Employment Clauses that One Must Know

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This edition will provide you with the important clauses of the employment contract that one should know and make use of while drafting an Employment Contract.

The Burning Tale

What is an employment contract?

An agreement entered into between an employer and an employee at the time the employee is hired that outlines the exact nature of their business relationship, specifically what compensation the employee will receive in exchange for specific work performed and the underlying terms and conditions involved in the relationship.

Why do we need Employment Contracts?

Employment contracts are crucial for legally defining the relationship between your business and your employee. A contract  creates a strong basis for protecting both your company’s interest and the employee’s specific role in the company. It also helps avoid disputes, keep the employee motivated and retain key employees.

Common Types of Employment Contracts

Following are some common kinds of contracts that we come across in our daily lives

Fixed  Term ContractsExecutive contractsNon-compete contractsConfidentiality contractIntellectual Property Assignment ContractEmployment Bonds

Important clauses to include while framing an Employment Contract

1. Confidentiality Clause

Very often the employees are required to deal with matters which are confidential in nature and it is, therefore, advisable that a clause be inserted in the appointment letter providing that the employee will not divulge or disclose the information or affairs or the transaction which may come to his knowledge during the course of employment or otherwise.

2. Non-Compete Clause

It is essential for the business to ensure that the confidential information is not used for the purposes of either setting up a competing business by the person to whom it is provided or for the purpose of sharing it with the competitor.  

A non-compete is essentially an agreement entered into between two parties whereby one party is prohibited from joining another competing business or setting up a competing business by virtue of being employed or associated with the other party.
3. Non Solicitation Clause

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/her own benefit during or after his/her employment.

4. Employment Bond

The employer in order to protect and safeguard its interest often executes a training bond with its employees for training imparted and/or provided during the course of their employment or specifically provided prior to their joining, to ensure that they work for a particular duration. These bonds specify the minimum period for which the employee shall serve the employer. If the employee acts in breach of such an agreement, the employer can seek compensation, at times which are limited to the expenses incurred for training the employees. The employer is entitled only to reasonable compensation based on facts and circumstances of the case.

5. Clawback Provisions

A unique feature of the executive compensation in the US is the presence of ‘clawback’ provisions, which enables the companies to recover a portion of incentive-based compensation from its employees if in future the accounts of the company are restated. This is to discourage fraudulent and other accounting malpractices which inflate profits.

6. Golden Handshakes

Golden handshakes can be defined as incentives given to employees in case of dismissal, corporate restructuring, or in case of their retirement. These incentives range from stock options, compensation, severance package, equity, etc.

7. Gardening Leave

Gardening leave refers to the period between the employee is given a notice of termination and his actual termination. During this period, the employee is not allowed to continue working either at the workplace or from home or any other location, though he is paid a salary for the notice period.
8. Termination Clause

Termination for proved misconducts, the conviction of any crime involving moral turpitude, committing any dishonest, malicious or grossly negligent act, etc. In case the termination is without cause, then the employee needs to be given a notice period or garden leave.

9. Statutes to be considered while drafting a contract

The Industrial Employment (Standing Orders) Act, 1946The Industrial Disputes Act, 1947The Payment of Wages Act, 1936The Payment of Bonus Act, 1965The Equal Remuneration Act, 1976The Minimum Wages Act, 1948The Code on Wages, 2019The Factories Act, 1948Respective Shops and Establishments Act of the stateThe Employee Compensation Act, 1923The Maternity Benefit Act, 1961

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BONUS: We have made a detailed analysis of the  Employment Contract. Click here to watch the video.

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