Hiring your first employee is an exciting step — but one wrong sentence in your offer letter can open the door to serious legal trouble. If you’re a small business owner, it’s critical to understand that offer letters aren’t just paperwork — they’re legally significant documents that need to be clear, compliant, and thoughtfully crafted.

Let’s look at the four most common offer letter mistakes small business owners make — and how to avoid them.

Job Titles Aren’t Just Labels

It may feel harmless to give someone a title like “Manager” or “Director,” but job titles come with legal implications. Misclassifying an employee — whether it’s treating someone as exempt when they’re not, or calling someone a contractor when they’re really an employee — can lead to lawsuits, tax issues, and back pay claims.

Remember: contractors shouldn’t get offer letters at all. They’re separate businesses, and they should receive a business-to-business agreement — not an employment offer. That agreement should clearly spell out the scope of work, payment terms, and deliverables.

When in doubt, match the title and classification to the actual duties being performed, not just what sounds right.

Vague Compensation Language Creates Risk

Flexibility in job offers might feel like a smart move, but phrases like “approximately $60,000” or “we’ll review pay in six months” can create misunderstandings. These ambiguities leave you open to disputes — especially if expectations aren’t met down the line.

Be clear and specific: outline the exact salary, whether it’s annualized, how often pay is issued, and any bonus or incentive details.

Here’s a tip: use the phrase “annualized salary” instead of “annual salary.” The former clarifies that pay is earned over time, not guaranteed in a lump sum — an important distinction if someone leaves mid-year.