How to read an employment contract? What is important and what to ignore? Is it binding on you and your employer? What if you break it? With the disruption brought about by the pandemic, we saw plenty of firing and hiring. Before signing your last employment contract, did you read through all its terms? Most of the time, we get a copy of our employment contract only at the time of joining. Given the time crunch and the unnecessarily lengthy document, we end up taking a quick glance through its terms before signing it. In this blog post, we will tell you what is important in that noise – things that are really really important.
Why your Employment Contract is important?
The contract is the main document laying down the relationship between an employee and employer. In case of a future dispute, the rights and obligations in the contract become crucial. The long winding sentences in contracts often lead to hesitancy among employees to read the entire document. The provisions of the Indian Contract Act of 1872 govern the contract. In some states (such as Delhi), the Shops & Establishments Law also lays down what all details have to be in the employment contract.
11 Employment Contract terms you must read and not skip
The below terms contain 11 of the most important clauses in any contract. We explain how to quickly go through them in your employment contract before signing it:
1. Compensation and benefits
The first thing we enthusiastically read in an employment contract is our salary or the cost-to-company (CTC). It’s good to thoroughly read through your remuneration. It is also important to know its exact break-up (including fixed and variable components). This comes in handy when you’re planning your income tax liability.
2. Job title and description
This is, arguably, the most important part of your employment contract. It gives insight into your role and responsibilities at the job. It is common practice for companies to leave this description wide and ambiguous. This leads to extra responsibilities saddling the employees in the future.
3. Term of employment
The employment contract may be fixed-term or permanent. A fixed-term contract comes to an end after a set duration. This duration is usually for completing a specific task or a project. On the other hand, a permanent employment contract is open-ended. It comes to an end only when terminated as per the terms of the contract.
The termination of an employment contract has 3 important elements – procedure, payments, and notice period. All 3 of these have to be as per the applicable law. This law arises from the Shops & Establishments Statutes (of the state), the Industrial Disputes Act of 1947, and standing orders.
For example, under the applicable law in Haryana, an employee who has worked in an establishment for 3 or more months, may resign after serving a notice of 7 days.
At times, the notice requirement in the contract may slightly differ from the legal requirement. Also, it is common for an employer to set out a shorter notice period during probation, or a longer notice period for a resignation. The important point is, if the contract sets out any term less beneficial than the applicable law, the law would trump the contract.
At times, companies may require you to serve a probation period upon joining. This is typically a period of 3 to 6 months and is subject to confirmation. If in line with the applicable law, employers may also terminate employment during this probation period without providing any notice or payment.
6. Collection of personal data
In the current digital world, we widely believe that privacy is a myth. An employer may be collecting your “sensitive personal data” like medical records, biometrics, or financial information as part of joining formalities. The employer requires prior informed consent from its employees for this data. Usually, the contract contains a broad declaration saying “I agree” to such terms.
7. Non-compete clause
A non-compete clause bars you from joining a competitor in the future. It usually continues to apply even after the employment period has ended. Usually, such a clause is held invalid if they unreasonably bar you from earning a livelihood, post-termination.
8. Non-solicit clause
A non-solicit clause bars you from soliciting any employees (known as “poaching”), or clients or suppliers of the ex-employer. Usually, this is held legally valid even after the employment has ended.
9. Non-disclosure clause
The contract may also have a non-disclosure clause that requires the confidentiality of information or trade secrets. This is also a legally valid restriction even after termination. It is important to pay close attention to these clauses, even though they seem like legal jargon.
10. Employment bonds
The contract may also require you to sign an employment bond. That means the contract may require you to work for a minimum time period (say, 5 years). It may further require you to pay compensation (say, INR 5 lakh) to the company if you leave before this 5-year period. This is an employment bond and one should be careful while agreeing to such a clause.
Legally speaking, courts have allowed companies to recover money from employees for breaching an employment bond, only in specific cases. Firstly, the company has to prove that they have spent money to provide any specific training or benefits to the employee to ensure they work for the minimum period. Secondly, the company has to also prove that they suffered a loss due to the employee leaving earlier. But only a reasonable amount can then be claimed from employees as damages. The employer cannot claim an absurd sum from the employees under an employment bond.
11. Settlement of disputes
We live and work in an increasingly connected world where establishments have offices in multiple locations. It is possible that the employment contract may specify courts in one city to have jurisdiction over all employment disputes. For example, a company has its registered office in Mumbai while you are working for its branch office in New Delhi. So, if the contract then lays down Mumbai as the only jurisdiction, it will be impractical and expensive to attend legal proceedings in case of a dispute.
Legality of Employment Contracts
Where an employment contract has “unconscionable” or completely one-sided terms, courts may hold them to be voidable. This is so because courts tend to take a stricter view in the case of employer-employee contracts. The reason being, in an employer-employee relationship, the parties are not on equal footing. The employer mostly has an advantage over the employee, and thus, employees have no option but to sign standard form contracts.
The courts have also looked at negative covenants (non-compete and non-solicit explained above) in detail. They are held to be void if barring an employee from earning a livelihood, after termination. Given the above, it is good practice to go through your employment contract before signing it. Moreover, you can ask for a copy in advance and request one of your lawyer friends to read it to ensure it is fine.
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