Differences Between Offer Letters and Employment Contracts

Differences Between Offer Letters and Employment Contracts

Reviewed by: .

When hiring an employee, an employer may send them an offer letter, an employment contract, or both. However, you should know that an offer letter and an employment contract are significantly different documents. Both employers and employees need to be aware of the differences in these documents before agreeing to either. 

An employment contract is a more detailed, formal, and legally binding document than an offer letter. An offer letter only outlines the broadest terms and conditions of employment, whereas an employment contract describes the terms and conditions of employment in explicit detail.

This article will explain the differences between an offer letter and an employment contract in more detail and explain why a signed offer letter can have important legal repercussions for employers and employees. Keep reading to learn more!

Offer Letters and Employment Contracts Compared

Offer letters and employment contracts are separate documents with crucial differences. You need to be aware of them as they can have significant legal and financial consequences for both employers and employees.

Here is a table that contrasts offer letters with employment contracts:

Offer LetterEmployment Contract
PurposeSpell out basic terms of employmentDetailed, legally-enforceable contract outlining terms and conditions of employment
TargetMid and lower-level full-time employeesEmployees on fixed short-term contracts and top managers
StylePersonal and informalFormal and legal
ContentsConditional offer of a job
Job position and status
Start date
Compensation and benefits
Mutual right to termination
Contract fixing employment terms
Job title and expectations
Duration and terms of employment
Compensation, benefits, raises, and bonuses
Termination process and severance pay
Confidentiality and Non-compete clauses
Arbitration process

The remainder of this article will discuss the specific differences between offer letters and employment contracts in greater detail.

The Purpose of Offer Letters

An offer letter makes a conditional employment offer and describes the most basic terms and conditions of employment. It needs to be signed and returned within a stipulated time to be valid. Often employees may also have to undergo background and medical checks or drug screening before beginning work.

A signed offer letter is a legally enforceable agreement. However, the terms it contains are generally very broad. This looseness of terms means that neither employer nor employee will wish to pursue a legal path to resolve any disputes that may arise over the duration of employment or at its termination.   

Generally, the employment referred to in an offer letter is offered at-will. This means that the employment is neither for a fixed duration nor permanent in nature. Either the employer or the employee can terminate the contract at short notice without offering an explanation.

Most employees today, especially lower and mid-level workers and managers, are hired on the basis of an offer letter. By ensuring that their employees can be terminated at-will, employers can avoid lengthy legal disputes when they need to fire employees. The offer letter also protects the right of workers to move out of a job if they wish to. 

For more information, including samples of job offer letters, refer to the American Society of Employers’ website.

The Purpose of Employment Contracts

Employment contracts are formal contracts that stipulate detailed terms and conditions of employment. They are legally-enforceable documents that protect the rights of both employers and employees across the duration of employment and even after it.

Employment contracts offer workers greater clarity as to the terms of their employment. They often include specific information on working conditions, including benefits, raises, and bonuses. Employment contracts may also specify the duration of employment and the terms of termination of the contract.

At the same time, employment contracts also protect the employer’s assets. These include any confidential information such as intellectual property the employer owns. They also govern client relationships and may include details about the appropriate use of company resources such as expense accounts.

The employment contract often plays a crucial role in resolving disputes between an employer and employee. Even if discussion or arbitration does not resolve a dispute, the employment contract is still the primary document that courts will use to decide in favor of either an employer or an employee. 

Employees usually offer employment contracts on fixed short-term contracts or employees contracted for specific projects. They are also always made between employers and top-level managers. This is because top managers have access to the most sensitive information, and their performance is vital to recruiting companies.

The Contents of Offer Letters

Offer letters only include the broad terms of employment. That said, all offer letters must consist of a description of the job that specifies:

  • The job title, duties, and expectations.
  • The nature of the role, i.e., whether the job is part or full time.
  • The compensation and benefits offered.

Additionally, some offer letters may also include information such as:

  • The department within the company that the employee will join.
  • Who the employee will report to.
  • Start dates and work schedules.

Most offer letters will specify that the employment offered is at-will, meaning that either the employer or the employee can terminate the employment at short notice for any reason.

In the US, offer letters are also subject to local and regional laws. Some states, such as California and Illinois, require that an offer letter include:

  • Pay rates. This includes whether pay is calculated hourly, daily, weekly, or shift-wise. Or if payment is made for a piece of work, as commission, or as salary. 
  • Additional pay or benefits. This includes overtime, tips, meals, and lodging.
  • Payday details. This includes the day of the week, month, or year, or the milestone fixed by the employer as the payment date.
  • Name of the employer. Includes any names under which the employer is operating their business.
  • Address of the employer. Specifies the physical location of the employer’s head office or place of business. If the physical address is different from the employer’s mailing address, then a mailing address needs to be included as well.
  • Phone number. The telephone number of the employer must be provided.
  • Insurance details. Must include details of the workers’ compensation insurance carrier that the employer uses, including their name, address, and telephone number. 

Usually, offer letters do not specify the duration of employment. Unlike employment contracts, they also do not include exclusivity and confidentiality clauses.

The Contents of Employment Contracts

An employment agreement is a more detailed document that goes into great detail in specifying the terms and conditions of the employment. Most employment contracts will include:

  • Job title, duties, performance expectations, and targets.
  • Duration of employment, if fixed or short-term.
  • Compensation and benefits, including raises and bonuses.
  • A pledge of exclusivity.
  • Confidentiality clauses, terms, and conditions.
  • Termination processes.
  • Severance pay.
  • Arbitration procedures.

The extent of details an employment contract includes, and their legal enforceability, mean that employment contracts are usually vetted by a legal team before an employer sends them out to prospective employees.

Is a Signed Offer Letter Considered as an Employment Contract?

A signature on an offer letter is a mere acknowledgement of receipt of the offer letter. However, under certain circumstances, the terms specified in an offer letter can be legally enforceable, even if the job in question is at-will. 

For a legal precedent establishing the enforceability of a signed offer letter, look at Hooker v. Trusted Life Care, Inc. and Peter Falkson.

In this case, a Superior Court in Massachusetts ruled in favor of the plaintiff Leslie Hooker, a certified respiratory therapist, and against her prospective employers, Trusted Life Care (TLC). As Leslie Hooker had signed the offer letter accepting employment at TLC, the court found that her employer was contractually-obligated to allow her to begin work. 

Once employment begins, legal protections specified in the offer letter and under law come into force, even if employment can be terminated right away. This means that an employee who has accepted an offer letter can seek severance pay or file a suit alleging discrimination if the employer does not provide a reason for terminating their employment.

Another case that highlights the employer’s liability based on a signed offer letter is Stephen Prozinski v. Northeast Real Estate Services, LLC. In this case, the court enforced the severance pay terms outlined in the offer letter, despite the employer offering reasonable grounds for dismissal.

However, there are also instances where an offer letter may not be legally enforceable, even if signed. For example, in another case, a Superior Court in Massachusetts maintained that certain job offers cannot be enforced, even when signed.

In this case, Dr. Moore received an offer letter from her prospective employer, the LGH Medical Group, by email. She had also signed the letter accepting the terms of her employment. However, the offer letter specified that the terms of her employment would be fixed in a forthcoming employment contract.

Said employment contract never came, and Dr. Moore decided to sue the LGH Medical Group for breaching the terms of the offer letter. The court held that as the offer letter specified that it was not a legally binding document and that the terms of Dr. Moore’s employment would be fixed in a separate employment contract, she could not sue as the formal employment contract was never sent. 

The contrasting rulings in Hooker v. Trusted Life Care, Inc., et al. and Moore v. LGH Medical Group point out potential pitfalls to employers and employees in relying on offer letters as legally enforceable documents.

Conclusion

Offer letters and employment contracts have crucial differences that can have significant legal and financial consequences for both employers and employees. If you are unsure of the terms and conditions of your employment—or their legal enforceability—you should consult a lawyer before you sign either document. 

Sources