Payroll Systems » What Is the Difference Between an Offer Letter and an Employment Contract?

What Is the Difference Between an Offer Letter and an Employment Contract?

A company’s hiring process is a crucial part of the employee lifecycle that requires thoughtful consideration and effort to land on the right candidate. We recently discussed some general steps that should be taken after an employment offer has been accepted. Now, we will be taking a few steps back to explore the differences between an offer letter and an employment contract.

Offer Letter

An offer letter is a formal document that is sent to a candidate to officially offer them the position that they applied for. This letter should contain basic information about the position, written confirmation that the employer is officially choosing the candidate. It often includes the following details:

Full or part-time status

Start date

Job title

Job responsibilities

Compensation (salary or hourly and amount)

Benefits when applicable

Paid time off policy

Onboarding and first-day instructions

Signature line for the candidate to sign

A time frame in which to return the letter by

The letter is typically sent AFTER a job offer has been made either verbally or through e-mail. The offer, however, may still not be set in stone as many companies do impose contingencies before employment actually begins. This can include background checks and drug testing results.

Once a candidate signs and returns the offer letter, they have confirmed that they are accepting the position. Yet, you must keep in mind the way in which the letter is written, especially when mentioning any form of benefits or compensation, so it is not implied that they are now entitled to these benefits even if they leave the position shortly after.

To avoid this confusion, the offer letter should include a statement that the employment is at-will. This means that an employer can terminate an employee at any time for any reason, except an illegal one, or for no reason without incurring legal liability. All states, excluding Montana, presume at-will employment. It also allows an employee to leave for any reason without running into legal consequences.

Avoid using any vague verbiage that implies an indefinite future of employment. Include wording that conveys the idea that your company can rescind or alter any information included in the offer letter if necessary.

When possible, share the offer letter with your HR department or trusted HR partner before it is sent out to ensure it meets the correct standards. Having a pre-approved template is the ideal route to avoid any confusion.

Employment Contract

While an employment contract sounds like an offer letter, it is a signed agreement between the employer and candidate and establishes both the responsibilities and rights of all parties involved. An offer letter is encouraged to be a bit vague about the future of that position and candidate, while the employment contract has the terms of employment detailed and set in stone. The contract often contains:

The exact duration of employment

Salary or wages (itemize everything the candidate could earn, including commission)

Future competition- You can include a non-compete agreement or clause that states that if the employee leaves the company or the contract of employment is not renewed, they cannot enter a position within a competing company. Often, these clauses do have a time limit in which they are to be honored.

Confidentiality- Non-disclosure agreements should be detailed here

Employee contracts clearly define responsibilities and benefits for both parties and leaves no room for interpretation about the employment details. All parties involved are covered in signing these agreements which can create a stable work environment. However, employment contracts are not for everyone as they can limit flexibility as an employer is legally bound to follow through with their end, regardless of whatever circumstances may come up along the way.

The decision to make a certain type of hiring decision boils down to what is best for the position and your company. You just need to keep in mind the differences between the two and what actions are necessary on your part in order to avoid any trouble in the future.

You deserve a recruitment process that is highly efficient and agile. Payroll Systems’ ATS is the tool you need to empower your company with top-notch talent.

Contact us to learn more about our HR and payroll solutions to complement ATS— from timekeeping systems with companion mobile app, physical clocks, and customized job costing and labor distribution reporting.