10 Key Offer Letter Considerations
There are numerous considerations at play when extending or accepting an offer of employment. The following post discusses some of the considerations that I have found helpful in working through the onboarding process.
1. Are you an employee or an independent contractor?It might seem basic and straightforward, but there is actually quite a lot of flux at the moment in terms of determining whether someone is an employee or independent contractor.
If you perform labor (whether physically or at a desk), you are either an employee or an independent contractor. When you are classified as an independent contractor, but should be classified as an employee, you are “misclassified.” Being misclassified can lead to claims for underpayment, as well as missing out on employment benefits to which you may be entitled, such as health care. Whether you are an independent contractor is determined by law.
Misclassification is a common claim in employment lawsuits. Thus, if you are hiring or being hired as an independent contractor, it makes sense to analyze whether the classification is proper. An ounce of prevention is worth a pound of cure.
2. Are you exempt or non exempt?Whether you are exempt or not determines whether you can be paid a salary for hours worked, or whether you must be paid on an hourly basis for overtime and be provided regular meal and rest breaks.
When someone is classified as exempt when they are actually non-exempt under the law, they are considered "misclassified" which, as in the case of the independent contractor/employee dichotomy, can lead to substantial liability. Accordingly, care should be taken to make sure you are appropriately classifying or classified, depending on your situation.
3. The Offer Letter Is A ContractThe employment relationship is fundamentally contractual in nature. While there is a substantial body of federal and state employment law (even cities can pass employment-related ordinances), these laws largely serve to provide minimum standards and protections. Once these minimum standards are met, the key terms of the employment relationship are up to the parties to negotiate and agree on.
The contracts that govern the employment relationship (particularly in the technology sector) frequently involve three types of agreements: (1) the offer letter itself; (2) a confidentiality and proprietary information assignment agreement; and (3) an employee handbook. There can also be additional contracts. These additional contracts typically involve employment benefits, such as stock plans or severance pay plans.
The offer letter tends to cover the following: (1) the title, job duties and reporting structure for the employee; (2) the start date and location of work; (3) a high level summary of compensation and benefits; and (4) the terms of the employment offer (frequently at will).
The confidentiality and proprietary information assignment agreement tends to elicit the following promises: (1) that company information is confidential and cannot be shared; (2) that the employee’s work product for the company belongs to the company and not to the employee; and (3) often some mechanism for resolving disputes, whether via arbitration or the courts, as well as a choice of law -- such as California law -- which will govern any dispute.
Employee handbooks tend to cover areas that are specific to the employer and its line of business. In general, handbooks will provide the details of the employer’s policies. For example, a good handbook will spell out in detail the company’s employee compensation and benefit plans.
Finally, certain compensation plans – such as stock option or severance plans -- will often be addressed in separate, stand-alone contracts. A stock option plan, for example, would govern the timing, pricing and terms of the options. Similarly, a severance plan would govern who is eligible for severance and the amount of severance to which they are entitled.
It’s important to note that there is no requirement that any particular term of an employment agreement be in any particular employment document. An agreement to arbitrate could be found in an offer letter, a confidentiality agreement or an employee handbook. This means that a careful review of all documents is warranted prior to agreeing to its terms.
4. Employment At WillUnless otherwise specified, an employment relationship is presumed to be at will. If you are an employee, this means that you can be terminated at any time, for any reason (so long as the reason is not illegal), or that you can leave your employment at any time. Problems with the employment at will doctrine often arise when there is an unwritten understanding that the employment relationship will last for at least some minimum term, or that the employment relationship will only be terminated for cause. Unless this understanding is in writing, it is most likely not enforceable in court.
Given the at will doctrine, when considering a job opportunity, it can make sense to negotiate for a minimum employment term or additional compensation in order to mitigate the risk of an early termination.
5. Is it in writing?All material terms governing the employment relationship should be in writing and should be set forth either directly in the offer letter or be incorporated into the offer letter by reference to another document. Terms that are not in writing run of the risk of not being honored or enforceable. Memories fade, employees come and go. At the end of the day, the only record of any agreement on terms is often what’s in an employee’s personnel file.
An offer letter is a form of contract and usually includes language that the letter supersedes all prior written and oral communications. Further, the offer letter usually can only be modified by a subsequent writing signed by both parties. Given these terms, unless you have it in writing, it is often not enforceable.
6. Bonuses and CommissionsAny bonus agreement should be writing. However, not all bonus agreements are created equal. Bonuses generally fall into two categories: discretionary and non-discretionary. Discretionary bonuses are not firm promises, but rather allow the company to decide whether to issue a bonus. The employee usually has no claim for failure to pay a discretionary bonus, because there is no firm promise of payment. Non-discretionary bonuses, on the other hand, usually promise that a bonus will be paid in the event some goal or milestone is met. If it can be shown that the goal or milestone was met, then the employee does have an enforceable promise.
Commissions in California must be paid out according to a commission plan. The commission plan is a form of contract, and can be enforced in in court the event its terms are not complied with.
7. Is equity involved?There are many issues surrounding employee equity. However, I have found the following principles to be useful in examining equity grants.
For public companies, the value of equity grants are straightforward, because they are actively traded on stock exchanges. For mature, private companies, determining the value of an equity grant depends on the quality of information you have about the company. It is sometimes possible to gather this information during the negotiation process. For privately held, growth oriented companies (e.g., startups), it can be more difficult to determine their value. The downside to an equity grant in a private company (either mature or growing) is the potential failure to reach a liquidity event – either ever or for a long period of time.
For privately-held corporations, you really don’t know anything about your equity position if the only data point you have is the amount of shares you are being granted. That’s the numerator. You need to know the denominator: i.e., how many shares are outstanding. Once you know the numerator and denominator, you can figure out your percentage interest in the company. From there, you can determine what your equity stake is at different company valuations and the likelihood that it will reach those valuations.
Time-based versus production-based equity. Consider whether it makes sense to negotiate an equity stake based on time served (time-based) or based on accomplishments (production-based). There are pros and cons to both, so the situation you find yourself in governs which route is optimal.
Are any non-standard terms? This means actually reviewing and analyzing the documents underlying the equity grant – such as the stock grant document and stock purchase agreement. Not all equity grants are created equal.
What happens in the event of termination? Under the terms of some equity plans, you may have to exercise any stock options within a short window of time after termination in order to prevent them from lapsing. This can lead to an unexpectedly large demand for capital.
Finally, you want to consider the tax implications of any equity offer. Not all equity offers are treated the same from a tax perspective. For example, will you be hit with a tax obligation prior to a sale of shares? What will the tax obligation be? Knowing what your tax responsibilities are prior to joining an organization can provide a clearer picture of the net value of the offer.
8. Non-Standard Company PoliciesAs noted above, many company standards and procedures will be outlined in various documents not necessarily referenced to or included in any offer letter. These documents, such as a company’s handbook, are contractual in nature and should be reviewed and analyzed when determining whether to accept an offer of employment.
These documents can reveal surprising information, such as that an employee is subject to a non-compete; that the employee must litigate a dispute out-of-state; or that the employee’s laptop may be searched by the company at any time. Once again, it pays to be diligent in reviewing all employment-related agreements.
9. Dispute ResolutionThis is an often-overlooked provision in any employment agreement. Where will any disputes over employment be resolved? In general, employment disputes are, by default, decided by a court, unless the parties agree to proceed to arbitration. There are advantages and disadvantages for employers and employees in terms of proceeding in court and arbitration, so consideration to these options should be given.
In addition to where disputes will be decided, employment contracts often specify that the law of a particular state will apply to the contract. Consideration should be given as to whether the state law which the contract applies is appropriate.
10. Benefits/Business Expenses/PerksLast but certainly not least, employers and employees will want to consider what benefits should be made available or are available, what types or levels of business expenses are supported, and any perks associated with accepting employment.
Individual situations vary, so exercise common sense and seek out qualified legal advice in the event you have specific questions or concerns.