Differences Between Offer Letters vs. Employment Contracts

When recruiting new employees, HR professionals and hiring managers may find that they use the terms “offer letter” and “employment agreement” interchangeably. However, there is a big difference between the two—one that could impact the relationship between the new hire and the management team. Find out what you need to know about the difference between offer letters and employment contracts.

What is an Offer Letter?

An offer letter is a communication employers use to extend a job offer to a new hire candidate. If accepted, the candidate will then officially join the company by participating in the onboarding process, where they typically select their benefits package and learn the ins and outs of the organization. 

Offer letters can consist of a number of different details about a given position. For example, many offer letters include the person’s new title, their schedule, what’s expected of them, to whom they’ll report, and their salary. Additionally, according to a piece published by DLA Piper, an international law firm based in the United Kingdom, explicitly indicating a new hire’s status as an at-will employee is a “hallmark of an offer letter.” 

Of course, this isn’t an exhaustive list. Employers can also include information about various compliance policies that may be relevant to their position or the industry. The primary takeaway is that an offer letter should give job candidates a basic understanding about the position they've been offered and their role within the company. 

What is an Employment Agreement / Employment Contract?

On the other hand, an employment agreement (sometimes referred to as an employment contract) can be a legally binding document that more concretely describes the terms and conditions of a person’s employment—meaning that it more explicitly lists the conditions of employment. Unlike offer letters, an employment contract is meant to create a binding promise between the worker and employer. 

In some cases, these contracts are reserved for different types of employment outside of the typical full-time or part-time status, such as freelance workers and independent contractors. Or, as New York-based law firm Romano Law puts it, for “key employees.”

Under these circumstances, an employment contract may more explicitly state when a person may be fired, what they might earn in addition to their salary, and even include the details of a potential severance package.

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Offer Letter vs. Employment Contract: Understanding the Differences

In general, offer letters are less formal than employment contracts, which typically set terms and conditions of employment that are legally binding. It’s also vital for employers to understand that they aren’t required by federal law to send an offer letter to new hires. However, employers should be careful what they include in offer letters. 

Why? If an offer letter is improperly constructed, it could inadvertently form a legally binding contract. 

In these instances, it’s much more likely that the employer will be held to all the terms of that contract despite their intention to simply send an offer letter. Obviously, this can be extremely costly to the employer—particularly if a letter is sloppily or improperly constructed and an employer fails to live up to its promises (see TSR Consulting Services, Inc. v. Larry Steinhouse).

How Can Employers Avoid an Offer Letter that Creates a Legal Contract?

In general, it’s recommended that employers and HR teams develop a standardized offer letter template that can be used every time a new person joins the team. This way, each employee enters the employment relationship with the same basic information and understanding of their roles and responsibilities. 

The template should also avoid certain language that may inadvertently create a legally binding contract. For example, in a resource published by online legal authority FindLaw, the writers suggest employers avoid including the words “guaranteed,” “through,” and “for” in offer letters to maintain at-will status for their employees.

Breaching these guidelines can result in a job offer letter that actually binds employers to unintended (and possibly damaging) contractual obligations.