An Overview of Employment Contracts
Employment contracts are the way that many companies define the working relationships they have with their employees. These contracts vary widely, depending on the relationship employers and employees have agreed to, but there are some common themes that most employment contracts will contain.
For starters, employment contracts will typically contain any terms that are fundamental to the employment relationship. This means that any obligations that the employer is under by law, any that it wishes to impose on its employee, or both, will be spelled out in the contract.
The same can be said for the employee’s obligations to the employer. Employment contracts may create common law obligations on the employee, but it is likely employers may wish to add more to what is required of their employees in an employment contract’s terms. These terms can include, but are not limited to:
Another important point for employment contracts is that they define the terms of termination between the two parties. Although there is already a significant body of law that defines an employee’s rights on termination, there are still points that the employer may wish to address in a contract of employment. In particular, the employer can define its severance obligations on termination .
However, in regards to termination, it will be useful to keep in mind that most employment contracts are drafted with an assumption that the contract should be binding under employment law and courts will therefore have to consider that any term that looks like it is excluding the application of important employment laws like the Ontario Employment Standards Act, 2000 will not be found to be binding. For that reason, main terms of the EMPLOYMENT STANDARDS ACT, 2000 cannot be derogated from.
As set out in section 5(1) of the ESA, for example, an employment contract cannot contract out of the rights guaranteed under any section of the act for the employee in question. This means that while the contract of employment can expressly state what the employer’s minimum obligations are to the employee under the ESA (which is required for contracting out of an ESA entitlement), the employment contract cannot provide for anything less than what the law qualifies as the employee’s right.
The content of an employment contract can be an absolutely essential tool for employers to be able to get the full agreement of the employee on terms that they would have otherwise assumed were understood. Having clear contractual terms that cover all the aspects of the employment relationship is particularly important in an employer’s ability to rely on its provisions to defend legal actions made against it by a disgruntled employee on termination or otherwise.
What Is an Offer Letter?
An offer letter is typically used for non-executive employees and offers employment conditionally, and the terms and conditions of employment. It may also be used to formalize details of an offer, and precede an employment contract. In other words, it is not intended to be a formal contract. Nevertheless, in practice, it still acts as de facto confirmation of an employment relationship and terms thereof, and may ultimately be relied upon and/or used by the courts as evidence of the parties’ intentions. The offer letter must also remain consistent with the eventual contract of employment, and failings here could lead to an adverse finding against the employer, particularly in the case of mistakes that are identified at a later date.
Offer letters typically include:
- Job Title
- General Responsibilities or Duties
- Key Terms and Conditions (or sometimes just a reference to the contract)
- Start Date
- Expected Hours
- Salary
- Benefits
- Bonus/Commission
- Conditions Precedent
- Termination Upon Acceptance
- Method of Acceptance
Employment Contracts vs Offer Letters: What’s the Difference?
When comparing employment contracts with offer letters, they are fundamentally similar but have important differences. Both employment documents are used to formally offer employment to a job candidate, but they vary in structure, content and the level of detail that is included. Below is a brief overview of the most important differences between these types of employment documents.
These two employment documents also differ by their level of depth: An employment contract may include a considerable wealth of detail that is not found within an offer letter. For example: By contrast, employment offer letters generally contain much less detail, focusing primarily on compensation information and job duties. An employment contract is much more likely to be enforceable than an employment offer letter. Offer letters are generally not considered binding. However, if it includes very specific and detailed information such as the length of employment, essential terms and the specific amount of compensation, it may be legally binding. An employment contract is usually legally enforceable and generally does not adhere to any formalities. In fact, most employment contracts clearly state that the employee has no right to anything not expressly contained within the contract, and that the company may modify or change the terms of the agreement at any time.
Legal Considerations
The law is fairly simple with regard to offer letters: they are ambiguous and therefore often unenforceable. Offer letter language is often vague, which prevents anyone from pointing at a particular sentence or paragraph, saying it meant that a person had not in fact been offered employment or had not in fact accepted an offer. However, once that employee has signed, dated, and returned the offer letter, even though there is no specific and acknowledged offer being accepted, the law will presume that the offer letter was an offer of employment; that the offer letter was accepted by signing, dating and returning; and that those actions created an enforceable contract. This can catch employers off guard. Even though an offer letter is vague, if it is signed, dated, and returned, the law will presume a mutual intent to be bound, and so it is.
When to Disclose Employment Contract Terms
Employment contracts are typically more appropriate for certain types of employees and companies or in certain jurisdictions. For example, you should always use an employment contract if you hire executive employees, particularly those who will have fiduciary relations with your company. Other than for executive employees, the key factor to consider in deciding whether to offer an employment contract is whether you need flexibility to terminate the employment without cause. If you need that flexibility, or if your state does not recognize at-will employment, or if your employee is valuable and you want to ensure future compensation and job security, then you will want an employment contract.
Aside from special circumstances, however, there are different categories of businesses and employment situations in which offer letters are used regularly:
Startups: Startups that cannot afford to offer employment contracts for all employees should limit the use of employment contracts to its tier one employees (e.g. , the C-level executives). It should also adopt a well-drafted employment-at-will policy.
Small Businesses: Small businesses with a few employees should use employment-at-will policies. If your state statute permits it, you should include a judicial criteria section that is normally included in employment-at-will policies.
Medium-Sized Businesses: Medium-sized businesses (e.g., 100-150 employees) should offer employment-at-will policies to all employees below tier one.
Larger Businesses: Larger businesses should offer employment-at-will policies to all employees below tier one and should have executives sign employment contracts with good severance and restrictive covenants (although not necessarily with tier two employees).
New Non-Public Companies: New non-public companies should offer employment-at-will policies to all employees below tier one and should have executives sign employment contracts with good severance and restrictive covenants.
Avoiding Common Mistakes
When it comes to employment contracts and offer letters, there are several mistakes that both employers and employees commonly make. One of the most common mistakes made by employers is issuing an offer letter or employment contract that are not tailored to the job that is being offered. It is often tempting for employers to use a template that they find online and make some quick edits. However, this is unadvisable because a well-drafted employment contract or offer letter should take into account the specific circumstances of the job being offered. For example, it should outline the specifics of the compensation structure, including the possibility of commission or bonuses. It should also clearly outline the job description and responsibilities. If an employee is offered a position in sales, the offer letter should state that the employee’s duties will include sales activities and performance in this role will be evaluated. When these terms are clearly outlined in an employment contract or offer letter, it will less likely be the case that the employer’s policies are interpreted by the courts to overrule an expressed intention. Employers can avoid making this mistake by taking the time to customize their employment contracts and offer letters for the specific position. In addition, employers should seek legal advice when drafting an employment contract or offer letter so that it is clearly and easily understandable by the employee, while also protecting the employer’s interest in the terms and conditions. Conversely, an employee who receives an employment offer or contract should consult with legal counsel to ensure that it is in their best interest and that they understand its contents completely. Another common mistake made by employers is to make an employment contract or offer letter conditional on a successful probationary period. Employers often make the mistake of not re-evaluating the terms and conditions after the successful completion of the probation period. The terms and conditions may only state that the employment contract is effective until the probation period is completed, without any mention of what will happen to the agreement after the probation period ends. As such, it will be under the interpretation of the court as to whether or not the probationary agreement ends after that term or it remains in effect indefinitely. The mistake of failing to address the probationary clause in an employment contract or offer letter can be avoided by adding a clause to the agreement which states that the agreement will remain in full force and effect after the probationary period ends. In addition, the employer would be well-served to properly evaluate the success of the probationary employee before allowing the full force and effect of the employment contract to take place. Employees often make the mistake to not review the contents of the employment contract and make an informed decision, under pressure to sign an offer letter. Often, candidates seeking employment may be in a financially desperate situation. They may feel that they have no choice but to sign the employment contract or offer letter. As a result, they may not take the time to fully read through it and understand the full effect of the terms. This mistake can be avoided by employees asking for a couple of days from the employer to review the contents of the employment contract or offer letter in order to make an informed decision. Employees should never accept an employment contract or offer letter until they fully understand its contents. They should not sign the agreement simply because they are afraid of losing the job offer.
Conclusion: Your Best Defense
As we have seen, at the outset of the employment relationship, both employees and employers should be aware of the fundamental differences between an employment contract versus an offer letter. For employees, it is important to understand that if you receive an offer letter instead of an employment contract, and if you accept the offer from your employer, the terms of the offer letter generally will be binding on you, regardless of whether there is a free-standing employment contract. Whereas your employer need give you only reasonable notice of termination, your offer letter will govern the extent of your common law duties and entitlements on termination . If your employer gives you an employment contract which governs your employment, and it differs from the offer letter (if any), then you should carefully review the two documents for inconsistencies, and consider obtaining the advice of an employment lawyer before signing the employment contract. For employers, when preparing employment documents, it is best to use an employment contract where possible in order to avoid the pitfalls of a seemingly informal offer letter. To sum it all up, to make good employment decisions, both employees and employers should always seek legal advice from qualified lawyers who specialize in employment law.
