Offer Letter Vs Employment Contract Explained

What is the difference between an offer letter and an employment contract? 

An offer letter is a short congratulatory note extending a job offer, while an employment contract is an extended written agreement setting out the terms and conditions of employment. 

Both an offer letter and an employment contract are legal documents, discussed below. 

The law of employment contracts

The foundation of employment law is contract law. Hence, an employment relationship is a contractual relationship.  

Contract law does not require a written contract to form a contract. Instead, all that is required to form a legally binding contract is (1) an offer, (2) acceptance and (3) consideration.

Accordingly, employment law does not require a written contract to form an employment relationship. Again, all that is required to form a legally binding employment relationship is (1) an offer, (2) acceptance and (3) consideration.

In short, an employment contract is formed when an employer makes a job offer, and the employee accepts (as long as the employer pays wages and the employee does work – i.e. the consideration ingredient). 

Most employers extend “offers” via written job offer letters, and most employees usually “accept” written job offer letters by signing an accompanying document called an employment agreement or employment contract. The “consideration” is the exchange of labour for wages.

However, a job can be offered and accepted without a written job offer or contract. A job can be offered and accepted orally or implicitly. 

Still, it is best for employers, for various reasons, to make a job offer in writing and include a complete employment contract in the job offer or on a separate document. This is why for most jobs, an employment contract usually accompanies the offer letter, and if accepted, it sets out the terms and conditions of the job. 

The difference between a job offer and an employment contract 

Typically, a job offer is a letter to an employee offering them a job. A job offer typically includes a greeting and details about the position and the start date. Finally, a job offer usually includes a paragraph asking the new employee to review and sign an accompanying larger document (the employment contract) laying out all the applicable terms and conditions of employment. In this way, an offer letter is just ½ of a standard job offer. The other ½ is the employment contract. 

An employment contract is usually a few pages long, containing clauses covering everything from compensation to termination. Employees are usually asked to sign this document, not the job offer letter, to indicate their acceptance of it. 

Employment contracts are primarily used to oust implied common law terms or add various contractual law terms not implied in all employment contracts. For example, a common law employment contract term requires “reasonable notice” of termination. In contrast, a written employment contract explicitly may oust the implication of reasonable notice instead of using a set, lesser formula for notice. Likewise, for example, there is no implied common law social media policy, so if an employer wants an employee to refrain from posting about the company on social media, it had better use the employment contract to insert such a prohibition. These are just two examples of countless ways a written contract can subtract or add to the common law of employment. 

Keep this in mind to drive home the difference between an offer letter and an employment contract. As a best practice, there is never a termination clause or social media policy media in an offer letter. Such legalese is reserved for the employment contract as a best practice. 

Lastly, almost all employers use offer letters, but only some use employment contracts. Some employers prefer the common law of employment over a written employment contract governing their employment relationship because it could make them more competitive with job seekers. However, these same employers usually send offer letters expressing an offer, congratulating the employee and sharing a few basic details about the job, like compensation and position. 

In short: Job offers are one-page notes extending an offer. An employment contract is a lengthy document laying out the fine print of employment. Employment contracts are usually attached to job offers either on a new page or as a separate attachment in an email. 

What Employers Should Do In Making Job Offers

Employers should use a job offer letter and an employment contract to extend job offers. A job offer letter is a professional, courteous gesture. An employment contract serves to protect the employee from unneeded common law liability. Employers can quickly write a job offer letter themselves, but they should consider hiring a lawyer or using goHeather to create an employment contract template. A job offer is simple, and there is normally nothing risky about doing it alone so long as it is to the point and free from legalese. On the other hand, an employment contract is complicated and risky to do on one’s own because terms that are miswritten can be held unenforceable and void the contract. 

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