentation expressing the offer. Job offer letters may include anything from start date, compensation, benefits details, employment status, to terms of the employment such as needed background checks or drug screenings. Letters offer a new hire the opportunity to see hiring details in formal writing, before they move forward with the onboarding process. This said, are formal job offer letters required?
Is There a Legal Requirement to Extend an Offer Letter?
While formally composing job offer letters is common, there is no legal obligation to do so. Formal job offer letters can certainly be of benefit to employees as it may outline many of the expectations and requirements before moving into the onboarding stage.
Conversely however, it may in turn create undue risk for employers. If not careful in their wording, employers could potentially bind themselves to any number of promises. It is crucial that, should employers choose to send formal job offer letters, they focus their energies on remaining compliant, and follow all procedures in order to avoid unnecessary risk.
One prime example of this can be found in the TSR Consulting Services, Inc. v. Larry Steinhouse case. The case involves an incident where Steinhouse sued TSR Consulting Services for the failure to acknowledge the terms, which were guaranteed in his offer letter. The Letter explicitly stated:
For the first twelve months of your employment, through May 31, 1998, your compensation will consist of a base salary, which if annualized would be $120,000. In addition, you will receive a guaranteed non-recoverable draw of $10,000 against commissions for this same period. Also, as you requested an additional recoverable draw of $20,000 against commissions can be provided. The objectives for the additional incentive/compensation commissions are outlined in schedule A. For the second year of your employment, you will receive a guaranteed recoverable draw of $120,000 against commissions.
Due to the wording of the offer letter, which includes the word “guaranteed” as well as the specified term for payment, the ruling found the offer letter to be a binding contract. This meant that TSR in fact owed Steinhouse what was listed in the contract. This ultimately amounted to nearly a quarter of a million dollars. In the end, TSR settled the case without going to court. In this situation, TSR did not consider the impact that the wording on an offer letter would entail. An expensive mistake.
Can Employers Be Sued if They Don't Send an Offer Letter?
Should an employer abstain from sending an offer letter, they are at no risk of a lawsuit.
Sending offer letters actually poses a greater risk than abstaining. This is because if letters are written quickly or carelessly without attention to detail, you could face an issue similar to that of the above example. Should the employer not live up to the contract in any way, then the employee has a right to a lawsuit against said employer. Offer letters are not inherently a bad practice, they are however a practice to be cautious with.
Do Offer Letters Differ from Employment Contracts?
Employment contracts differ greatly from offer letters. As previously discussed, an offer letter is a simple document intended to extend an offer of employment to an employee. On the contrary, an employment contract is intended to lay out in detail the terms of employment.
Employment contracts act as a binding agreement. They explicitly state when a person may be fired, what they might earn in addition to their salary, and may even include the details of a potential severance package.
While an offer letter can become a binding document should the wording make it so, it is the intention of an employment contract to be a legally binding document. This makes creating an employment contract a more encompassing task, albeit a safer one, as the dangers of an offer letter are the entire purpose of the employment contract.
Employment Contracts Best Practices
If your organization opts to send a new employee an employment contract, then it is crucial you follow the best guidelines to effectively communicate the information and remain compliant. When using employment contracts, consider these best practices:
- Use a Template: Maintain a standardized procedure by using a template to develop employment contracts. As a safeguard against legal disputes, all employment contracts should be submitted to HR for review before being sent to the prospective hire. These can be distributed, signed, and stored in an HRIS.
- Avoid Offer Letters: It is important for employers to avoid unnecessary risk. There is very little to be gained through sending an offer letter, and the risk is high. Employers should forgo sending offer letters and focus on employment contracts. If an employer chooses to send an employment contract in lieu of an offer letter, that employer should have an attorney review employment contract templates. With that said, this process can prove costly.
- Make Job Offers Verbally: This informal offer should precede a more formal employment contract upon a candidate's acceptance. Opt for this option before committing to a formal offer letter that may enhance risk.
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