Offer letters differ from employment contracts in a number of ways, although by their very natures they can cause confusion. While an offer letter is usually used as a tool to communicate to the employee the terms of their salary, benefits and responsibilities, an employment contract is a binding agreement between the employer and employee. Many employers are reluctant to give employment contracts because of the worry that they will negate the "at will" nature of the employment. Offer letters are typically drafted to avoid this issue.
"At Will" Hiring
"At will" hiring means that an employee is employed only for as long as both he and the company will it. It allows companies to terminate employees for any legal reason and allows employees to quit at will. Most states recognise "at will" hiring, and in some states it is the default assumption and can only be modified by special language within a contract.
An offer letter is a brief letter, often stating the description of the job for which an employee has been hired as well as outlining issues such as salary, benefits and responsibilities. It is usually sent to a new hire to confirm what the employer is offering. However, offer letters that refer to "annual salaries" or "annual bonuses" can be construed by an employee as a promise of a given term of employment -- for example, "You will be here for a year and receive X amount for your services." Because many companies are reluctant to hire employees for a set term, and thus give up their ability to terminate that employee at will, such language in an offer letter can become a bone of contention.
An employment contract can be a very useful tool for both parties. It allows the employer to specifically spell out what it expects, as well as how it will determine benefits, vacation pay and salary increases. It also provides an employee with proof of what she was promised against future changes, such as the manager who hired her being transferred, or the employer not living up to the agreement. Should there be a disagreement between the employer and the employee, a contract can avoid litigation and make the conflict a much simpler matter of contract law. Many employers avoid employment contracts because of the misconception that they negate the "at will" nature of the employment. However, this isn't the case if the terms of the contract specifically state that the term of employment is "at will."
Offer letters can be misconstrued as contracts because of the language they use or because of the employer's requirement that an employee sign the offer letter and return it. However, an offer letter does create --- to some degree --- an agreement between the employer and the employee. However, it should promise only what it directly states. Some offer letters are unspecific, and the language can be seen to create an implied agreement. An employment contract is often much more specific, relaying the exact terms between an employee and employer; because of this specificity, a contract that states the "at will" nature of the employment is less open to interpretation.