The short answer: An offer letter is a contract whether it says “contract” anywhere or not. Before you sign one — as a new hire or as the employer sending it — check five things: at-will language, how bonuses and commissions are actually calculated, what the IP assignment really claims, whether there’s an arbitration clause, and whether a non-compete is hiding in the packet. This is a red-flags guide, not a numbers guide — and it ends with a lawyer, not a verdict.
Sending offer letters as an employer? The most expensive sentence in yours is the one that accidentally promises something. Have an employment lawyer review your offer-letter template before the first one goes out — once it’s signed, the wording is the deal.
This guide is educational, not legal advice. Employment contract law is state-specific and fact-specific — nothing here tells you whether your specific offer letter or clause is enforceable.
Red flag 1: The at-will language is missing — or the handbook undermines it
Most U.S. employment is “at-will”: either side can end it at any time, for any lawful reason. (Montana is the exception, with its own wrongful-discharge statute.) An offer letter should say so plainly.
The subtler trap runs the other direction. Employers who write warm, promise-flavored language — “we’re excited for your long career here,” “termination only for just cause” in a handbook — can accidentally create an implied contract that overrides at-will status. Courts in many states have held that handbook language promising progressive discipline or job security can bind the employer, even when the offer letter said “at-will.”
- As the hire: if the letter says at-will but the handbook reads like a tenure guarantee, ask which one governs — in writing.
- As the employer: your offer letter and your handbook must tell the same story, and both need a clear at-will disclaimer. Have a lawyer read them together, not separately.
Red flag 2: “Discretionary” bonus with no formula
“Eligible for an annual discretionary bonus” tells you nothing. Discretionary by whom? Based on what? Paid when — and what happens if you leave in November?
Vague bonus and commission language is the single most litigated part of offer letters. What to look for:
- The formula or the factors. “Up to 10% based on company and individual performance” is better than “discretionary.” A named formula is better still.
- The payout timing and the forfeiture rule. Many plans require you to be employed on the payout date. If the bonus is a big part of your compensation, that clause is doing real work — read it.
- Commission specifics for sales roles. Rate, what counts as a “sale” (signed contract? paid invoice?), clawbacks on cancelled deals, and what happens to your pipeline if you’re terminated. “Standard commission plan” with no attachment is not a term — it’s a placeholder.
As the employer writing the letter: vagueness you think protects you (“we’ll figure out bonuses later”) is what creates lawsuits later. Write the formula down or don’t promise the bonus.
Red flag 3: The IP assignment claims your weekends
Most offer letters include an invention-assignment clause: anything you invent related to the company’s business belongs to the company. That’s normal. What’s not normal — and what you should flag — is scope creep:
- “All inventions, whenever conceived” — some clauses claim everything you create during employment, including side projects on your own time with your own equipment. Several states (California’s Labor Code §2870 is the best known) limit how far these clauses can reach, but the clause will still be in the letter, and fighting it costs money.
- Prior inventions. If you bring existing IP (a side project, open-source work, a patent application), the letter should carve it out explicitly — usually in an exhibit listing your prior inventions. A blank exhibit you sign anyway is a gift.
Red flag 4: The arbitration clause (and what it waives)
Buried arbitration provisions mean employment disputes go to a private arbitrator instead of a court — typically with no jury, limited discovery, and very narrow appeal rights. Whether that’s good or bad for you depends on the claim, but it should never be a surprise.
Read for: who pays the arbitrator’s fees (employer-paid is the norm and the fairer structure), whether it covers all claims or carves some out, and whether you’re also waiving class or collective actions. Some states restrict certain waivers; the enforceability landscape shifts — another reason this guide ends with a lawyer.
Red flag 5: A non-compete in the packet
Non-competes sometimes arrive stapled to the offer letter rather than as a separate agreement. Given that the FTC’s 2024 non-compete rule is dead and state law now governs entirely — with California, North Dakota, and Oklahoma voiding most non-competes outright and other states enforcing only “reasonable” ones — a non-compete’s enforceability depends entirely on your state. (Full breakdown: Non-Competes After the FTC Rule Died.)
- As the hire: never assume a non-compete is unenforceable because “the FTC banned them” — it didn’t stick. And never assume it’s enforceable because it’s in writing — it might be void where you live.
- As the employer: presenting an overbroad non-compete in a state that voids them doesn’t just fail — in the current enforcement climate it can draw the wrong kind of attention.
The employer’s checklist: what your offer letters must contain
If you’re the one sending offer letters, every one should nail down:
- Job title, start date, work location (including remote-work terms if applicable).
- Base compensation and pay schedule — salary or hourly, and when it’s paid.
- At-will statement, consistent with your handbook.
- Benefits summary with effective dates (when health coverage actually starts matters).
- Bonus/commission terms with the actual formula or a clear pointer to the plan document.
- Contingencies — background check, references, work authorization — stated upfront, not discovered later. (Contingent offers have their own sequencing rules: Background Checks: The FCRA Sequence.)
- What happens to accrued, unpaid compensation if employment ends — as far as your state law defines it.
And one thing it should not contain: promises about job security, fixed terms, or guaranteed future compensation that you don’t mean as binding terms. Every optimistic sentence is a potential exhibit.
A note on the offer stage and medical inquiries
Federal law draws a bright line at the offer stage: before a conditional job offer, an employer generally may not ask disability-related questions or require medical examinations (42 U.S.C. §12112(d)(2)). After a conditional offer, medical inquiries are permitted if they’re required of everyone in the same job category (§12112(d)(3)). If your “offer letter” arrives alongside a health questionnaire, the sequencing matters — and it’s exactly the kind of thing to raise with counsel, not to resolve by gut feel. (EEOC guidance currency being confirmed at write time.)
Methodology
This is a red-flags guide, not a numbers guide — there are no worked calculations because the expensive mistakes here are contractual, not arithmetic. The flags are drawn from the recurring dispute patterns in employment offer litigation (at-will/implied-contract conflicts, bonus forfeiture fights, IP scope disputes, arbitration enforceability). Every flag is jurisdiction-hedged because offer-letter law is state law. No template contract language appears anywhere in this guide, deliberately — templates are how employers create the liability this guide warns about. This page is educational, not legal advice.
Sources
- 42 U.S.C. §12112(d) — uscode.house.gov (ADA limits on disability-related inquiries and medical examinations, pre- vs. post-offer)
- FTC non-compete rulemaking and vacatur materials — ftc.gov (rule status; see the non-compete guide for the full timeline)
- California Labor Code §2870 — leginfo.legislature.ca.gov (limits on invention-assignment clauses reaching independent work)
Frequently asked questions
The offer letter says “this is not a contract.” Is it still binding?
Courts look at what the letter actually promises, not at its disclaimer label. A detailed letter with specific compensation, duties, and term language can be treated as a contract regardless of the header. Disclaimers help; they don’t immunize.
Can I negotiate an offer letter?
Yes — and the red flags above are your negotiation list. At-will language, bonus formulas, IP carve-outs, and non-compete scope are all negotiable before you sign. After you sign, they’re terms.
Should a startup use the same offer letter for everyone?
The template should be consistent, but role-specific terms (equity, commissions, IP exhibits) need individual attention. One template with unreviewed per-role edits is how inconsistencies — and lawsuits — are born.
Do I need a lawyer to review a standard offer letter?
For the employer’s template: yes, once, before the first send — it’s the highest-leverage legal hour in this cluster. For a hire evaluating a single letter: if any of the five red flags looks off, yes. Employment lawyers review offer letters routinely; it’s not an exotic ask.
What if I already signed something with these red flags?
Don’t panic and don’t assume the worst clause controls — enforceability is state-specific and many overbroad clauses fail in court. But do get advice before you act on that assumption (like joining a competitor). The time to test a non-compete is not after you’ve resigned.