Before we proceed, no they are not the same!
Offer letters and employee contracts are similar but they exist to fulfill completely different purposes. You might have been using them wrong all these while.
Offer letters do not give detailed information as the employment contract. As a small business owner, one of the major concerns for you is to be deeply aware of the difference and not imply an employment contract in the offer letter you are sending out.
What is the offer letter for?
Offer letters are basically that. An offer.
Organizations typically issue them first before following up with a contract.
What you want to achieve with this is to clearly write out the basic terms of employment. It also spells out the basic requirements and expectations in the event that the said employee accepts your offer.
The typical offer letter includes basic information such as:
- Your Company name
- Job title you are offering
- Starting date
- Salary and pay schedule
- Specific benefits, particularly if you’ve negotiated benefits that deviate from the company’s typical offering
And the employee contract?
Although offer letters spell out the employer’s expectations, the employee contracts are more detailed.
So companies do the needful and protect themselves with employment contracts. These contracts in addition to what is typically in an offer letter also spell out the restriction against sharing private information or confidential information with third parties, IP policies, compensations detail, taxation and deduction policies, leave and HR policies etc
Employee contracts include the following information:
- Everything in the offer letter
- Compensation (This could also include a severance pay if any)
- Equity compensation (sweat or options)
- Job description
- Notice period, if applicable. (Notice period is the length of notice both employer and employee must give each other before terminating the relationship)
- Nondisclosure or confidentiality clauses (sometimes, this could be a stand-alone agreement)
- Intellectual Property (IP) assignment & transfer clauses (again, this could be a stand-alone agreement)
- Restrictive clauses like:
Non-compete clause – It stops your employee from working for a competitor or other organisations in your field for a certain period after leaving your employ.
Non-solicitation clause – stops your employee from doing business with your customers, vendors or even hiring another employee for a certain period after leaving your employ.
Few things to note about restrictive clause
- Ensure it has a time limitation e.g 6 months, 2 years etc
- Include a geographical limitation e.g in Ikeja, in Abia State etc
- Ensure it is industry and sector specific
- Include an exclusion where the employer’s consent is obtained, i.e. if the employee seeks your consent, the restrictive clause won’t apply.
Where a restrictive clause does not take the points above into consideration, it is possible for a court to declare that the clause is not binding on the employee as it will be viewed as an unfair term.
There are different schools of thoughts on restrictive clauses. Some think it is unfair on the employee and should never be included. Some think it is unfair on the employer if an employee can up, go and just replicate the employer’s business.
We think it should be on a case by case basis. E.G.
Ade’s driver Brutus does not need to have any restrictive clauses in his employment contract.
Chidi, who Ade invited to join his company as co-founder and Chief Operating Officer may sign an employment contract that includes clauses that stop Chidi from working with or founding a business that builds school management systems within Nigeria for 12 months after he stops working in Ade’s company.
Chidi also cannot do business with any of the company’s existing customers or vendors.
Offer letter or employee contract?
So as a company which should you go for? An offer letter or an employee contract?
Ideally both, but if you have to choose one, the employee contract is better. The detail and complexity of the employment contract should be determined by the level of the employee hired. In addition to Brutus not having restrictive covenants, do you really think Brutus needs an IP assignment clause in his contract, really?
Employee contracts are not only good for outlining and negotiating the terms of employment between you and your employee, by giving a contract with clear and other beneficial terms, you move one step ahead of your competitors, and attract better talent.
If you need an employee contract, get one here.