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.

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.

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.