Get the Contract Terms Into the Job Offer Letter

If you plan to include non-compete terms, non-solicitation clauses, or delayed compensation arrangements, those provisions must be part of the initial job offer. Courts view adding contract terms after an employee has accepted the offer as changing the deal—and they will not enforce it. Once an employee has started making plans for the job, you cannot have them show up on day one and sign new terms.

Employee handbooks and company policies are different—those apply during employment and end when the employee leaves. But contracts that bind the employee after they leave must appear in the original offer.

If You Missed the Window, Pay for It

If contract terms were not included in the job offer, there is still a path forward—but you need to pay the employee something of real value to sign. It cannot be a token amount. Two pennies, fifty cents, or even a dollar will not work. Courts reject anything considered de minimis. Typically, $500 is sufficient. The payment does not have to be a great deal for either side, but it has to be a real number.

Separation Agreements Close the Relationship Cleanly

When an employee leaves—voluntarily or otherwise—a separation agreement (also called a severance agreement) lets both sides resolve their differences and move on. The employee might receive a severance payment; in return, both parties agree not to sue each other. These agreements need to comply with your state’s employment laws, which often include strict requirements to protect the departing employee.

Many companies with 10 to 30 employees start using separation agreements routinely when letting someone go. The cost is small compared to the peace of mind that comes from knowing a former employee will not come back with a lawsuit.

EPLI as a Backstop

Even with strong agreements, lawsuits happen. Employment Practices Liability Insurance (EPLI) covers claims for wrongful termination, discrimination, and other employment disputes. A single covered incident—often $50,000 to $100,000 in legal costs—can pay for many years of premiums. If you have employees, this policy deserves a serious look.

Video Transcript

Set Expectations Early in the Hiring Process

When you bring on a new employee, the job offer letter is your opportunity to set clear expectations. If you plan to include non-compete terms, non-solicitation clauses, or future compensation agreements, it’s common for those details to appear in that initial offer. Adding contract terms afterward often makes them unenforceable.

Courts May Reject Post-Acceptance Contract Changes

Courts see that as changing the deal after it’s been accepted. If it’s too late, you can still create a valid agreement, but only if you pay the employee something of real value in return.

Keep All Terms in the Original Offer

One final tip for entering into contracts with employees. The contract offer should be included in the job offer letter. You don’t want to thrust new contract provisions onto an employee after the job offer letter, because many times courts will say, “No, you can’t change the deal after that.” You know, once the employee has accepted the offer and started making plans for the job, you can’t have them show up on that first day and sign new terms.

Employee Handbooks Are Treated Differently

Now, it is fine for an employee handbook and company policies because all of those end when the employee leaves, but you can’t have new contracts that bind the employee after the employee leaves, unless those terms are included in the job offer letter.

Option 1: Include Terms at the Time of Offer

So what is the takeaway here for you? If you are going to have contracts with your employees for non-compete, non-solicitation, delayed compensation, or any other sorts of contracts, you want to make sure that those terms are provided to the employees at the time of the job offer letter.

Option 2: Provide Payment for New Terms Later

Now if it is too late, there is something you can do. You can pay the employee to sign the contract with the new terms. So even though the employee already accepted the job, maybe even started, if you pay the employee to give up his or her rights and go into this new agreement, then as long as that payment is reasonable, it doesn’t have to be fair market value, but it can’t be two pennies. It can’t be fifty cents. Now you might say, “Can it be a dollar?” Usually no, but a hundred dollars may be sufficient. Typically, $500 is sufficient, so it doesn’t have to be a good deal for either party, but it can’t be a fake amount. Something that is considered de minimis, so small that it really isn’t money at all.

Avoid Symbolic or Insufficient Payments

It has to be more than that. It has to be a significant amount. So, either have contract terms as part of the job offer letter or pay the employee to make sure that those terms will be enforceable when the employee signs that contract.

What a Separation or Severance Agreement Does

Now related to employee contracts is the contract with an ex-employee. This is sometimes called a Separation Agreement or a Severance Agreement. Whether you call it separation or severance doesn’t really matter. It means the same thing. The relationship has changed. The employee is no longer working with the company, and the parties are agreeing to resolve their differences and agree on terms for that separation.

Mutual Exchange of Value

Now, keep in mind, There needs to be something both sides are giving up in this. Sometimes the employees get paid money, that might be called a Severance Payment, but not always. And often you are just agreeing, “Hey, we are going to go our separate ways. We are not going to sue each other.”

Make Sure Agreements Comply With State Law

These types of agreements need to be written by an attorney or by someone with current knowledge of your state’s employment laws because usually states have strict rules on what must be in here to prevent you as a business owner from taking advantage of an ex-employee. So the benefit of having separation agreements for you is that when your employee leaves, you don’t have to worry they are going to come back and sue you later for something.

A separation agreement basically might be, “Hey, I will pay you two weeks pay or a month’s of your salary or whatever amount you agree to,” in exchange for the employee agreeing not to sue you or claim anything was done improper.

When to Start Using Them

Many companies, once they get to the size of somewhere between 10 and 30 employees, start routinely using separation agreements with anybody that they fire. And the reason is that the company wants to know that they are not going to have to deal with some lawsuit later. It provides a lot of comfort and assurance to a company to pay a small amount of money to an ex-employee in order to know we don’t have to worry about some problems here.

What EPLI Covers

Now, if you are concerned about this, there is an insurance policy that you can get for this. It is called EPLI, Employment Practices Liability Insurance. You can get a policy like that. And then if you get sued for some sort of violation of employment laws, that policy is designed to cover those sorts of legal actions that can be really helpful because you spend fifty grand per employee lawsuit or dispute, sometimes a hundred grand, that is a lot of money. And so often you find having some sort of insurance policy that you just pay every year is worth the peace of mind. And one legal dispute covered by the insurance policy typically covers many years of paying those monthly insurance premiums.

Where to Learn More

Now, if you would like to know more about how to avoid trouble like this, I have a free resource at AaronHall.com/free. I provide information for business owners of small to mid sized companies on how to avoid common legal problems. That includes a PDF. It includes videos talking about important issues.

Stay Informed

I am Aaron Hall. I am an attorney for business owners and entrepreneurial companies. If you would like, subscribe to this channel so you can get more educational content like this.