This Article is written by Baargavi Ramesh, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution offered by Lawsikho as part of his coursework. Baargavi is a student at CMR Law School, Bangalore.
An employment agreement is a formal agreement that usually specifies the conditions of relationship between an employer and an employee including but not limited to compensation and expectations. This type of agreement is also referred to as employment contracts they are often executed for a specified period of time, say one year
There are two types of employment agreements:
- Collective Agreements (CA): A binding agreement which has been negotiated with one or more unions, and one or more employers, and two or more employees.
- Individual employment agreements (IEA): An employment agreement entered in to by one employer and one employee who is not bound by a collective agreement that binds the employer.
Any employment agreement that is offered by an employer must contain minimum statutory legislation rights, covering important areas such as minimum wages, annual leave, probationary periods agreed , public holidays, sick leave etc. It is also a good policy to state details of the probationary periods that have been agreed, the disciplinary process and disputes process that the organisation follows.
The following is the list of most relevant terms that should form part of an employment agreement:
- Appointment (Acceptance of employment/ Location of employer
- Primary responsibility and job description
- Remuneration (Salary, incentive , bonus)
- Payment terms
- Termination (Termination without cause, resignation , termination for cause)
- Death and disability
- Hours of work
- Return of employers property
- Intellectual Property
- Governing Law, Jurisdiction and Arbitration
This article is an attempt to explain the basic concept of an employment agreement, the essential features and contents of such agreement and also the common and important clauses of an employment agreement which must be necessarily incorporated in such agreement.
Features of an Employment Agreement
According to Indian Contracts Act 1872 an Employment Agreement generally known as Contract of Employment is a bilateral agreement for exchange of service and remuneration over a period of time. Employment Contract is that form of contract for personal service which the courts recognize as expressing the social relationship of employer and employee as opposed to other relationships.
The essential features of this agreement are:
- Competent Parties
- Legal Objects and
- Free Consent
An employment agreement or contract of employment also contains various terms and conditions to which both the employer and employee are bound. A breach of such terms or conditions shall lead to repudiation of the agreement. These terms and conditions must be provided to the employee before or at the time of signing off the agreement so that he/she can understand the terms he/she is going to be bound by. In normal contract or agreement the negotiating parties stand at equal footing, but in this type of contract an employee is always at receiving and is necessarily at the mercy of the employer and cannot be expected to possess the equal bargaining power. All employment agreement/ contract normally contemplate the employee not to divulge any confidential information and trade secrets.
Conditions of Employment Agreement
Section 27 of Indian Contract Act states that “Every agreement by which anyone is restrained from exercising lawful profession, trade or business of any kind to that extent is void”.This statement is not an absolute restriction and are intended to only apply for partial restrictions. During the period of employment the employer has exclusive right to the service of the employee. Whereas a restraint operating after termination of retirement is for freedom from competition from a person who no longer works within the contract.
Contents of an Employment Agreement
A contract of employment is executed in two identical copies one for employee and other for the employer. The following is only a general list of important terms and conditions which are to be recorded in an employment agreement the agreement is not limited to this list:
- The Parties to the contract– Both the employer and the employee must sign the contract of employment.
- The Date of commencement of the work– The effective date from which the employee should join the service.
- Validity of the contract (whether for present or fixed term)– A Contract/ Agreement for employment is valid for present is a principal rule. It generally means that the work will continue until the employee resigns or is terminated by the employer. An employer must have a justified reason for terminating an employee. If the agreement is valid for present it means the employee has a steady or permanent job. A fixed term contract / agreement means the time of commencement of the service by the employee and the time at which the service will be terminated will be mutually agreed upon by the parties. In other words the duration of the services will be clearly stated. A contract of employment may be of fixed term for the following reasons: a) Deputyship b) Work experience placement c) Project work d) Peak demand or period
- Place of work– The place at which the employee should report to commence his/her service should be stated in the agreement.
- Jurisdiction and Governing Laws– When a dispute arises out of an employment agreement or contract and for resolving such legal disputes one party may prefer to go in for an arbitration while other party may prefer to go in for judiciary to adjudicate the matter. By including Jurisdiction clause the parties to the contract may clearly specify the judicial court or forum which will have the right to resolve the legal dispute between the employer and employee in relation to the employment contract/agreement.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.
- Job description– The employment agreement/ contract should state the primary responsibility to be taken by the employee and it must also include the description of job stated in the offer letter delivered to the employee. The department and the person to whom the employee is to be trained under should be clearly mentioned in the agreement.
- Probationary period and duration of such period– A probationary period may be agreed upon at the beginning of the contract of employment. The time limit for a probationary period shall not exceed six months. In a fixed term employment the probationary period shall not exceed half of the employment contract duration. During this period employee is paid normal remuneration .
- Duties- A brief list of duties and obligations to be undertaken by the employee must be stated in the agreement.
- Remuneration and the method of payment– The Contract must specify the gross salary that is being offered to the employ. Any deductions made to the salary such as tax, insurance etc must be specified in the contract. The method of payment of remuneration must be mutually agreed by both the parties. The remuneration may be of different kinds: a) Salary for management employees b) Hourly wages c) Commission etc.
- Working hours– The contract/ agreement must specify the regular working hours. The working hours must comply with the Factories Act 1948.
- Annual Holiday and Holiday Pay– An employee is entitled to same remuneration for the period of holiday as when working. In addition to this he is also paid an holiday pay. This clause 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.
- Period of 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.
Important and Common Clauses in an Employment Agreement
Necessity of Employment Agreement
A written document stating the provisions relating to employment of a person creates a sense of trust between the person hired and the company/ employer. A carefully worded employment document not only limits the liability of the company but also cements the relationship between employer and employee.
This document also acts as an important evidence in case of conflict between the employer and employee. This agreement acts as a source of legalities to which both the parties are bound and prevents any discrepancy to the decided upon terms in case the employer/ company or the employee violates the agreement in the near future.The agreement is precise yet comprehensive in order to address any discrepancy and also includes the remedy in case of a breach of the agreement.
- Title of position offered– The status of the employee , his duties as well as responsibilities fall under this category . This information must be added in the most precise manner.
- Benefits- The higher the position a person holds in a company more the benefits are given to the officials example provision of an office car.
- Social security benefits– Employee’s PF and insurance policies are the foremost important consideration of an employment agreement. It must be in compliance with statutory laws in order to make employee social secure and enabling them to do work without any hassle.
- Vacations and Leaves– This provision deals with number of holidays provided by the organization including and not limited to only government/ public holidays. This provision also covers sick leaves.
- Confidentiality– The employer most of the time includes this provision to ensure non –disclosure of important trade and business secrets of the organization by the employee. This provision is also remains in effect even after the term of employment inorder to prevent dissemination of proprietary information of the organization after they have left the organization. Remedies such as injunction, recovery of damages etc are also included in this clause.
- Non-Compete clause– An employee is not bound to resign himself whenever he wants in view of gaining some experience to start on his own. There are certain protocols which are required to be maintained by him. This is why the clause stating “Term” has been initiated and with a view to avoid a threat to compete.
- Remuneration- The amount to be paid to the employee by the employer for rendering services is to be mentioned in this clause . This clause must be in compliances with statutory provisions such as equal pay for equal work( remuneration act), minimum wages act etc.
- Termination- The why, when and how of the termination of the agreement is been dealt in this clause. It must also include the circumstances in which the organization wishes to suspend the services of the employee or when the employee wishes to resign his/her job.
- Reimbursement of Expenses– The employee while performing his/her routine work may have to encounter expenses that are essentials for achieving the business objectives. The organization shall be liable to pay back such expenses to the employee.
- Disability and Death– In several large organizations in the event of death of their employee or in the event permanent disability of their employee often huge monetary compensation or job opportunities to the family of the affected employee is provided. This clause covers the actions that would take place in such events.
- Dispute Resolution and Remedies– The remedies and method of dispute resolution has to be specified in this clause in case of material breach of this agreement.
Sample Employment Agreement
This Agreement is executed at ______________ and effective from this day of _________ 2019.
By and Between
________ , A company having CIN______ incorporated under the laws of ________ represented by its________________ (designation) Mr/Ms______ son/daughter/wife of ___________ having its registered office at _______________ hereinafter referred as employer (which expression shall, unless it is repugnant to the context, mean and include its successor , administrators and permitted assigns);
Mr/Ms __________ son/daughter/ wife of__________ aged_______________ residing at ___________ hereinafter referred to as employee.
Whereas the Employer is carrying on the business of__________
The employer invited applications from eligible candidates for the post of ______________ and in response thereto the employee submitted application dated__________ to the employer.
On processing the application and scrutinizing the relevant documents the employer found the Applicant/ Employee competent for the post and offered to appoint him as________________ in the company.
The Employee as accepted the appointment on terms and conditions as follows:
Therefore, in consideration of mutual obligation and undertakings contained herein this agreement witness it as follows:
- Designation of the employee
- Duration of employment
- Place of work
- Working hours
- Compensation on confirmation
- Applicable laws
- Rights Cumulative
- Representation and Warranty
- Dispute Resolution
- Entire Agreement
In Witness Whereof the parties hereto affixed their signatures at the place ,on the day, month and year mentioned herein above:
_____________________ Signature of Employer
_____________________ Signature of Employee
- ___________________ Name and address of the witness
( Signature )
- __________________ Name and address of the witness
An employment agreement is an important and an essential proof of document which makes the employer and the employee bind towards each other. This concept of employment agreement is similar to any other contract in force. The agreement must be examined carefully from time to time as per the changing laws and employment conditions of the country where the company is operating.
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[…] The contract will lay out the rights and obligations of both employee and employer. The following elements are the basis of an Employment […]