An ‘employment contract’ or a ‘contract of employment’ in simple terms is a detailed written bilateral legal agreement between an employer and an employee laying out the details of the employment such as the job description, pay, working hours, terms of employment, etc.

In India non-government employers usually follow either of the two types of employment contract :-

• Open-ended employment contract – when the contract of employment is continued until either of the two (2) parties, i.e., employer or employee ends it; or
• A fixed term contract – in which the employment of the employee comes to an end after a specific duration or time period. This kind of employment agreement is usually executed with the intention to hire the employee for any specific tenure or any specific project.

Like any other contract, employment contracts are governed by the Indian Contract Act, 1872.² The statutory essentials of a valid contract are an offer, unqualified and absolute acceptance, consideration, legality, and capacity. However, as per industry practice and some statutory principles such as labor laws, there are industry practices to include all clauses in an employment contract to avoid any future disputes between employer and employee.

ESSENTIAL CLAUSES OF EMPLOYMENT CONTRACT AS PER INDUSTRY PRACTICES

DETAILS OF BOTH THE PARTIES – EMPLOYER AND EMPLOYEE

As with any other contract, in the contract of employment also the details related to both parties i.e. employer and employee are a necessity. Details of the employer such as the name of the employer/company, office address, whether it is a registered company or a limited liability partnership, whether it is registered under Indian law under Indian jurisdiction or elsewhere, and nature or field of business of the employer is mentioned.

Details of the employee such as the name of the employee, residential address, PAN number or identification number, and expertise of the employee (a role for which the employee is recruited).

EFFECTIVE DATE OF REGISTRATION

This clause specifies the exact date from which the employee’s employment will be effective or begin with and continue till termination.

PROBATION

The probation period is like a trial period. This clause is added to find out if the performance of the employee is satisfactory or unsatisfactory. If the employee’s performance is not good enough, it gives the employer the right to remove the employee from his/her position. Only on successful completion of the probation, the employee’s employment is confirmed. It is a safeguard tool for the employer from any sort of legal complication on firing an employee on probation from their position.

DESIGNATION, EMPLOYMENT, PLACE OF EMPLOYMENT

The contract needs to specify the designation or post assigned to the employee and based on which the employment will commence. It is also advisable to specify a list of roles and duties expected to be performed by the employee during the course of the employment in order to have a written agreement of the same and avoid any future disputes related to duties and responsibilities.

COMPENSATION OR REMUNERATION

As an industry practice, it is necessary to clearly mention the remuneration and other benefits such as tax benefits, bonuses, or any other incentives provided to the employee in exchange for his/her services to the employer. Sometimes this clause may also contain information related to increments and future benefits during the course of employment and after a certain period of continuous service. This clause shall also mention that the employer can withhold the portion of payment for deductibles such as taxes and any other statutory deductions as per any laws under the governing laws of the agreement.

INTELLECTUAL PROPERTY CLAUSE

This is a vital clause and is included in the employment contract for safeguarding the IP (“Intellectual Property”) rights of the goods and services or any other intellectual property created by the employee during the course of the employment for the employer. This clause usually states that any intellectual property created by the employee during the course of employment is a ‘work for hire’ under the governing laws and all inventions or any other IPR (“Intellectual Property Rights”) shall be assigned to the employer so that if the employee leaves the company in future, the IP rights remain with the company. Sometimes this clause also includes direction as to what shall be the course of action of the employee if he/she unknowingly gets hold of a third party trade secret or undisclosed information.

CONFIDENTIALITY

This is one of the most crucial and important clauses to be included in the contract of employment. It states that during employment an employee shall or may have to work with confidential information of the company/employer such as trade secrets, know-how, business plans, strategies, finances, personal data, or even sensitive personal data, etc. This clause binds the employee and restricts him/her from disclosing such information outside the employment during or post the employment period.

NON-COMPETE AND NO-SOLICITATION

A non-compete clause is an agreement that restricts the employee from competing with the employer so that the employee does not work directly for a competitor after the termination of employment, and a non-solicitation clause is used to restrict the employee from poaching the clients, employees, consultants, or staff of the employer after the completion or termination of employment.

NON-DISPARAGEMENT

This clause is added as a direction to the employee to not make any disparaging, defamatory, or derogatory statements against the employer during the course of employment or after the termination of employment.

TERMINATION

This clause describes the terms and process of termination of the employment of the employee. Termination can be either due to a valid cause or no cause.

Termination due to cause needs to specify reasons such as breach of agreement or company policies, any fraud or negligence on the part of the employee, or any charges being framed against the employee for any offense applicable under a court of jurisdiction or if insolvency proceedings are commenced against the employee. Termination due to no cause need not usually specify any reason but shall contain a notice period before the termination of employment.

GOVERNING LAW AND DISPUTE RESOLUTIONS

The dispute resolution process is mutually agreed upon between the employer and employee and shall be mentioned in the contract. The clause contains the governing laws or jurisdiction which shall be applicable to both the employee and employer. For example, the clause may state that “the agreement shall be governed by and construed in accordance with the laws of India and the courts shall have exclusive jurisdiction over the disputes arising out of the agreement.”

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