Many factors influence whether an offer letter or an employment agreement constitutes a binding contract. The offer letter or employment agreement can amount to a contract, depending on whether it meets the requirements for a binding contract. The name of the document is irrelevant when determining whether it is a contract or not. Ideally, when engaging an employee, you should provide two separate documents: an offer letter and an employment contract.
This article will explore what an offer letter and employment contract are and how these relate to contract law.
Employment Letter of Offer
A letter of offer is typically a short document with fundamental details outlining an intended employment engagement, including the following:
- the position you are offering;
- type of employment, for example, whether the job is full-time, part-time or on contract;
- company name; and
- key terms and conditions set out in the employment contract (which is often attached).
In the offer letter, you may request information such as:
- a TFN declaration form;
- a Superannuation Standard Choice form; or
- any documents that are necessary for the role.
In addition, you may also request that the employee sign and date the attached employment contract and return a copy.
It is important to note that the offer letter does not usually contain an employment contract’s comprehensive terms and conditions.
An employment contract is preferable because it:
- includes all the details of the terms of engagement with the employee;
- allows either side to point to the relevant clause in the contract if any disputes arise; and
- avoids disputes arising in the first place, as both parties are fully aware of their rights and obligations.
Employment Contract
Unlike a letter of offer, an employment contract is a much lengthier document. It contains detailed terms and conditions of employment. For example, it will typically set out:
- employee’s duties;
- any probation period;
- remuneration;
- annual leave and personal leave;
- confidential information obligations;
- intellectual property obligations; and
- any restraint of trade or non-compete clause.
As an employer, you must ensure that the employment contract is clear on your rights and obligations and those of the employee. Suppose the business falls under a certain industry or the employee works in an occupation covered by a modern award. In that case, the employer must adhere to the minimum requirements under the relevant modern award. Modern awards outline various entitlements, such as:
- whether the employee is full-time, part-time or casual;
- minimum rates of pay;
- overtime rates;
- penalty rates; and
- allowances.
What Makes a Contract?
A contract is a legally binding agreement between two or more parties – in this case, between yourself, an employer, and your employee. There are five key components to making a valid contract. Let us explore each of these below.
1. Offer and Acceptance
This means that you must communicate the offer, and the employee must accept the terms of the offer. For example, you might send an email with the employment contract requesting the employee to accept the terms of the offer by replying with a signed copy of the contract.
2. A Common Intention Between the Parties to Create Binding Relations
In other words, you and the employee agree to set up a legal relationship based on what is defined in the terms of the offer letter or the employment contract.
- Something Promised in Exchange for the Promise
As an employer, this is your promise to pay the employee a salary or hourly rate. That is, your remuneration for the work the employee produces.
4. Legal Capacity
This means you and the employee have the legal ability to enter a contract. Factors that challenge legal capacity could be:
- the employee’s age;
- whether there is a language barrier between you and your employee; or
- whether the employee has some form of mental impairment.
5. Consent From Both Parties
Obtaining valid consent is crucial to a contract. Neither you nor your employee can be coerced into agreeing to the contract.
Offer Letters and Employment Contracts
As the name suggests, a letter of offer is likely to be considered an “offer” – one of the components of a valid contract. However, it may not be a contract until the parties meet the other four elements.
Accordingly, as an employer interested in successfully providing a valid offer letter leading to a binding agreement, you should assess what may confuse an employee. For example, an offer letter may be confusing if you send a letter without any terms and conditions. Attaching a clear employment contract to the letter of offer is beneficial for many businesses. As with a letter of offer, an employment contract is only legally binding if the above elements are met.
You can also form contracts verbally if you satisfy the factors here. Ideally, however, businesses should enter written contracts with employees to avoid any uncertainty in the arrangement. By having a written contract, you give a point of reference for both yourself as the employer and the employee to return to if there are any questions or a need to revisit the terms of the employment contract.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
An offer letter or employment contract may be a contract, depending on whether it meets the elements of a binding contract. Employers should provide an offer letter and an employment contract when engaging employees. Employers should ensure all rights and obligations for both employers and employees are set out correctly in an employment contract.
If you need help drafting an offer letter or employment contract, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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