This post is part of a new series that specifically discusses employment law issues for startups and small businesses operating in New York State and New York City.
Not every employee should receive an employment contract. As a general rule, employment contracts are reserved for executives and other key leadership employees who are vital to the success of the employer’s business. As such, offer letters are what should be used for rank-and-file employees to memorialize the terms and conditions of their employment.
Offer letters should include details about:
- the position the employee is being extended an offer of employment for (title alone will suffice, but it’s also appropriate to include a description of the employee’s responsibilities),
- who the employee will report to (a position and/or a name),
- the employee’s anticipated start date,
- the employee’s expected hours and days of work,
- the employee’s compensation and manner of pay (for example, salary, hourly wage, commission, etc.),
- whether the employee is exempt or non-exempt from the minimum wage and overtime pay requirements,
- frequency of payroll,
- the employee’s eligibility for benefits, such as paid or unpaid time off and health insurance benefits, which are often detailed in a separate policy or plan, and
- whether the employee will be expected to work exclusively for the employer.
Since employment for a fixed term is uncommon for rank-and-file employees, the offer letter should also include a statement of at-will employment, which basically confirms that employment is for an indefinite period of time and it is subject to termination by the employee or the employer, with or without cause, with or without notice, and at any time.
The offer letter should also specify any conditions of employment, such as:
- confirmation that the employee is authorized to be employed in the U.S. (via Form I-9),
- successful completion of any background checks (if performed),
- success completion of any reference checks (if performed),
- licensing (if required), and/or
- the employee signing a confidentiality agreement, proprietary rights agreement, non-compete agreement and/or non-solicitation agreement.
If the employee is a commissioned salesperson in New York, the offer letter must include:
- a description of how wages, salary, drawing accounts, commissions, and all other monies earned and payable will be calculated,
- how often the employee will be paid,
- if the arrangement provides for a revocable draw, the frequency of reconciliation, and
- any other details pertinent to the payment of wages, salary, drawing accounts, commissions, and all other monies earned and payable when the employment relationship ends.
As a best practice, all offer letters should be signed by the employees to indicate acceptance of their terms.
As noted above, more formal employment agreements can be used with executives and other key employees. Employment agreements should include details about:
- the employee’s position/title and description of the employee’s responsibilities,
- whether the employee will hold any officer or director titles,
- who the employee will report to (a position or governing body),
- employment start date,
- whether employment will be for a fixed term, and the circumstances under which, and related penalties, employment may be terminated earlier by either the employee or the employee,
- the employee’s compensation and any anticipated changes in compensation (typically tied to specific goals),
- any incentive bonus plans, which may be detailed in a separate policy or plan,
- any stock or equity grants, which are often detailed in a separate policy or plan,
- any incentive awards, which are often detailed in a separate policy or plan,
- any corporate perks, which may be detailed in a separate policy or plan,
- the exclusivity of the employee’s employment with the employer,
- the employee’s eligibility for benefits, which are often detailed in a separate policy or plan,
- any severance benefits to be paid to the employee and the terms for receipt of same,
- any garden leave (which is a transition period for employees who give or are given notice of termination, keeping them on the payroll but away from the workplace), and
- any confidentiality obligations, any obligation to assign intellectual property, and any restrictive covenants, such as non-compete and non-solicitation restrictions.
If there is any right to deferred compensation in the employment agreement, the agreement should also include safe harbor provisions under Section 409A of the Internal Revenue Code.
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