In this article, Tirumala Chakraborty who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Key clauses in employment contracts.

Key clauses in employment contracts

An employment contract is a legally enforceable agreement stipulating the terms and conditions of the employment in addition to recognizing the rights, expectations, and obligations of both the employer and the employee. Employment contract is a bilateral agreement based on an offer, acceptance, consideration, competent parties, legal object and free consent. An employment contract is entered into for an agreed duration with respect to exchange of service and remuneration. There are several regulations which by itself are complex in nature governing the relationship between the employer and employee

Once such agreement is executed with consent between the employer and the employee, the same is said to binding on both parties. The important clauses in a contract of employment are appointment, term of the employment, responsibility, remuneration, payment of salary, sickness and disability, termination, confidentiality, indemnification, notice, restrictive obligations, choice of law and jurisdiction. Every employee executing such contract is under an obligation to perform his part of the duty as has been set out in the contract while it shall be the duty of the employer to protect the employee from harm or injury, and make fair compensation for any loss or damage arising from any job-related accident. In addition to such specified obligations, the contract of employment also includes terms and conditions relating to promotions, rewards and terminations.

NATURE OF SUCH CONTRACTS

An employment agreement laid the foundation of the employment relationship between an employer and employee. It can be made verbally or in writing and like any other agreement it specifies various terms and conditions under which a person who accedes to perform duties as directed by the employer in exchange of salary for an agreed period of time. A contract of employment must include various details in relation to such employment such job description, payments, benefits, rules and regulations for termination etc. An employment contract starts with the acceptance of the offer of employment or the terms and conditions offered by the employer. The acceptance is the assent given to the proposal offered and it has the effect of converting it into a promise and any alteration or modification to such existing contract can be made only with approval of both the parties. Any breach of the terms and conditions to which both the employer and employee are bound will result to repudiation of such contract.

Any contract of employment signed with an Indian company is governed by the Indian labour law. There is no provision in the Indian laws that make it mandatory for an employer to provide a written contract of employment or written statement to his newly hired employee. In India, usually a simple letter of appointment signed between the employer and employee serves the purpose of the employment contract.  The common intention of the parties to create legal obligations and the promise to employ and be employed forms the integral part  of the agreement and thus from a cultural perspective, it can be said that contracts in India are not seen as binding as it is in other developed countries.

KEY CLAUSES OF EMPLOYMENT CONTRACTS

An employment contract is drafted, signed and executed between the employer and employee mainly to prevent nondisclosure of information such as trade secrets, non-competition, non-solicitation as well as protection of confidential information. The key clauses that a contract of employment should include are briefly described below:

CONFIDENTIALITY CLAUSE / NON – DISCLOSURE OBLIGATIONS

A well draft contract of employment should include a confidentiality clause that gives protection to company’s sensitive information such as trade secrets and client data and obligates the employee to keep such information confidential from the public. This particular clause restricts the employee from disclosing confidential information to any third person without the permission of the employer. A separate agreement commonly referred to as non- disclosure agreement can also be drafted and executed for this purpose as the confidentiality clause overlaps with clauses such as restrictive covenants, non- solicitation clauses etc. In the matter of Diljeet Titus versus Mr. Alfred A. Adebare and Others (2006 (32) PTC 609 (Del)), the High Court of Delhi rejected the contentions of the defendants and restrained them from using the information taken away illegally at the termination of the employment. The Court restrained the defendants from using that information as it was necessary to protect the interests of the plaintiff’s business.

It is indeed very important to include a confidentiality clause in an employment agreement as it somewhat gives assurance to the business that the hired employees of the company will not expose the trade secrets to the other competitors in the market. By signing the non- disclosure agreement the employee is agreeing that disclosure of company’s secret or misusing that information lead to breach of such contract. The Indian Penal Code and the Information Technology Act, 2000 provides for Criminal prosecution and imprisonment or fine (or both) as consequences for breach of confidentiality and disclosure provisions. The Information Technology Act, 2000 under Section 66e talks about the punishment for violation of privacy policy and  various other related acts such as tampering with computer source document (Section 65), hacking (sec 66) etc.

In absence of a clearly written confidentiality clause in the contract of employment, the employer will have to count on the judiciary and the rules provided in common law. The most important issue that has to be taken into consideration while adjudicating a matter in relation to this is the whether the revealed information is a secret which is exclusively available to that particular organization or it is just a general information for the public domain.

RESTRICTIVE CLAUSES

This is one of the key clauses to be included in an employment contract. It is mainly designed to protect the legitimate interest of the business and simply not to avoid competition. This clause restricts an ex employee from using integral information such as business strategy, customer details etc. in relation to his prior employment. Restrictive covenants provide protection both to the business and the employer during the employee’s employment period and even after such period ends. This clause disallows an employee from competing with his ex employer for a certain period of time after he has disassociated himself from the business and stops him from misusing the invaluable information to the competitors those who are seeking to poach upon the market of the business he was associated with.

An employer must be mindful while drafting a restrictive covenant and certain factors such as the extent of geographical area, the time length for imposing such post employment restrictions, type of information that is being protected etc are to be considered in a much substantial way. The extent of restrictive covenants must be in respect to the position of the employee within the business. It is more likely and reasonable to put a restriction on the senior employees as they are more aware of the organization’s sensitive information.

Though there are several types of restriction to be imposed the most common types of restriction that are used by employers are discussed below:

Non-compete covenants

Under a non –compete covenant or contract, it is agreed by an employee not to enter into or start a similar trade or profession in competition against his prior employee. In India, the Contract Act under Section 27 of the Act deals with the legality of non- compete clauses and says that every agreement by which any person is restrained from exercising a lawful profession, trade or business of any kind is void. Whenever a covenant in regard to restraint of trade or profession is call into question, the burden of proof lies on the person who is probing to uphold it and it is the duty of the Court to determine to what extent it establishes a restraint of trade. Non – compete covenants can be effective during the period of employment and can only be challenged on the ground of being onerous. After the termination of employment, restrictive covenants are considered to be void under Section 27 of the Indian Contract Act. Restraining a person from carrying on a trade generally aims at avoiding competition and has monopolistic tendency and this is both against an individual’s interest as well as the interest of the society and on that ground such restrains are discouraged by law. The right to freedom of profession, trade and business is confirmed by the Constitution of India under Article 19(1)(g), so any agreement which interfere this freedom is void.

In England also an agreement made for restraining someone from a trade is void and it was laid down by the House of Lords in the  famous case of Nordenfelt versus Maxim Nordenfelt Guns & Ammunition Co. Ltd. [(1894)  A.C  535]. It was held that both the general and the partial restraint of trade are prima facie void.

Non-solicitation covenants

This is often included in a non – compete agreement, non disclosure agreement but can be also be drafted as a separate agreement. Under this, an employee simply agrees not to solicit or give advice to the client of the organization after he leaves the organization. This particular covenant prevents an ex employee from dealing or soliciting the clients or customers of his former employee; regardless of which party has given the proposition. It also prevents the employee from soliciting his colleagues to quit the job for example trying to recruit them away from the organization.

TERMINATION

An essential part of a contract of employment is the termination clause. A clause containing the employment period and its termination should be included in a contract of employment. It is a statutory clause written in the contract of employment which states that either party to the contract may terminate the relationship of employment by serving a certain amount of notice such as one month notice. A termination clause specifically mentions the terms and obligations to be complied by the employer and employee upon termination of the employment. This clause must include certain details such as the amount of notice period to be served by the employee, compensation to be paid upon such termination etc. Employment contract has an implied term that every employee will serve a reasonable termination notice.

The relationship of employment between an employer and his employee gets terminated either on resignation of the employee or situation arises where an employee gets terminated with or without a cause. Though it is not reasonable to terminate an employee without a justified cause but in such a case, employee is entitled to compensation or damages for the loss of earning caused due to such wrongful termination. The most common legal grounds for terminating an employee include violation of rules and regulations of the contract, grave misconduct or his disability to discharge his duties. An employee is also obligated to indemnify his employer in case he fails to perform his part of duties or for the loss or damage caused to the employer due to his action. In India, the relationship between an employer and his employee is governed by the Industrial Disputes Act, 1947 and this Act is considered as the most important labour law of the country. This Act prescribes the rules to be followed for termination or retrenchment of workmen from the employment and the amount payable as compensation for such termination.

Termination clause is considered to be one of the key clauses in employment contract and must be clear and explicit. It should be properly drafted and executed in order to make it enforceable.

COMPENSATION AND BENEFITS

A standard contract of employment must define compensation. Any compensation or benefits deriving from the employment should be included in the contract. It allows amending the salary, incentives, benefits and other compensation of the employees. It includes the base salary, bonus or incentives, information about hikes. Every particular about the payment of bonus and compensation should be stated in the contract. A separate provision can be made for “no additional compensation” which means even if an employee becomes an elected director of the company, he will not be benefitted with to any additional compensation for such achievement. A “no additional compensation” is mainly inserted in the agreement meant for executive level employees.

The benefit plan and the percentage of benefit to be borne by each party should be stated unambiguously. It should clearly state the type of benefits the company offers its employees for example health insurance. Usually, an amount to premium is required to be paid by the employee for availing such benefits. It should also specify the possibility of sharing profit from the company.

JURISDICTION AND GOVERNING LAWS

It is pertinent to mention that disputes may arise out of a contract and for resolving such legal dispute some parties prefer to go for arbitration and in such case they include an arbitration clause in the contract while other rely on the judiciary to adjudicate the dispute rises between them. By including a jurisdiction clause, the parties to the contract clearly specifies the judicial Court or forum which will have the right to resolve the legal dispute between the employer and the employee in relation to their employment contract. A jurisdiction clause may either provide for exclusive jurisdictional rights which mean the specified courts will only have the rights to dealt with the dispute or they may provide for non – exclusive jurisdiction. In case of a non- exclusive jurisdiction clause, the specified courts may hear the dispute but here the parties are free to approach other courts if they think it to be apropos to refer the matter to some other courts.

A governing law clause in an employment contract sets out the choice of law of the parties to the contract.  Laws relating to employment vary from state to state and hence it is advisable to state the set of governing laws clearly in the contract. This clause of governing laws helps in avoiding the initial confusion regarding which set of laws should be applied to adjudicate the dispute between the parties to the contract. Some of the state laws are much in favor of the employee while others are seen as more beneficial to the employer than the employees. The laws of a particular state will be the governing law if any legal dispute arises between the employer and the employee in relation to the contract irrespective of the fact where it is filed. Where a contract is connected to several places, it is particularly important to set out the choice of law. There are several legal systems with possible relevance to the contract in a case where the parties to the contract are in different countries and the place for performance is a third country. Thus, it is very much essential to decide expressly which legal system will govern such dispute.

RESOLUTION OF DISPUTES AND GRIEVANCES / ARBITRATION CLAUSE

In an employment relationship, a grievance between an employer and employee is a complaint raised by either party against the other and should be dealt either in a formal or in an informal manner for resolution of such grievance in the workplace. There could be several reasons for filling such grievance that include breach of terms and conditions of the contract, discrimination, harassment etc. This is exactly where the need for inclusion of an arbitration clause lies in the employment contract like any other contracts. This clause specifies that any dispute arising out of that employment relationship will be resolved through arbitration, a form of dispute resolution and prevents the party from approaching a judicial Court. Now a days many employers prefer to include an arbitration clause in the contract of employment since this method of dispute resolution is much cost effective and less time consuming. This clause must contain details about the arbitration procedure such as the binding nature of the arbitration award, appointment of arbitrators and the place for arbitration sitting.

OTHER CONTENTS OR CONSIDERATIONS

An employment contract should also have these contents apart from the key clauses that have been discussed above. We may note below certain other contents in a contract of employment:

Name of the parties

In a contract of employment, the first and the foremost thing to be included is the detail of the parties to the contract. Like any other standard form of contract, there must be at least two parties to form an employment contract. The person who makes the proposal is generally called the employer and the person to whom the proposal of employment is made is called the employee. It should contain the details of the employer’s organization as well as the name and full address of the person to be employed.

Appointment

When the proposal of employment is accepted by the employee, a contract of employment has to be made for appointing the employee. The appointment date or the starting date of the employment should be mentioned. The employee should keep in mind that he is starting a fresh and the  employment rights that he gained from his prior employment will no more be taken into consideration. Though, this rule is not applicable in case an employer is taking over the entire organization with the existing employees.

Job description

The contact should mention the primary responsibility to be taken by the employee and it should also include the description of the job specified in the offer letter of the employee. The department or the detail of the reporting person with whom the employee will work should be clearly mentioned by the employer in the contract of employment.

Location

Another important content is the place of work where the employee will work. If there is any probability that the place of work might change in future should also be specified by the employer. This allows greater elasticity for the employer.

Schedule and employment period including hours of work

To give a meaning to the employer- employee relationship, the contract should specify the employment period clearly in the contract. The employee should know whether he is employed for a continuous period or for a set time period. This includes the number of hours an employee is expected to work and other working options such as working at night, working from home etc.

Probationary period, if any

A probationary period is the trial period used by the employer to assess his employees. This trial period is usually applicable in case of new employees as well as existing employees placed in a new position. During this stretch of time the employer expects his employee to learn and fulfill his expectations at the end. The employer has the option to extend the probationary period if he thinks it to be appropriate. Any trial or probationary period which the employer expects his employee to serve before getting the opportunity to work as a permanent employee should be stated in the contract of employment.

Salary including deductions and payment term

An employment contract should clearly specify the gross salary to be offered to the employee for his employment. Any tax deductions, deductions made for the purpose of insurance or any kind of deductions from the employee’s salary should be mentioned. The contract should also state the payment date or when the payment is to be made by the employer.

Other expenses

There are situations where an employee will have to borne certain work related expenses while discharging his duties for example travelling expenses. An employer should specify it to the employee that which all expenses will be reimbursed. This allows maintaining clarity in the employment relationship.

Holidays

A contract should specify the exact number of holidays to be enjoyed by the employee during the period of employment and restrictions on holidays, if any. This should also state whether the employee can carry over any unused holidays into the next year or get any payment in lieu of such holidays on termination of the employment.

Time off and sick leaves

This spells out the number of days an employee can take off from his work and whether the public holidays are included or excluded from this amount of time. It is usually an employer who gets affected when an employee takes time off from his work due to sickness. But it is expected that the employee must inform the employer and provide him with a doctor’s certificate. The provision for any sick pay should be stated clearly in the contract. But it is always better to have a separate policy in regard to sickness and absence in order to avoid complexities.

Vacation policy

There should be a vacation clause in the contract of employment that calculates the amount of vacation days an employee is entitled to enjoy annually or monthly during his employment period. This discretionary power lies on the employer. The clause additionally includes the details regarding rolling-over unused vacation into the coming year and the procedure for scheduling such.

Notice

The notice period applicable in case of both employer and employee should be stated unambiguously in the contract of employment. This clause also includes the actions to be taken by either party in case the other fails to comply with it.

Retirement

A person gets terminated from his employment automatically on reaching the standard retirement age.  Most organizations prefer to draft a separate retirement policy for their employees rather than inserting it as clause in the contract of employment.  The retirement policy ensures the justified retirement age and is not required in cases where employee decides their date of retirement.

Pension

A standard form of employment contract provides a provision for pension to his employees on compulsory termination after attaining the standard age of retirement. This includes the details of the pension scheme to be offered by the organization. If the organization has no provision for pension, it is also required to be mentioned in the contract of employment.

CONCLUSION

The concept of employment agreement is similar to any other contract in force. A comprehensive employment contract provides the key duties and responsibilities of the employee duties and responsibilities and helps him to understand exactly what his employer is expecting him to do. The main object of an employment contract is to prevent disclosure of information, non-competition, non-solicitation as well as protection of confidential information so it is always advisable to execute a written contract of employment between the employer and the employee. In practice, the employer signs a letter of appointment with the proposed employee prior to entering into the employment contract. An appointment letter is usually executed with a view to cover the probation period of an employee till the time such employee is made permanent in the organization by the employer.

BIBLIOGRAPHY

Legislation

• Indian Contract Act, 1872.
• Information Technology Act, 2000.
• Industrial Disputes Act, 1947
• The Constitution of India

Books referred

• Law of Contract by R.K Bangia
• Dutt on Contract by Salil Kumar Roy Chowdhury and H.K Saharay
• K Malik’s Commentary on Industrial Disputes Act, 1947

Dictionaries referred

• Oxford Dictionary
• Black’s law Dictionary

Websites referred

• indiankanoon.com
• wikipedia.org
• mondaq.com
• netlawman.co.in
• findlaw.com
• compactlaw.co.uk
• out-law.com
• pandadoc.com

Case Laws

• Diljeet Titus versus Mr. Alfred A. Adebare and Others (2006 (32) PTC 609 (Del))
• Nordenfelt versus Maxim Nordenfelt Guns & Ammunition Co. Ltd. [(1894) C  535]