Understanding the Employment Contract

An employment contract is a legally binding agreement between two parties, the employer and the employee, and is designed to give both parties security and protection. Employment contracts are important for both employee and employer. It binds both parties to their duties and responsibilities.

Generally, contracts of employment are poorly drafted and inadequate and in many cases, there is only a verbal agreement – i.e, there are no written terms and conditions. Such a scenario may bring difficulties for parties. Here is a deep dive into the Do’s and Don’ts you need to keep in mind while drafting an employment contract.

Types of Employment Contracts

  1. Fixed Term Contracts

Fixed-term employment is a contract in which a company or an enterprise hires an employee for a specific period of time. In most cases, it is for six months to a year but can be renewed after the term expires, depending on the requirement. 

Under the fixed-term employment contract, the payout or the payment is fixed in advance and is not altered till the term expires. However, such contracts cannot be given for routine jobs. It is usually given out for jobs which are temporary or time-bound.

  1. Executive Contracts

An executive employment contract is a written employment agreement, usually made between a highly compensated executive and an employer, that contains more expansive terms and conditions than an ordinary employment agreement.

An executive contract can spell out any number of things for those people who serve in an executive capacity within a company; typically as a senior-level employee, such as a Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Marketing Officer, and the like.

  1. Non-Compete Contracts

A non-compete agreement is a legal agreement or clause in a contract specifying that an employee must not enter into competition with an employer after the employment period is over. Coupled with a non-disclosure obligation, these agreements also prohibit the employee from revealing proprietary information or secrets to any other parties during or after employment.

Many contracts specify a certain length of time when the employee is barred from working with a competitor after they end employment. Employers may require employees to sign non-compete agreements to keep their place in the market. Those required to sign these agreements may include employees, contractors, and consultants.

  1. Confidentiality Contract

A Confidentiality Agreement is a legal document between two parties that prevents the release of information, ideas, transaction details, and more to third parties. 

Confidentiality agreements, also known as secrecy or non-disclosure agreements (NDAs), are contracts entered into by two or more parties in which some or all of the parties agree that certain types of information that pass from one party to the other or that are created by one of the parties, will remain confidential. Such agreements are often used when a company or individual has a secret process or a new product that it wants another company to evaluate as a precursor to a comprehensive licensing agreement.

  1. Intellectual Property Assignment Contract

An Intellectual Property (IP) assignment agreement is a contractual agreement which facilitates the transfer of IP from one party to another. The party transferring the IP interest is the assignor. The party receiving the IP interest is the assignee

  1. Employment Bonds

The employment bonds are agreements between employee and employer where it contains the terms and conditions of employment. The employment bond contains a clause which requires the employee to serve the employer compulsorily for a specific period of time or else, make payment of the amount specified as bond value.

Important Terms Associated with Employment Contracts

These are some important clauses that can help you draft a perfect employment contract.

  1. Confidentiality Clause

Often employees are required to deal with matters which are confidential In nature and it is therefore advisable that they are close to being inserted in the formal letter providing that the employee will not divulge the information or affairs or the transaction which may come to his knowledge during the course of employment.

The important point to take care of while drafting the Confidentiality Clause is that the duration of the non-disclosure period should be clearly specified. For example, in the employment contract an employee is obliged to keep any information confidential even after termination of the employment contract for 2 years.

  1. No-Compete Clause

It is a clause complementary to the confidentiality clause wherein the business ensures 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 to the competitor. 

However, just like the confidentiality clause, the law says that this clause has to be reasonable. The employee cannot be bound or restricted not to pursue a competing business forever. The contract needs to define the time period when the employee is restricted to pursue such businesses or sharing of information.

  1. Non-Solicitation Clause

A non-solicitation clause typically refers to an agreement between an employer and employee that prohibits an employee from utilizing the company’s clients, customers, contact lists, etc. after such employee leaves/exits the company.

Solicitation clause is valid only when the clause has reasonable restrictions such as the distance, and time period. Just approaching a company’s client alone does not amount to solicitation.

  1. Employment Bond

An employment bond is an agreement between the employer and the employee which provides that the employee shall work for an agreed upon minimum period of time upon joining the business. The rationale behind this agreement is that the employer seeks to recover the costs he/she faces in training the employee. If the employee acts in breach of such a contract then the employer can seek compensation limited to the expenses incurred on the training.

However, it is important to note the reasonability of the conditions imposed on this clause as well. The time period for which the employee has to remain with the employer should be reasonable. The employer cannot force the employee to work for him for years on end. The second thing to keep in mind is the compensation payable by the employee on the breach and termination of his contract will have to be reasonable to the extent that it adequately and not overly compensates the employer for the cost he/she suffers due to the breach. 

  1. Golden Handshake

Golden Handshakes are clauses in employment contracts that provide for a severance package in the event that an employee loses their job. This is usually offered only to top executives of a company who may lose their job through retirement, layoff or termination. 

The compensation may be in the form of cash or stock options. The total amount of the money receivable to the employee shall not exceed remuneration which they would have been paid, had they completed their term.

  1. Garden Leave

A garden leave refers to the period of time during which an employee stays away from the workplace, or works remotely during the notice period. The employee remains on the payroll and is in the process of terminating their employment, but is neither permitted to go to work nor to commence any other employment during the garden leave.

  1. Probationary Period

Probation period is a period of engaging an employee to test his/her performance on the suitability of a position. If an employee’s performance is found to be unsatisfactory, the employer can terminate the employee’s services and the same cannot be construed illegal.

Probation periods are important as they help employers to be sure they’ve made the right recruiting decision, and to take action more quickly if they feel a new starter isn’t suitable for the role. This reduces the expense of continuing to employ someone who is unsuitable for the job and enables them to be replaced more swiftly.

Statutes to be kept in mind while drafting an employment contract

  • The Industrial Employment (Standing Orders) Act, 1946
  • The Industrial Disputes Act, 1947
  • The Payment of Wages Act, 1936
  • The Payment of Bonus Act, 1965
  • The Equal Remuneration Act,  1976
  • The Minimum Wages Act, 1948
  • The Factories Act, 1948
  • Respective Shops and Establishments Act of State
  • The Employee’s Compensation Act, 1923
  • The Maternity Benefit Act, 1961
  • The Payment of Gratuity Act, 1972
  • The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  • The Employees’ State Insurance Act, 1948, and
  • The Indian Contract Act, 1872. 

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