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Offer Letter Stating Annual Salary Does Not Create Contract   |   Free Hiring Policy

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. Get your FREE access to this and 100's of FREE HR resources today.

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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                                   [Download Free Policies]

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.

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This article is not intended as legal advice. Readers are encouraged to seek appropriate legal or other professional advice.

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