In this blogpost, Sonal Srivastava, Student, Amity Law School, Lucknow, writes about what are employment contracts, its features and what are the employment-related disputes in India.
The employer-employee relationship has always been a topic of legal discussion. It has constantly been evolved and witnessed many changes in the recent past and present. Several laws have been enacted to strike a balance in the relationship between employer and employee. These laws have broad ambit and include within their scope in all areas of the employer- employee relationship and are not merely restricted to contractual issues or workplace discrimination. Thus, the present Article intends to bring into light the various aspects of Employment Contracts in India.
What are employment contracts
A contract of employment is a bilateral agreement for the 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 the other relationships[1].
Essential features of employment contract
Like any other contract in India, an employment contract also consists of the following essential features- offer, acceptance, consideration, competent parties, legal object and free consent.
Offer or proposal– The term “proposal” has been defined in section 2(a) of the Indian Contract act, 1872 as follows-
“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”
In I.B.P. Co. Ltd v. Ramashish Prasad Singh[2], an official of the appellant/defendant company, furnished information in the presence of some others that certain dealers were going to be employed by the I.B.P., one such being a dealer at a particular spot and encouraged the plaintiff/respondent that he being a local, a local man had better prospects for the job and satisfied the criteria laid down by the company for its illegibility. Such an assurance or information furnished by the official could not be termed to be a proposal or offer in the eyes of the law, ruled the Patna High Court.
Acceptance– Section 2(b) of the Indian Contract Act 1872, defines the term “acceptance” as follows-
“When the person to whom the proposal is made signifies his assent to the person making the offer, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”
The effect of acceptance being that it legally binds both the parties through the medium of the offer and its acceptance made by them.
Consideration– Section 2(d) of the Indian Contract Act, 1872 defines “consideration” as follows-
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promise to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”
According to section 10 of the Indian Contract Act, 1872, the presence of the consideration is one of the essentials of a valid contract and according to section 25; the general rule in India is “that an agreement without consideration is void.”
Competent parties– According to section 11 of the Indian Contract Act, 1872:
“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”
Legal object– According to section 23 of the Indian Contract Act, 1872:
The consideration or object of an agreement is lawful unless-
- It is forbidden by law, or
- Is of such a nature that, if permitted, it would defeat the provisions of law; or
- Is fraudulent; or
- Involves or implies injury to the person or property of another,
- Or the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
Free consent– According to section 14 of the Indian Contract Act, 1872, consent is said to be free when it is not caused by-
- Coercion, as defined under section 15, or
- Undue Influence, as defined under section 16,or
- Fraud, as defined under section 17, or misrepresentation, as defined under section 18,or
- Mistake, subject to the provisions of section 20, 21 and 22.
Employment related disputes in India
With time, there has been a great deal of development in the industrial field which has called for the formulation of a coherent and approachable understanding of industrial relations. The industrial disputes are no more only subject to two classes- labour and employer but has evolved into a new class as ‘White Collar Employees’ who perform managerial, professional and administrative tasks as compared to ‘Blue Collar’ who are involved in manual labour.
The employment-related disputes can be classified under the following heads
- Pre-Hire
- During Employment
- Termination
- Post- termination
Pre- hire– The dispute between an employer and employee may arise even before the joining of an employee. These disputes generally arise when the employee has some discharge obligations towards his previous employer, and he has not properly terminated his contract with the previous employer before joining new employment. Sometimes the prospective employee has post-termination agreement such as an agreement to non-solicit, non-disclosure of information, etc with his previous employer and he or she may have breached that. In such kind of situations often the prospective employer is also dragged into litigation by taking the position that the new employer is encouraging and assisting him or her to do so.
The following scenarios may also give rise to pre-hire employment disputes[3] :-
- When the employer withdraws offer prior to employee’s joining.
- When the employee’s background check results are unsatisfactory, or the employee provides incorrect disclosures or misrepresents to the prospective employer.
Thus to reduce litigation risk, it would be helpful to get representation from the prospective employee either through an employment contract or otherwise that he or she shall not breach any post-termination agreement or conditions towards their former employer as a result of joining the employment with the new employer.
During employment– There may arise some disputes between the employer and employee during the course of employment, and such disputes are broadly classified into two heads of Employment- Related Disputes and Disputes Relating to Restrictive Covenants during Employment.
- Employment related disputes cover misconduct, indiscipline by the employee, insider trading, indulging in criminal activities, under-performance, breach of terms of employment, which may at an end lead towards a dispute.
- Restrictive Covenants during Employment- There are broadly two kinds of restrictive covenants in operation during the term of employment which are non-compete and non-disclosure of confidential information. Generally, the breach of non-compete restrictive covenant leads towards a dispute.
Termination– There are two types of termination- Voluntary and Involuntary. When an employee voluntary terminates employment either by resignation or retirement, then it is unlikely that there would be any issue unless the terms of employment contract provide to the contrary.
When an employer terminates the contract of employment due to misconduct by an employee or any other likely issue, then there is a standoff between employer and employee which has all the ingredients of a dispute and which is generally settled through resort to courts.
Post- termination– Modern day employment contracts give place to covenants restraining the employees from joining new employment even after the termination of previous employment.
A breach of post-termination employment contract often forces the employer to take advice on the legal recourse available to it.
Status of restrictive of covenants in India
Incorporation and subsequent enforcement of restrictive covenants in employment contract such as non-disclosure of information, non-solicitation agreement, non- competition agreements, etc has always been contentious issues in India as they are in conflict with the provisions of section 27[4] of the Indian Contract Act, 1872.
Non-Competition restrictions[5]– An agreement in restraint of trade has been defined as one in which a party agrees with any other party to restrict his liberty in future to carry on trade with other persons who are not parties to contract in such manner as he chooses.
Employers often tend to incorporate restrictive covenants in the agreement to protect their confidential information and trade secrets as well as their growing business. For any restrictive covenant to fall within the ambit of Section 27 of the Contract Act, the agreement has to be in restraint of trade. To determine whether a restrictive covenant in employment contract would be reasonable and valid or not, the courts have paid due regard to bargaining power of each party, reasonableness of restrictions set out in the covenant, time, place and manner of restriction etc.
Section 27 of the Contract Act has been applied in the context of (1) employer – employee contracts, (2) contracts with partners, (3) dealer contracts and (4) miscellaneous cases.
Non- solicitation of employees and customers[6]– A non-solicitation clause prevents an employee or a former employee from indulging in business with the company’s employees or customers against the interest of the company. For example, an employee agrees not to solicit the employees or clients of the company for his own benefit during or after his employment.
In Desiccant Rotors International Pvt. Ltd v.Bappaditya Sarkar& Anr,[7] the Delhi High Court allowed an injunction against the manager prohibiting him from soliciting Desiccant’s customers and suppliers to stand in effect. It is pertinent to note, however, that the Delhi High Court held that a marketing manager could not be deemed to possess confidential information and that his written declaration to that effect in his employment agreement was meaningless and thus rejected Desiccant’s claim to enforce the confidentiality obligations on the manager.
Non- disclosure of confidential information– The employee is required to take necessary steps to not disclose any confidential information till the time it is not necessary to do so under any law in force. He shall also comply to not disclose the confidential information with any other organization or company unrelated to its company.
Non- poaching agreements– This class of restrictive agreement is carried between two employers. This type of agreement essentially considers the case wherein two organizations/companies agree not to solicit or ‘poach’ the employees of their direct competitors. Non-poaching agreement per se does not contravene section 27 of the Contract Act as it does not restraint an employee from seeking and/or applying for any job/employment. What this class of agreement does instead is, it simply mandates that one competitor should seek the consent of the other before hiring that other competitors’ employee/s.[8]
Section 3 of the Competition Act, 2000, states that agreements which are anti-competitive in nature are banned. Thus, any non- poaching agreement which is anti- competitive in nature would be unlawful.
Possible ways to enforce restrictive covenants[9]
- Serve the employee with a legal notice.
- Seek enforcement of undertaking or encashment of cheque based on clauses of the agreement
- Initiate civil suit seeking injunction/specific
- Performance of contract as well as damages.
Conclusion
The employment contracts have come a long way in the modern industrial era. Any agreement which is anti-competitive or any agreement which restrains the prospective employee from practicing the profession of his choice or carrying out any trade activity is unlawful as well as immoral. Reasonable restrictions in employment contracts are valid and generally do not lead to any legal consequences. Thus, the presence of employment contracts ensures that all the terms and conditions of employment are specifically laid down and properly understood by both employer and employee.
[1] http://www.netlawman.co.in/ia/an-indian-perspective-on-employment-agreements
[2] A.I.R. 2006 Pat. 91.
[3]http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf
[4] Section 27 of the Contract Act provides that ‘every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.’
Exception 1:Saving of agreement not to carry on business of which good will is sold – One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business
[5]http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf
[6]http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf
[7] Delhi HC, CS (OS) No. 337/2008 (decided on July 14, 2009)
[8]http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf
[9]http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf
