Home Employment Contracts Termination of employment contracts

Termination of employment contracts

December 31, 2023

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This article has been written by Vaishnavi Raul pursuing Diploma in US Contract Drafting and Paralegal Studies and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Introduction

Termination of employment refers to the end of an employee’s work with the company. It can be voluntary when the employee leaves of his own will. Involuntary termination occurs when a company downsizes, makes layoffs, or fires an employee. While terminating an employee, the employer should consider certain safeguards to avoid litigation in the future. There should be a valid reason for such a termination. Employees are to be given advance notice and a chance to appeal such a decision. Employers should ensure that all benefits and severance pay are paid to the employee as per Indian law.

What are employment contracts

Employment contracts are signed agreements between the employer and employee specifying the core terms of employment. It can be negotiated before or after hiring. They may be written or oral, but written agreements are preferred by law. Once the agreement is signed, it is legally binding on both parties, and in the event of any breach, the concerned party can be held liable. The contents of the employment agreement can differ as per the needs of a specific business.

Essential clauses of employment contracts

The employment agreement includes numerous essential clauses, such as:

Job title- The employee’s job title and the job description.
Remuneration- Specifies the wage, salary, benefits or commission that the employer and employee agree upon.
Term- specifies the period or length of employment. It can be for a specific period or on a project basis, depending on the employer.
Confidentiality/non-disclosure clause- To prevent the employee from disclosing any proprietary information about the company to a third party.
Dispute resolution- Specifies the methods, governing law, appeals mechanism and place for resolving disputes between the employer and the employee.
Termination- Defines actions and events that are grounds for termination under the agreement.
Non-compete- Prevents the employee from working with the competing or rival company for a certain period.
Severance- Specifies the benefits and financial amounts accorded to the employee when they vacate their position.

In addition to these core terms, an employment contract may also include other provisions, such as intellectual property ownership agreements, vacations and sick leaves.

Employment contracts are important documents that protect the rights of both employers and employees. They should be carefully reviewed and negotiated before being signed.

What is termination and who can terminate an employment contract

Employment contracts play a critical role in establishing and maintaining professional relationships. However, it can come to an end due to the end of the term, misconduct, immoral behaviour, poor performance or force majeure. Contract termination refers to the formal process of legally ending a contractual agreement between parties.

An employee or employer can decide to end (‘terminate’) an employment contract. This may be done by:

an employee resigning, or
an employer dismissing an employee.

Grounds for termination of employment contracts

The employment contract can be terminated on fair and reasonable grounds only. Termination can occur with or without cause in the following circumstances:

Termination with cause

Incompetence

An employment contract can be terminated due to the poor performance of the employee. If the employee is not meeting the standards or not performing as per job expectations, then the employer can terminate the contract. This is usually after a period of warning and/or probation where the employee has failed to improve.

Misconduct

The employee can be terminated on account of misconduct on his part. Misconduct includes the following:

Theft
Bullying
Criminal behaviour
Lying
Fraud
Spying for a competitor
Bribery

Using company resources for personal benefit

Employees can have a personal business venture that they can explore outside non-office hours. If the employee uses official time and resources for a personal business venture, this can lead to termination. Employees are allowed to have personal business ventures, as long as they are conducted outside of work hours and do not use company resources. If an employee is caught using company time or resources for their personal business, they may be subject to disciplinary action, up to and including termination.

First, it is important to maintain a separation between an employee’s personal and professional lives. When an employee is working on their personal business during work hours, they may be distracted and less productive. This can impact the quality of their work and the overall productivity of the company. For example, an employee may use their company computer to access confidential information for their personal business. This could put the company at risk of data breaches or other security issues. Other employees may feel that they are being taken advantage of if they are working hard while their colleagues are using company time to work on their own businesses. This can create a negative work environment and lead to resentment.

Gross insubordination

Insubordination refers to events when the employee shows unreasonable disrespect towards the employer. Insubordination is considered a serious offence in most workplaces, and it can result in disciplinary action, up to and including termination of employment.

Minor insubordination may include:

Refusing to follow a supervisor’s instructions.
Making rude or disrespectful comments to a supervisor.
Tardiness or absenteeism without a valid excuse.
Using profanity or making threats in the workplace.

Severe insubordination may include:

Physically assaulting a supervisor or coworker.
Stealing from the employer.
Destroying property.
Insubordination that endangers the safety of others.

Insubordination is often a symptom of a larger problem in the workplace, such as a lack of communication, poor management, or a toxic work environment. If an employee is repeatedly insubordinate, it may be a sign that they are not a good fit for the company. In some cases, insubordination may be grounds for termination of employment.

Breach of confidentiality

The employee is under an obligation to protect the organisation’s confidential information during the term of the employment and failure to do so results in a breach of confidentiality. This includes any information that is not publicly known and that has been designated as confidential by the organisation. The employee must not disclose confidential information to any third party, including family, friends, or colleagues. The employee must also take reasonable steps to protect confidential information from being accessed or disclosed by unauthorised persons. Failure to do so may result in a breach of confidentiality, which can have serious consequences for the employee, including termination of employment and legal liability.

In addition to the obligations set out above, the employee may also be subject to other confidentiality obligations, such as those imposed by a non-disclosure agreement (NDA). An NDA is a legally binding contract that prohibits the employee from disclosing confidential information to any third party. NDAs are often used in situations where the employee has access to sensitive information, such as trade secrets or financial data.

It is important for employees to be aware of their confidentiality obligations and to take steps to protect confidential information. By doing so, they can help to protect the organisation’s interests and avoid potential legal liability.

Termination without cause

Resignation

Employees can choose to terminate the employment contract by offering their resignation. This can be done by giving notice to the employer according to the terms of the employment contract.

Redundancy

Redundancy happens when an employer wants to reduce the workforce due to economic reasons or the position is no longer needed by the company. This can happen due to a slowdown in business or automation, for which a smaller number of staff is required. Employees are selected for redundancy based on their skill set, experience and length of service. This usually involves a selection process, and employees with the least time at the company or in their role are usually selected first.

Mutual agreement

The employment contract ends automatically after the end of a certain period or on completion of a specific project or job. The parties may choose to renew the contract after the end of such contracts. The period at which such termination will occur is pre-determined in the employment contract.

Wrongful termination of employment contracts

Wrongful termination occurs when an employer terminates, dismisses or removes an employee from employment without any valid grounds. When a company or employer fails to furnish the grounds for termination, it is known as illegal termination. If the employee is not given the opportunity to be heard, it infringes on the fundamental principle of Audi Alteram Partem. Wrongful termination happens in the following circumstances:

Breach of contract

A breach of contract occurs when a company or employer violates a written contract or acts in a way that contradicts the employee handbook.

Discrimination

If an employee is terminated due to his race, religion, gender, age or other protected characteristic, then it amounts to discrimination, and such dismissal contravenes anti-discrimination laws. Employment discrimination includes verbal or written discriminatory practises and may include actions as well.

Retaliation

This occurs when the employer terminates the employee in response to reporting illegal behaviour or discrimination, cooperating with investigations or demonstrating legal rights. It often coincides with discrimination and harassment in the workplace.

Harassment

Harassment occurs when there is a hostile work environment. It can include negative or insulting comments about gender, race, religion, age, disability or sexual orientation. Unwelcome sexual advances or retaliation for rejected advances are also types of harassment.

Whistleblowing

Employees who report illegal work practises in the company to the authorities are termed whistleblowers. They can notify the authorities of discriminatory practises or present evidence for the same. If they are terminated due to whistleblowing, then it is a wrongful termination. Employees should be terminated without cause and on reasonable grounds only. Not giving valid grounds can amount to wrongful termination.

What is a notice period

A notice period can be defined as the time period between the date of the formal resignation of the employee and the last working day of the employee. It is usually specified in the contract. The term of the notice period ideally ranges from 15 (fifteen) days to 90 (ninety) days, subject to the type of employment, size of the organization, requirements under the local employment laws, contractual agreement, employee’s position in the organization, etc.

The termination of any employee needs to comply with the applicable central or state law, as the case may be, since these laws supersede contract provisions. Therefore, contract provisions need to be compatible with the law.

In Chairman and Managing Director, India Airlines vs. Binod Kumar Sinha and Ors. (2001), an employee who joins service is subject to certain terms and conditions of service and he cannot quit the employment without giving requisite notice to the employer. But what should be the duration of reasonable notice in such circumstances is a matter to be decided in each case depending upon the exigencies, needs or necessities and the essentiality of the service concerned.

Termination without notice

Providing a notice before termination of employment is a norm but in certain cases, employment can be terminated without giving a notice. These include gross misconduct, breach of contract, redundancy, probationary period and health or safety concerns.

Severance pay

It is the compensation or benefits provided to the employee whose employment is terminated due to the end of the contractual term, a layoff, restructuring or downsizing. It is calculated based on the employee’s length of service, employment contract, company policy, and local labour laws. Typically, one month’s salary should be paid to the employee if he has worked for one year or more.

Dispute resolution

Arbitration for resolving disputes has gained widespread popularity in recent times but in India, the question of the arbitrability of labour disputes is still undecided. Factors such as privacy, flexibility, cost and time effectiveness of arbitration are key reasons for its preference over traditional dispute redressal mechanisms. However, Indian law does place a restriction on arbitrating ‘certain disputes’ on account of public policy considerations. In the case of Kingfisher Airlines vs. Captain Prithvi Malhotra and Ors. (2012). Kingfisher Airlines’ application for reference to arbitration was denied and the Labour Court retained jurisdiction over the proceedings.

Conclusion

An employment contract is an essential document that establishes an employment relationship. It contains various aspects such as scope, term, remuneration, severance and termination of employment. Therefore, employees must show diligence while signing the same. Employees should be terminated without cause and on reasonable grounds only. Not giving a valid ground can amount to wrongful termination of employment. The employer should serve a notice to the employee as per relevant laws or according to the contractual terms. Therefore, due process should be followed while terminating an employee and failure to do so can have legal implications for the employer.

References

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