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Terminated Employee Claimed Breach of Contract
Offer Letter Language Must Show Intent to Limit At-Will Relationship
Five Tips for Drafting Offer Letters That Do Not Create Contracts
A written offer letter reassures a
new employee because it makes the hiring process more formal and
professional. But can the letter also create an employment contract
if it is not worded properly? A circuit court decision gives
employers guidance on drafting offer letters that won’t create
contracts affecting the at-will relationship.
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Have you ever worried that if you
describe an employee’s salary in an offer letter as "an annual rate"
you could create a contract of employment for at least a year? Some
employers are so concerned about this possibility that they make
only verbal job offers in order to reduce the possibility the offers
will be interpreted as contracts affecting their employee’s at-will
status. Fortunately, it looks like this concern may be overstated.
According to a decision by the Fifth Circuit Court of Appeals, in
Hamilton v. Segue Software, Inc., No. 00-10541 (5th Cir. 11/20/00),
the inclusion of an annual salary by itself is not enough to
override the at-will relationship.
Terminated
Employee Claimed Breach of Contract
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In this case, the employer, a Texas
software company, sent an offer letter to the employee stating "Your
base salary will be at an annual rate of $125,000.00 paid
semi-monthly." The letter also included a reference to an employment
agreement and instructed the employee to sign and return both the
letter and the agreement to accept the offer. The agreement,
however, was not included with the letter so the employee sent back
only the offer letter. He eventually signed the agreement five
months after beginning employment. The contract included the terms
and conditions for employment; rules governing conflicts of
interest, confidentiality, and intellectual property; and an at-will
statement indicating the employee could be terminated or quit at any
time. The employee was then fired a month later. He sued the
employer, claiming the offer letter had established a one-year
contract under Texas law and that the employer breached the contract
by terminating him after only six months. The district court ruled
in favor of the employer, and the employee appealed to the Fifth
Circuit Court of Appeals.
Offer Letter Language Must Show Intent to Limit At-Will Relationship
As a matter of background, in most
states (including Texas), employees who do not have contracts
guaranteeing employment for a specific period of time (such as one
year) are considered to be at-will employees. Under the at-will
doctrine, employers have the right to terminate employees without
contracts at any time and for any legally permissible reason.
Employees have a similar right to resign whenever they want.
Since contracts are interpreted by
applying state law requirements, the Fifth Circuit looked at whether
the offer letter language created a definite contract of employment
for a one-year period under Texas contract law. The court began its
analysis by pointing out that Texas law presumes the employment
relationship is "at will" unless an employment contract directly
limits "in a meaningful and special way" the employer’s right to
terminate an employee without cause. The court looked to a Texas
Supreme Court decision which found that in order to overrule the
at-will presumption, an employee must demonstrate that the employer
had an "unequivocal" and definite intent not to create an at-will
relationship. In other words, the employer must expressly state its
intent to terminate the employee only under clearly specified
circumstances.
Applying this standard, the Fifth
Circuit determined that the employee’s offer letter stating the
salary on an annualized basis was not either unequivocal or definite
about the length of employment. According to the court, the
reference to an annual amount did not provide a guarantee of
employment, but instead "merely provide[d] a benchmark to evaluate
one’s pay." Since the written offer letter did not specifically
limit the employer’s right to terminate, the Fifth Circuit agreed
that the employee was employed at will and could be terminated at
any time; and, therefore, there was no contract to breach.
Five Tips for Drafting Offer Letters That Do Not Create Contracts
Since this court decision
interpreted a dispute involving Texas state law, it only applies
directly to Texas employers. However, every state except Montana
recognizes the at-will employment relationship, so it is possible
that other state courts may use its findings to interpret their own
at-will requirements. Even if it is not followed in other states,
the case illustrates the potential problems an offer letter can
create and underscores that employers should pay special attention
to the language of each offer letter. A poorly written letter may
land you in court, while a carefully drafted one can be an effective
employee relations tool by making the offer more formal, tangible,
and professional. Furthermore, a written record outlining acceptance
of the offer, starting date, starting salary, and other pertinent
information helps prevent misunderstandings about the conditions of
employment.
Here are a few simple guidelines to
limit the chances your offer letters will create contracts:
1. Do not include any statements
creating an expectation that employment is for a specific period of
time or that termination will be only for specific reasons. For
example, using the term "probationary period" to describe the first
few months of employment or discussing bonuses the employee "will"
receive at the end of the year can form the basis that the employee
has a contract to work for a specific period. Similarly, references
to job security or to specific disciplinary procedures can be
interpreted to mean the employee can only be terminated in limited
circumstances.
2. Do not describe the employee’s
pay only on the basis of an annual rate. Use references to a weekly,
biweekly, or monthly rate and also include the phrase "equivalent to
$XXX on an annual basis."
3. Use phrases such as "generally"
and "typically" when referring to terms and conditions of
employment, such as benefits and company policies. These generalized
descriptions are less likely to be misinterpreted as binding
promises.
4. Include a specific at-will
statement so the employee understands that either party may
terminate the relationship at any time.
5. As a final precaution, have your
legal counsel review the standard wording you use in offer letters
for any statements that may jeopardize the at-will employment
relationship. |
Personnel
Policy Service, Inc.
