In these tough economic times, some companies are cutting the wages and salaries of employees rather than having a reduction-in-force. Part of any due diligence review must include a review and analysis of the offer letters that the employees signed. In some instances, the offer letter is a contract preventing the company from terminating the employee and/or changing his salary or wages.
We recently examined an offer letter which stated that the company was “offer[ing] you the…Annual Salary” of “$XX,XXX (Bi-weekly $X,XXX.XX)” for the “Term: January 1 to December 31, 2009.” Employees were asked to sign if they agreed to these terms.
Such language in the offer letter can create a contractual right to employment for the one-year duration set forth in the offer letter and a contractual right to receive the annual salary in bi-weekly installments. The company does not have the right to alter these contractual promises, but could request the employee to alter the contract at any time.
Illinois courts have ruled that an offer letter without a fixed duration does not create a contractual relationship. No contractual relationship is created, even when the offer letter sets forth an annual or monthly salary. Such an offer letter creates nothing more than an “at-will” employment relationship. Under this relationship, a company has the right to terminate the relationship at any time, for any lawful reason and without notice. However, a company and employee may alter the at-will relationship by agreeing to contractual terms. For example, if a writing sets forth a duration, the at-will relationship is altered into a contractual relationship for a specific period of time. In addition, the parties may contract for certain benefits, procedures for termination of the relationship and the rights and obligations of the company and employee. For example, some offer letters, like more elaborate employment agreements for executives, will state that employees may be terminated only “for cause” or state that, after completing a “probationary period,” the employee becomes a “permanent” employee.
Provisions in an employee handbook will not overrule the language in an offer letter. For example, an employer may provide that employees are “at will” employees. However, applying principles of contract interpretation, more specific language in a letter offered to employees, containing specific terms and signed by employees, will prevail over other provisions.
We recommend that all companies examine the offer letters they use to determine if they create contractual rights. We also recommend that companies determine whether they want to continue or create contractual obligations. If they do not want these obligations, companies may have the opportunity to change these contracts at the end of the term and then should make sure that these writings are drafted in such a way as to provide the company with the greatest amount of flexibility possible for operating its company.