In India, the employment contract plays a pivotal role in defining the relationship between an Employer and an Employee. Everyone is an Employee in a company, from the CEO to contractual workers; the employment contract governs their employment. The contract clearly outlines the rights, responsibilities, and obligations of an Employee and the Employer, and breach of any of the conditions in that contract attracts punitive actions. The employment contract is binding on all the parties signing it. Indian law prohibits the formation of an agreement that restricts the trade practice. Section 27 of the Indian Contract, 1872 states that an agreement that restricts trade or business is a void agreement. Both the Employee and the Employer are to sign the contract. A well-drafted employment contract not only minimises potential legal disputes but also fosters a fair working environment. In this blog, we will dive into the details of the essential clauses that form part of an employment contract in India, their importance, and some sample clauses.
What is an Employment Contract?
An employment contract is an agreement between an Employer and an Employee which is legally binding on them. It \specifies the terms and conditions of employment. The contract outlines each party’s rights and duties to ensure a safe and cohesive working environment. In India, employment contracts are regulated by the provisions of the Indian Contract Act of 1872, the Industrial Disputes Act of 1947, and labour laws that govern the specific industry(s) and sector(s).
The primary goal of the employment contract is:
- To set clear terms and conditions of employment between the Employer and the Employee.
- To protect Employer and Employee from exploitation and unfair practices which are outside the scope of the Agreement.
- To offer a precise dispute mechanism.
- To ensure compliance with labour laws, company policies, and government regulations.
Key Clauses in an Employment Contract
India offers a variety of employment like full-time, part-time, temporary, and contractual work, the clauses included in the contract may vary. But some specific clauses remain same in the employment contract, and these are mentioned below:
1. Job Title and Description
This clause comes after the recitals and it defines the Employee’s roles and responsibilities in the company. It outlines the job title, key duties, and responsibilities of the employee to the organization. The Employer may also specify any additional roles or responsibilities of the Employee in the contract.
Importance:
- This clause clarifies the scope of work of the Employee and prevents confusion.
- It sets clear expectations for the Employee’s role and helps avoid any confusion or dispute regarding the job responsibilities.
Example Clause: The Company [Company Name] shall employ Employee as a [Job Title] on the basis of this agreement. In this capacity, the Employee is entrusted to perform the following duties and responsibilities _________________(it shall be defined by the Employer).
2. Compensation and Benefits
This clause defines the salary, allowances, bonuses, and any other additional compensation that the Employee is entitled to. It includes the details of the base salary, variable pay (bonuses or commissions if applicable), additional compensation, and other non-cash benefits like health insurance and retirement policies (if applicable).
Importance:
- This clause protects both Employee’s and Employer’s interests.
- It prevents potential disputes over salary-related matters.
Example Clause: The Employer agrees to pay the Employee a monthly salary of ₹[Amount], payable on the [Day] of each month. In addition to the salary, the Employee is entitled to [Bonus/Incentive/Other Allowances] as per company policies.
3. Term of Employment
Almost every employment contract has this clause. It specifies the term of employment and outlines whether the contract is for a fixed duration or indefinite. After completion of a term of employment, parties may need to renew the contract.
Importance:
- It helps the Employee to understand whether they are being employed on a permanent or contractual basis.
- It prevents unauthorized and illegal termination of the employee from its employment.
Example Clause: “The Employee’s employment will commence on [Date] and will continue indefinitely unless terminated by either party under the provisions of this Agreement.”
4. Probation Period
This clause refers to a temporary period during which an Employer evaluates the performance of a newly hired Employee to check whether the new Employee is fit for the organization. When an Employee completes their probation period, his employment gets converted into permanent employment. The probation period cannot be more than six months. The Employer usually keeps the power to terminate the employment of an Employee without notice during the probation period.
Importance:
- It provides an opportunity for the Employer to evaluate the performance of newly joined employees.
- It allows employees to learn about the workplace and its culture.
Example Clause: “The Employee shall undergo a probationary period of [3/6 months] from the date of joining, during which the Employer may terminate the contract with [Notice Period] without cause.”
5. Confidentiality and Non-Disclosure Agreement
This important clause ensures that Employees do not disclose sensitive information, data, or trade secrets of the company during and after their employment. Most of the time, companies extend the enforcement of this clause beyond the term of employment to ensure that sensitive information is protected.
Importance:
- It prevents the unauthorised disclosure of company information and trade secrets.
- It enhances trust between the Employer and Employee.
Example Clause: “The Employee agrees not to disclose any confidential information or trade secrets concerning the Employer’s business, operations, or intellectual property during or after the employment period.”
6. Termination Clause
This clause outlines the reasons and procedures for terminating an employee’s employment. It includes the notice period, handover, and other formalities that must be completed before termination. This clause may specify conditions for immediate termination due to misconduct, breach of contract, or other serious issues.
Importance:
- It helps prevent sudden or unfair termination.
- It provides clarity on notice periods and severance pay.
Example Clause: “Either party may terminate this Agreement by providing [30/60] days’ written notice or payment in lieu of notice. In case of gross misconduct, the Employer reserves the right to terminate the Employee immediately without notice.”
7. Leave and Holidays
This clause defines the types of leaves available to the Employee. It may include the number of annual leaves, sick leave, and casual leave that an Employee may take. It also contains the information about the public holidays. The Employer may also define the procedure for applying for leave and any limitations on leave or procedure for carrying forward of leaves.
Importance:
- It helps employees have a clear picture of their leaves.
- It protects Employees from unnecessary exploitation of leave policies.
Example Clause: “The Employee is entitled to [X] days of annual paid leave and [X] days of sick leave annually. The Employee is also entitled to public holidays as per the company’s leave policy.”
8. Non-Compete Clause
A non-compete clause restricts the Employee from working with competitors or starting a competing business after leaving the Employer for a specific duration of time and within a defined geographic area. The clause is not a violation of Section 27 of the Indian Contract Act of 1872, as it is drafted to protect the interests of the company’s business and its reputation.
Importance:
- It prevents unauthorized use of company’s information by Employee
- It protects the Employer’s business secrets.
Example Clause: “The Employee agrees not to engage in or accept employment with any competing business within [Geographical Area] for a period of [X] months after the termination of this contract.”
9. Dispute Resolution Clause
Resolution of disputes by the road of litigation is not easy. It takes days and years to resolve a matter. Therefore, to avoid the complexity of the litigation system, many companies include this clause in their employment contracts. This clause specifies the procedures for resolving disputes between the Employer and Employee. The clause may give an option to resolve the matter through arbitration, mediation, or conciliation before escalating to legal action.
Importance:
- It helps to minimize legal costs and time spent on disputes.
- It ensures amicable resolution of disputes.
Example Clause: “In case of any dispute or difference arising out of or in connection with this Agreement, the parties agree to resolve the matter through arbitration under the Arbitration and Conciliation Act, 1996.”
10. Working Hours and Overtime
This clause defines standard working hours per day or week. It also outlines any policies related to overtime, including how overtime is compensated. The overtime clause has to ensure compliance with the Factories Act of 1948 and other labour regulations regarding working hours and overtime pay.
Importance:
- It ensures compliance with statutory limits on working hours.
- It prevents the exploitation of Employees through excessive work hours.
Example Clause: “The Employee shall work [X] hours per day, [X] days per week. Overtime will be compensated at the rate of [X] as per company policy.”
11. Governing Law and Jurisdiction
The governing law clause specifies the legal system that applies to the contract and the jurisdiction in which any legal disputes will be settled. In India, these are typically the laws and the courts in a specific city or state will have jurisdiction.
Importance:
- Clarifies the legal framework for the contract.
- Specifies where any legal actions will be taken.
- Prevents confusion about jurisdiction in case of disputes.
Example Clause: “This Agreement shall be governed by and construed in accordance with the laws of India. Any disputes arising under this Agreement shall be subject to the exclusive jurisdiction of the courts in [City].”
12. Miscellaneous Clauses
In addition to the primary clauses, employment contracts may also contain various clauses like:
- Force Majeure: In this clause, certain circumstances are defined under which either party may be excused from performing their obligations due to unforeseeable events, such as natural disasters, strikes, or pandemics.
- Amendment Clause: Specifies how changes to the contract can be made. Typically, this requires written consent from both parties.
- Severability Clause: Ensures that if one part of the contract is deemed unenforceable by a court, the remainder of the contract still stands.
- Entire Agreement Clause: States that the written contract is the complete and final understanding between the parties, superseding any prior agreements or discussions.
Example Clause: “Any amendments to this Agreement shall be in writing and signed by both parties. If any provision of this Agreement is found to be invalid or unenforceable, the remaining provisions shall remain in full force and effect.”
Conclusion
In India, an employment contract is not just a formal necessity but also a vital instrument that guarantees legal compliance, clarity, and equity in the workplace. The key clauses of the contract should be modified to meet the unique requirements of the company and the Employee, forming its basis. Before signing, both parties should carefully go over the provisions of the agreement to prevent future misunderstandings or legal issues.
FAQs
1. Can an Employee be terminated during the probation period in India?
Yes, during the probation period, either party can terminate the employment with minimal notice as per the contract.
2. Is a non-compete clause enforceable in India?
Non-compete clauses are enforceable in India only if they are reasonable in terms of time, geography, and scope.
3. What are the maximum working hours allowed in India?
The Factories Act of 1948 limits the maximum working hours to 48 hours per week, with overtime compensation.
4. Is an employment contract required for all Employees in India?
While not mandatory for all Employees, an employment contract is highly recommended to avoid potential legal disputes.
5. What are the leave entitlements for Employees in India?
Employees in India are entitled to annual leave, sick leave, and public holidays, as stipulated by the company policy or labour law.
6. Can an Employer change the terms of the contract after employment starts?
Changes to the employment contract can only be made with the consent of both parties and must be documented in writing.
7. Are arbitration clauses mandatory in employment contracts in India?
No, arbitration clauses are not mandatory but are commonly included to resolve disputes efficiently outside of court.
