Making Sense of New Hire Documents

Job offer letters vs. employment contracts

Nov 23, 2017

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Job offers and employment contracts are among the most important documents in your HR toolkit. They are the prerequisite of any employment relationship, and nearly every business has to refer back to them at some point to make good on a promise or to resolve a dispute. In both cases, misunderstandings or ambiguity can cost employers tens of thousands of dollars.

Employment contracts carry significant weight for startups in particular. Along with outlining roles, salaries, and other benefits, employment contracts set the terms for ownership of intellectual property, a vital asset for venture finance and acquisition prospects.

The problem is that many employers aren’t aware of what to include or how to present hiring documents to best protect their business, which puts them at serious risk. Here’s what business owners need to know to get their hiring documents right.

Offer letters vs. employment contracts

When it comes to hiring documents, there are two key elements: the job offer and the employment contract.

Job offers

A job offer is a brief invitation from an employer to a potential employee to begin employment at their organization. Typically, the candidate and employer will have already discussed the position during interviews, and the job offer is simply to confirm that conversation.

Job offers can take the form of letters, or they can be made over the phone, in person, or via email. The offer should include general information about the job, including the title, start date, and employment status. It should also contain conditions of employment, such as whether the offer is conditional upon a background check or agreeing to the employment contract.

Employment contracts

An employment contract, or employment agreement, is a far more detailed contract that spells out the employer’s expectations.

Employment contracts provide terms and conditions of compensation, probationary periods, benefits, vacation, termination, and restrictive clauses such as non-competition and confidentiality agreements.

There are two types of employment contracts employers can use:

Fixed-term employment contracts, used for independent contractors, freelancers, or specialists who will work with the employer for a specified period of time. Learn more about the important differences between independent contractors and employees here.
Indefinite contracts, where the duration of the employment relationships is indefinite until either the employer or employee chooses to end it.

 Making a job offer

The screening calls, interviews, and reference checks are said and done. It’s time to make an offer.

Step one: Make the initial job offer in person, by phone, or by email. This offer should be very brief and outline just the general terms of the position: title, start date, employment status.

Step two: Follow up with a written employment offer package. As early as possible before the candidate’s start date, mail or email them an employment offer package, which includes the formal job offer and detailed employment agreement. Allow enough time to read, understand, and negotiate the terms, if necessary.

Step three: Once they sign, begin onboarding! You should only turn down other potential candidates after the employment contract has been signed by your top candidate.

Why you shouldn’t send offer letters and employment contracts separately

In many companies, it is common practice to separate job offer letters and employment contracts, asking candidates to sign an informal letter first, followed by a detailed contract after. We recommend keeping both hiring documents together for two reasons:

1. Legal liability: In a recent case from the Ontario Superior Court of Justice, the Court found an employment agreement that was signed after an offer letter to be unenforceable. Since the original offer letter constituted a contract in itself, the second, albeit more detailed, ‘employment agreement’ was considered void. To avoid this situation, employers should clearly state at every stage of the hiring process that employment is conditional upon agreeing to and signing the employment contract. Per employment and labour law partner Daniel Pugen, “All hiring documents should be presented at the same time and in advance of starting the job so that there is no confusion as to the contract being entered into between the parties.”

2. Unnecessary paperwork: Starting a new job is already an overwhelming process. Why add to that with more forms than necessary? Nevermind having to sort and store them among all the other employee records. Eliminate paperwork and keep your onboarding streamlined.

If you still wish to have a separate offer letter, that is okay. Just make sure to present the letter and contract to the employee on the same date. We also recommend stating in the offer letter that employment is conditional upon the candidate agreeing to and signing the employment contract.

What to include in the employment contract

Under common law, three elements are necessary to make an employment contract a contract: (1) an offer; (2) acceptance of the offer; (3) consideration—something given or promised in exchange by both parties. For example, an exchange of wages for work performed.

An oral contract that contains these elements is just as binding as a written one, but you should always put employment contracts in writing. This is a legal requirement for employee record keeping purposes and reduces the risk of misunderstandings that can lead to disputes.

The common contents and terms of an employment contract include:

An invitation to begin employment at your company
Job title and employment status
Job responsibilities and expectations (i.e. a job description)
Start date
End date, if it is a fixed-term contract
Name of manager, supervisor, or other reporting relationships
Work hours
Probationary period
Travel requirements, allowances, and/or relocation
Compensation, including commission, bonuses, and stock options
Employee benefits
Retirement benefits (RRSP or pension contributions)
Vacation time
Salary increases Intellectual property rights
Restrictive covenants, including non-disclosure clauses, non-solicitation clauses, and non-competition clauses
A termination clause
An Entire Agreement clause (a clause that states that the signed contract constitutes the entire agreement between the parties, and that previous conversations, negotiations, and promises are not binding on either party.)
A clause stating the employer’s right to amend certain parts of the contract
The date by which the employment contract must be signed and returned

Job offer letter and employment contract tips and best practices

A good job offer package can set the tone for a successful working relationship, address contentious issues early, and protect both parties down the line. Here’s our roundup of best practices:

Seek legal advice: Before entering into a contract, review your jurisdiction’s Employment Standards Act and seek legal advice where necessary.

Make it personal: A base template is a good idea, but don’t use a standard contract for every single employee. Carefully review and personalize the contract’s formality, terms, and details before each new hire.

Send a job offer package: Avoid sending a formal offer letter first and an employment contract at a later date. Present all hiring documents at the same time.

Give them time: Employment contracts must be signed prior to the employee’s first day of work. Be sure to give them enough time to read, understand, and negotiate the terms if necessary (at least one week).

Include consideration: If you amend an employment contract after an employee has started work, as in the case of promotions or policy changes, you may have to give new consideration (i.e. signing a bonus, new salary, or new stock options) or the contract will not be enforceable.

Avoid legalese: Ensure the language is as clear as possible. If you don’t understand the terms without a lawyer, neither will your candidate.

Keep your candidate pool open: Don’t turn down other potential candidates until your top candidate has signed and returned the employment contract.

Review and update: Review your employment contract template every year to ensure it is compliant and up-to-date with employment standards in your jurisdiction.

Go digital: Send and store your employment contracts with your digital HRIS. Employers in Canada and most other countries are required by law to keep employee records even after the employment relationship has ended (check with your jurisdiction to find out how long). A digital, cloud-based copy ensures it is always on-hand.