Drafting a Contractual Letter Agreement Between Employee and Employer

What is a letter agreement?

Letter agreements are one of the most important, and commonly used, agreements between an employer and employee. A letter agreement is a document setting forth the terms and conditions of employment. The letter agreement will often include all of the general terms of employment (e.g., salary, bonus, benefits, vacation entitlement, etc.), a confidentiality agreement, a non-compete agreement, and a non-solicitation agreement. It is also common for the letter agreement to have a termination provision that provides the entitlements of the employee upon termination. The letter agreement is often referred to as a starting point in the employment relationship; this provides the parties a chance to negotiate the agreement and make changes where required. A letter agreement is generally meant to be a straightforward agreement that sets forth the key terms of the employment relationship.
A letter agreement and a formal contract are very similar, with the exception that a letter agreement is generally meant to be an informal document that provides the same protections as a contract , without the formality of a formalized agreement. Canada West signed a Contract of Employment with Roger Davidson (the employee) that was 16 pages long, single spaced, with attachments and four separate signatures. Despite the fact that the contract was so long, it did not provide any more protection than a letter agreement. The contract provided that the employee was entitled to 6 months pay in lieu of notice, unless there was just cause for termination. When the employee was terminated a reasonable notice period of 12 months was determined by the court, since the contract did not provide specific language with respect to whether reasonable notice could be contracted out of. In other words, the contract was not followed because it did not give clear and precise language on points such as termination steps, notice periods, or a severability clause. Even though the contract had lengthy clauses, it did not provide the employer with any more protection than a 1-page letter agreement may have.

Potential Elements of an Employee and Employer Letter Agreement

A letter agreement should capture the essential elements of the employment relationship in order to avoid future disputes and claims. These elements typically include:
Job Description
The letter agreement should set forth the job description for the position being filled. This includes the exact job title, departments, locations, reporting structures, hours, and other specifics related to the position. The job description may also describe responsibilities and include policies or other summaries of the applicable requirements.
Salary/Compensation
The letter agreement should set forth the person’s salary or other compensation details. If the person is a commissioned employee, the letter agreement should make clear how the commissions work and how they relate to the person’s salary. Because commission structures are nuanced and often complex, we may provide guidance to employers to better articulate these arrangements in a letter agreement.
Bonuses
If applicable, the letter agreement should address the issue of bonuses. The letter agreement should specify whether the person will receive a bonus, how the bonus will be calculated, and when it will be paid. While bonuses usually are discretionary and not mandatory, we advise that employers determine whether they intend to pay an annual or periodic bonus, to avoid miscommunication and disappointment about bonuses.
Benefits
Most employers provide employees with certain benefits, such as health insurance, 401(k) retirement plans, paid time off (PTO), and sick leave.
Health Insurance
A full discussion of health insurance requirements is beyond the scope of this blog post. For purposes of this post, however, we describe the two basic types of health insurance: group health insurance and Health Savings Accounts (HSA). Most employers with more than 50 employees are required to pay at least 50 percent of the premiums for group health insurance for each eligible enrollee. We may help employers identify this type of coverage and other available options.
401(k) and Pension Plans
Most employers also offer a 401(k) retirement plan or some form of pension plan to employees. The letter agreement should address any employer obligation to allow the person to participate in the plan and/or contribute to the plan. Some employers also match up to a certain percentage of the employee’s contribution to the plan.
Paid Time Off and Sick Leave
Paid holidays, vacation, and paid sick time differ among employers. The letter agreement should summarize whether the person will receive paid holidays, PTO, sick leave, paid maternal or paternal leave, short term disability, and long term disability.
Termination
Employee contracts rarely discuss the terms of termination – except for lawyers. For all other employees, a letter agreement should set forth the terms of the at-will relationship and confirm that employment may be terminated at any time, with or without cause, and with or without notice. The letter agreement should also specify whether the employee is entitled to any severance pay upon termination of employment.
Letter agreements should be signed by both the employee and an authorized representative of the employer.

Drafting the Letter Agreement

With all these considerations in mind, we turn to the preliminary step in the employee hire process (other than actually hiring the employee): drafting the agreement itself. Here is a suggested step-by-step guide:

Consider the job: what is its purpose; what will be the employee’s specific responsibilities?
Decide how that information should be set out in the letter (i.e., as a list, or as a brief paragraph); the latter is generally preferred.
Determine what statutory or contractual notice of termination you will want: the general statutory notice is no less than one week’s notice for each year completed service: 13 weeks for an employee with 13 or more years of completed service.
Decide whether you want the employee to sign an acknowledgement by the employee, in which the employee acknowledges his or her understanding that his continued performance of duties is at-will and can be terminated at any time and for any or no reason; an example of a fairly apposite clause is: "It is further understood, acknowledged and agreed that employment hereunder is a temporary employment at will and that, subject to applicable law, both the Employer and I may terminate this agreement at any time with or without cause."
Decide on statutory or common law entitlements as to severance pay: the general rule is that severance pay must, at a minimum, be equal to notice of termination calculated under the Employment Standards Act, 2000 plus pay in lieu of accrued, but unused vacation pay; the phrase is "statutory values" refers to amounts payable under the ESA (i.e., the minimum values). However, note that the courts have held that common law entitlement by way of an implied term of each contract of employment will generally provide greater notice, which is often computed by way of a board formula based on the following factors:

i. Age;
ii. Length of service;
iii. Employment prospects.

Decide upon non-competition and/or non-solicitation clauses (note that only employees can enter into non-competition agreements, so the term "non-solicitation" will be generally preferred): "It is further agreed and acknowledged that the Executive shall be prohibited from accepting or deriving any benefit from employment or any other business relationship with any firm or enterprise which is in competition with the Employer (a "Competitor") and the Executive shall not be permitted to use or disclose any of the trade secrets or confidential information of the Employer to any third party."
Decide upon assignment clause: consider including a direct right to assign the agreement or a right to assign to affiliates: "It is further understood, acknowledged and agreed that the Employer may assign this agreement and/or all or any part of its rights of performance hereunder to an affiliate, which shall have the same rights as the Employer as assignor hereunder."
Determine the definition of an affiliate: "An affiliate is any corporation or organization that, directly or indirectly, through one or more intermediaries, is controlled by, controls or is controlled by, under direct or indirect common control with, the Employer."
Include a notice clause: "Any notice hereunder shall be in writing and shall be deemed to have been duly given if electronically transmitted, delivered, sent by courier, facsimile or registered mail to the employment address last indicated in this agreement or to such other address as may be specified by either party to the other in writing."
Decide on a confidentiality clause: "It is further understood and agreed that the Executive, as a condition of continued employment, is required to maintain and keep confidential all the information obtained as a result of the employment relationship, and to not disclose that information to anyone without the consent of the Employer, except to the extent required by law."
Ensure that any other words/clauses/sentences that may be ________ are __________.
Ensure that employee signature lines have been amended to lawful use, and place a line above and below where to enter/type name.
Get it signed.

Legal Issues and Precautions

In order for a letter agreement to be legally binding, it should contain the material terms of the employment relationship. This includes the type and scope of duties expected of the employee, the compensation to be paid, including whether it is at will or for a specified period, benefits and other pertinent conditions of employment. It should clearly spell out the roles and expectations of both employer and employee based on the negotiated dynamics of the relationship.
It has been held that objective manifestations of intent are paramount in determining whether a reasonable person would conclude that an enforceable contract was formed. [Fitzgerald v. Chesley, 194 W.Va. 289 (1995)] Thus, communications with the employee should be clear and concise, using words of promise and performance, rather than mere puffery or informal statements of employment conditions.
To ensure a letter agreement is binding on the employer, it should be signed by a representative of the company who is authorized to enter into contracts on behalf of the employer. [Fentress v. Comcon Drilling Corp., 290 S.W.3d 798 (Tenn. 2009)] If an officer of a corporation has not authorized him or herself, then an individual manager cannot bind the corporation in a letter agreement. Similarly, an agent of the employer must be authorized to bind the company to the terms of the letter agreement, otherwise the agreement is unenforceable against the employer. [Harris v. St. Mary’s d’Youville Pavillion, 204 F.3d 675 (6th Cir. 2000)]
Underscoring the importance of having a letter agreement signed by an authorized representative of the employer, courts have found employment letters to be non-binding when signed by an un-authorized manager. A hospital president lacked the authority to bind his employer when he signed a letter agreement holding the employer liable for severance payments to former employees. [Harris v. St. Mary’s D’Youville Pavilion, 204 F.3d 675 (6th Cir. 2000)]
Certain states require specific language for an employment agreement to be enforceable . For example, in Pennsylvania employment contracts are not enforceable unless they are in writing, and the writing must contain: "The particular provisions of the employment, including the consideration for it; the date when it will terminate, if established so; the county of this commonwealth where work under it is likely to be performed." [41 P.S. § 31-36]
In addition to having a signature from a representative of the employer with the authority to bind the company to the terms of the letter agreement, the employer should also ensure that the employee signs the letter agreement. The absence of the employee’s signature can support a finding that the terms of employment are merely a proposal and not an offer capable of acceptance by the employee. [Coleman v. Smith, 105 N.E.2d 538 (Ind. App. 1952)] Importantly, when approved by the employer and signed by the employee, a letter agreement that provides for a specified duration of employment is generally construed to be a valid and enforceable employment contract, superseding an otherwise at-will employment agreement.
Nonetheless, courts will look to the contract as a whole to determine the parties’ mutual intent and will give effect to the mutually-intended terms of the agreement. [Morris v. Audiovox Corp., 817 A.2d 525 (Pa. Super. 2003)] A long-term employment is generally not enough to rebut the presumption of at-will employment. [Dunlop Tire Corp. v. Brady, 801 F.2d 929 (6th Cir. 1986)] Courts have found that the addition of a duration clause to an at-will employment agreement that contains conflicting language is insufficient to alter the understanding that the employment is at-will and terminable by either party. [Perry v. Sears, Roebuck & Co., 708 F.Supp 1389 (E.D. Pa. 1989)] To be enforceable, a modification of an at-will agreement must be supported by consideration. [Sheaffer v. Elite Entertainment, Inc., 78 S.W.3d 581 (Tenn. 2002)]
Although a letter agreement should contain material terms of the employment relationship for it to be legally binding, it should not include every single detail of the relationship. This is because a letter agreement is not intended to be comprehensive, but only to address those areas that could legally or practically result in a dispute between the parties.

Sample Letter Agreement Template

I recommend that every employer create a letter agreement with its employees which sets forth the "rules of the game" when it hires a new employee or promotes a current employee. These letter agreements can also be used to modify existing agreements such as collective bargaining agreements. The following is a sample letter agreement template which may be customized by each employer as it sees fit. Obviously, this is just a sample template. It will need to be significantly tailored by each employer to meet its specific needs especially in terms of governing law, dispute resolution, and whether particular benefits should be included or excluded.

Final Steps

Assuming that the employer has had a chance to review the letter agreement and to have its own counsel review same (if not, do so now), and assuming that the employer is good with the letter agreement the way it is, time for the employee to sign it. The parties should not be surprised that the employee’s signature should come second, as the "employer" in a letter agreement just signed, is, well, still the employer. And while technically the employer is not changing hands, it smart to have the employer’s signature go second in the agreement.
The most common practice at this point is to send a PDF to the employee, asking for a scanned signature. In some cases there may be a telephone call or in person meeting to finalize and execute the letter agreement and incorporating any changes that occur to it at that time. The most important thing is to make sure that you save a copy of the fully signed agreement. I usually ask for a fully signed PDF back (with an original signature) but I also am okay with the employee signing it (maybe printing it out , signing it and handing it back). Just need the signature (with all of the other stuff we will discuss later). I pick my battles, here. As long as I get it in the end, and I can prove the employment relationship, generally speaking I am okay with it.
If there are any other changes I would make sure to have them in writing emailed back to me, and then printed and attached to the agreement with each party initialing them. That is sometimes easier and smarter than revise the letter agreement over and over again.
This process should only take a few days and not prolonged. We want to get the agreement signed, fully executed (signed by both parties), and then implemented. This allows the new employee to start work the next week, agree to start in two weeks or the like. Also allows you the chance to do any last minute payroll, wage, and benefit program planning before the start date is here!
It is important to make sure that you finalize and officially execute an employment contract with your employee in a way that protects you and your company. Make sure you are present to ensure a smooth transition into the Relationship.