This article is written by Shivani Varade who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
In a perfect world, the employer-employee relationship would always be amiable and free of disputes. However, experience tells us that the modern corporate world is not perfect, and we routinely encounter employment disputes at various organizations. Some disputes are driven primarily by business concerns, while others are personal. However, irrespective of the nature of the dispute, there is one key document that must be addressed: the Employment Agreement.
The rest of this article highlights the importance and contents of an employment agreement, and the key clauses that should be considered in order to avoid disputes in the future.
What is an employment agreement?
Employment agreement refers to an agreement between an employer and his employee, specifying the core terms of the employment, and maybe negotiated before or after hiring. Although it may be oral or implied from conduct, written agreements are preferred by law. Once the employment agreement is signed, it becomes legally binding on both the parties, which means that if either party violates the terms of the agreement, they can be held legally responsible for their actions.
The content of an employment agreement differs as per the needs of every business. Therefore, one should take time to carefully prepare an employment agreement for each employee, to minimize disputes and ambiguity about the employment relationship.
What does an employment agreement include?
Generally, an employment agreement includes important details regarding the employee’s position, such as wages, benefits, termination procedures, and the duties and responsibilities of both the employer and the employee.
Additionally, it includes the following terms:
- Job Title: Employee’s job title and a full description of the position.
- Term: Anything ranging from a start date to an employee’s work schedule, to the length of a particular project and an employment end date.
- Remuneration: Type of salary (e.g., monthly salary, wage, and whether an employee can collect commission, and if so, how much, etc.).
- Benefits: Details of the types of benefits that an employee can receive (e.g., health insurance, dental checkup, etc.).
- Vacation and Sick Leave: Company’s policies for vacation or holiday breaks, and sick or disability leave.
- Confidentiality/Non-disclosure clause: To ensure that an employee does not provide any proprietary information to competing parties.
- Dispute Resolution: Method for resolving employment disputes (e.g. arbitration or mediation).
- Termination: Actions that are considered as grounds for termination.
- Covenants Not to Compete: To prevent an employee from competing against their employer for a certain period of time.
- Severance: Any financial amount or other benefits that an employee may be entitled to when they vacate the position.
Key clauses for avoiding legal issues in future
The clauses that need careful consideration are as follows:
- PARTIES– Although it appears to be obvious, it is important to identify the correct parties to the agreement. For example, if an employee is an employee of a subsidiary of the parent company, this information needs to be correctly reflected in the employment agreement. The parent company may not want to unknowingly take on an obligation to the employee, although the common doctrine is that the court treats different entities as one employer for the purpose of attributing to liability for damages flowing from such actions as wrongful dismissal.
- TERM– A definite term of employment guarantees employees a job as long as they do not violate the terms of the agreement, and allows employers to dismiss the employee at the end of the term. However, the length of this term should be carefully negotiated. For example, employers should refrain from using a specific end date unless both parties are clear that the employee will be engaged for a fixed term. In case of termination by the employer, the employer is responsible to provide the employee with a reasonable notice of termination or pay in lieu of such notice.
- HOURS AND LOCATION– In some organizations and positions, the hours of work of an employee may be irregular or vary according to the requirement. Therefore, to avoid any misunderstanding on the part of the employee, the agreement should specify whether the employee is expected to devote full working time to the company. For clarity, the employer may specify in the agreement the number of working hours of each week and the location of work.
- JOB TITLE– The agreement should include the employee’s title and a description of an employee’s duties to assure the employee about his/her day to day task or his/her ultimate goal. It also helps the employer to expect good performance from the employee. However, this clause should include some flexibility in the language to allow for additional duties to be assigned.
- COMPENSATION– The agreement should indicate the amount of compensation and the manner of delivery of such compensation (monthly, bi-monthly, etc.). Additionally, it should not just provide that an annual salary of “x” is to be paid in equal sums, because in reality, the total salary of an employee is likely to include a bonus, deferred compensation, provident fund, equity distribution, stock options, merit raises, health and other insurance benefits, etc. Therefore, due to the increasing number of compensation options, clear and decisive language is crucial when the parties are describing the compensation.
- TERMINATION– This clause helps both parties, as it ensures that the employee knows which activities are required and which are forbidden, thus rendering a serious breach less likely. The labour law of the particular jurisdiction should be consulted to ensure that the terms of the agreement do not contradict legal requirements. Employment ‘at will’ agreement may provide that either party can terminate the agreement for a good cause after giving a notice of ‘x’ days to the other party.
- CONFIDENTIALITY– The agreement should contain terms regarding how the employee will treat any confidential information in connection with the employer’s business so that the employer’s confidential information is not at a risk of being misused or getting in the wrong hands or disclosed to competitors.
- NON-COMPETE AND NON-SOLICIT– Non-compete clause prohibits the employee from engaging in similar employment for a specified period of time within a certain geographical area. Non-solicit clause prohibits the departing employee from actively soliciting his/her former employer’s clients. However, it is important to note that if any restrictive covenant goes beyond what is reasonably required to protect the employer’s proprietary interests-client relationships, confidential pricing information, client lists, and such, the courts will not enforce the clause. Therefore, the clauses must be carefully structured and analyzed in order to prevent future disputes.
- DISPUTE RESOLUTION– To minimize the time and expense of a courtroom, the employment agreement should specify arbitration as a dispute resolution process. This clause should be mutually agreed upon by the parties to avoid disputes in future when one party perceives that arbitration will work to the advantage of the other party. For better clarity, the following details should be included in the arbitration clause:
- Whether the arbitration will be binding.
- Where the arbitration will occur.
- Which arbitration rules will apply (e.g. The Arbitration and Conciliation Act, 1999).
- Who will bear the costs (generally, both parties).
- How the costs will be allocated.
In addition to the clauses mentioned above, some common drafting errors that need to be considered are:
- OUT OF DATE– One should make sure that the employment agreement is not out of date and in line with current legislation. In case of any changes in the employment law, it’s vital to check that the agreement is checked on a regular basis to ensure that it complies with prevailing requirements.
- IRRELEVANT– A standard contract (template from the internet) or one sourced from another business, may not meet the specific requirements of every unique business. Therefore, to make the employment agreement effective, one should modify the draft according to the needs of the business in question.
- LACK OF CLARITY– One may have included all the information needed, but the exact meaning of clauses is vague, ambiguous, misleading or even completely indecipherable. Therefore, the use of plain and clear language is recommended to avoid confusion.
Advantages of an employment agreement
The following are the advantages of an employment agreement-
- Job security for the employee and labour certainty for the employer– Guaranteeing job to the employee and staff to the employer is one of the most important purposes of an employment agreement.
- Clearly defines duties and benefits: No wondering about the responsibilities included in the job, the compensation or benefits, as they are spelt out in the contract.
- Protects both parties- The agreement is binding on both employer and employee.
- Best way to maintain trade secrets or confidentiality for the employer– Through the confidentiality clause or Non-disclosure agreement.
Disadvantages of an employment agreement
The following are the disadvantages of an employment agreement:
- Limits flexibility- Once the employee is hired under the agreement, he/she can’t just quit if they feel like it, and the employer can’t just let them go if they decide they don’t need them anymore.
- Legal consequences that can arise in case of breach: As the agreement creates a promise to act fairly when dealing within the employer-employee relationship, there are legal consequences for breaking the terms of the agreement.
- Can only be altered through renegotiation: Both sides must agree to any changes to the original agreement.
Breach of the employment agreement
If the employer or the employee breaches any of the terms of the agreement, the non-breaching party could be entitled to damages and may enforce the agreement in court. The remedies to the breach depend on the type of agreement, as well as the central focus of the breach. If a breach involves failure to pay the salary, remedies may include a monetary damages award paid by the employer to the employee to reimburse the employee for the missing salary.
An employment agreement is accordingly an essential component of the employment relationship. We have seen certain clauses which need to be scrutinized in order to avoid future disputes between the employer company and the employee. Such clauses should also be tailored according to the individual business, in order to secure maximum business protection. Last but not the least, every employment agreement must be reviewed by the employee before signing to avoid the consequences of not holding up your end of the bargain.
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