Contracts? A familiar term, isn’t it? Law students often encounter it in their first year, but did you know that drafting contracts can be a lucrative skill?
Simple agreements can earn you around Rs. 5000 per contract, while more complex ones can bring in between 2-10 lakh rupees. So, mastering this art cannot only enhance your legal knowledge but also boost your income.
In this article, we will examine some of the critical clauses included in employment agreements. But before we dive deep into the technicalities, let’s learn more about employment agreements.
What Is An Employment Agreement?
An employment contract is entered into for the provision of services by an employee to an employer in exchange for remuneration.
We will be discussing the drafting of employment contracts for white-collar employees. Please note that several labour laws apply to blue-collar employees/workers.
These laws govern various terms of employment of workers such as wages, working hours, leave entitlements, bonus and wage entitlement, termination, etc. Therefore, when drafting an employment agreement for employees who fall within the category of workers, please ensure that these terms are reflected accordingly in the contract, as these cannot be contracted out.
When it comes to drafting employment contracts, it’s crucial to be well-versed in the various labour laws and compliances. These laws play a significant role in shaping the terms and conditions of employment, so it’s essential to keep them in mind during the drafting process.
(Side note: other contracts too often require good knowledge of the related regulations. That’s why, well, keep learning)!
It’s important to note that while Indian labor laws do not mandate that the employer provide an employee with a written contract of employment (except in certain states for particular types of employees), it is a predominant practice in India to have a written employment contract.
This practice not only helps to record the terms and conditions of employment but also provides a clear understanding for both parties involved.
Employers also usually prefer to have an employee manual/employee handbook, a set of human resources policies that apply to all employees of the organisation.
These govern various matters such as leave entitlement, carry forward or encashment of leaves, maternity benefits, sexual harassment policy, ethics policy, anti-bribery and anti-corruption policy, disciplinary process, reimbursement policy, etc.
The employment agreement usually contains the following clause to cross-refer to the HR policies applicable to the employees:
The Employee shall comply with all rules, policies, and procedures as set out in the Employee Handbook, a copy of which has been provided to the Employee. You are advised and instructed to go through these policies and strictly adhere to them. The Company reserves the right to revise its policies and procedures related to employment as it deems necessary or appropriate from time to time, and all such revisions are binding on all employees from the date of communication regarding such changes.
Having such a clause in the employment agreement makes it administratively convenient for employers to update their HR Policies owing to any law change or internal policy changes.
Alternatively, if these provisions are included individually in each employment contract, it will be inconvenient to amend each employment contract to give effect to each change in the HR policy.
Now, let’s turn to some of the critical clauses in an employment agreement:
- Appointment
This clause will provide who is being appointed, the designation, the date of commencement of employment, the nature of the appointment (whether full-time or part-time or on a contract basis), and the location of the appointment (where the employee is supposed to report and work). The clause shall also set out the duration for which the appointment is made. Specific employment contracts may be limited, especially if a person is appointed for a particular project. For example:
Subject to the terms and conditions set out in this Agreement, the Company appoints Deepika as its Chief Executive Officer. Deepika’s appointment during the term of the Agreement shall be full-time. Deepika shall work and report from the Company office in Mumbai. Depending on the Company’s requirements, Deepika may be required to travel to other locations, within India or outside India, from time to time.
Subject to the terms of this Agreement, your employment with us commences on [DATE] and shall be for 5(5) years, which can be extended further with mutual consent of the Parties.
- Probation
Employers usually prefer to include a probationary period to assess the employee’s performance. During probation, the employment can be terminated on a shorter notice period without following the formal disciplinary process. A sample clause for probation is set out below:
Your employment will be subject to the satisfactory completion of a probation period commencing on [DATE] and ending on [DATE] unless terminated earlier by these terms and conditions of employment. During your probation period, either Party can terminate the employment contract by giving seven days’ notice to the other Party.
- Responsibilities and Duties
This clause sets out the general duties applicable to all employees and any specific roles, responsibilities, and duties that may apply to a particular employee. The duties depend on the role/position for which a person has been appointed.
During the term of employment, Deepika shall:
- devote the necessary time, attention and abilities to the business of the Company;
- use her best endeavours to promote, protect, develop and extend the business of the Company;
- diligently perform such duties as set out in her job description or as may from time to time be assigned to her by the Company;
- be in charge of all day-to-day operations of the Company;
- shall report directly to the Board of Directors of the Company; and
- shall represent the Company before all third parties, business associates, and statutory authorities generally and specifically as mandated by proper authorisation.
Duties set out in such sub-clauses may be general or specific in nature, depending on the employee’s designation.
- Remuneration
The employment contract may provide the quantum of compensation along with the necessary perquisites, benefits, and deductions.
The employer usually provides the details (in the form of a schedule annexed to the agreement or in the main body). However, there may also be a clause stating that the remuneration shall be as informed to the employee occasionally.
As a draftsman, you need to set out the details in the employment contract or a schedule for the employment contract. For statutory deductions (for example, tax deduction at source), it is best not to mention the quantum/rate of tax deduction at source as it may change occasionally.
While drafting this clause, ensure that it is comprehensive and covers likely scenarios where any deduction should be made from the remuneration. When representing the employer, it is best to keep the language open-ended to cover all types of deductions.
In consideration of performing her duties under this Agreement, Deepika shall be entitled to the remuneration, perquisites, and benefits set out in Schedule A.
The Company shall be entitled to deduct from the remuneration any monies due from Deepika to the Company, including any money required to be deducted from Deepika’s remuneration by the applicable Indian laws, including tax deduction at source.
- Termination
This clause states that either party can terminate employment by serving notice for a specified duration. The clause should also mention the obligations that the employer and employee have to comply with upon termination of employment (for instance, returning all confidential material and work done).
Termination is usually either for cause (i.e. some reason) or convenience. Suppose the employer wants to have the right to terminate for cause. In that case, the grounds of termination should be specified, in addition to the general right of the employer to terminate the employment at any time during the duration of the job.
Suppose the termination of employment for a cause is subject to a disciplinary process. In that case, the procedure shall be set out unless a separate policy on the disciplinary procedure is contained in the company’s employee handbook.
Termination, whether for cause or convenience, is also subject to regulations. Therefore, checking the local laws before incorporating this provision into the contract is advisable. Usually, the minimum notice period required is also prescribed by local laws. Of course, parties may opt for a higher notice period (viz., usually what happens in case the employee is in a senior position).
Following the probation period, either Party may terminate this Agreement and the employment at any time by giving the other Party not less than six weeks’ written notice or payment in lieu thereof.
Notwithstanding anything contrary to the Agreement, the Company may terminate this Agreement and employment at any time, without notice or payment instead of notice, for ‘cause’. Cause includes conviction by any Court of an offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, or if found guilty of fraud or other gross misconduct, or gross negligence; or is unable to discharge her duties and obligations as per the terms of this Agreement, or is in breach of the terms of this Agreement or any other agreement entered with the Company.
Upon the termination of the employment, you shall:
- not represent yourself as being in any way connected or interested in the business of the Company and
- immediately return all property belonging to or provided by the Company in your possession and/or control, including, without limitation, credit cards, laptops, records, files, data, and documents. You shall not retain or take any copies thereof without the Company’s prior written consent.
- Confidentiality
This clause restricts the employee from disclosing confidential information to any third person without the employer’s permission. Usually, a separate agreement called the non-disclosure agreement (‘NDA’) may also be executed for this purpose. For each type of business, there is some proprietary information particular to that business that is confidential and critical to its success. Including a confidentiality clause puts an obligation on the employee to keep confidential information to themself. A breach of confidentiality obligations is often linked to a penalty clause.
Deepika shall not at any time during the employment (except as so far as is necessary for the course of the employment) or afterwards, disclose to any person any information as to the business, dealings, practice, accounts, finances, trading, software, know-how, or other affairs of the Company. All notes, memoranda, records, and other documents of the Company that are in her possession are and shall remain the Company’s property and shall be handed over to the Company from time to time on demand and, in any event, immediately upon the termination of employment.
Any violation of the obligations in the sub-clause above shall entitle the Company to exercise the right to terminate this Agreement without any obligation to make further payments. Deepika acknowledges that a breach of the confidentiality obligations would irreparably injure the Company. She agrees that the Company shall be entitled to an injunction restraining her from any actual or threatened breach of the confidentiality obligations or to any other appropriate equitable remedy without any bond or other security being required.
Note: Please always remember that these are merely sample clauses; depending on the scenario, there can be variations and additional provisions.
- Restrictive obligations
The two most common restrictive covenants often included in an employment contract are non-compete and non-solicit obligations.
Under a non–compete clause, the employee agrees that he or she shall not join a competitor of the employer post-termination or start a similar trade or profession in competition against the employer.
Example of a non-compete clause:
During the Term of this Agreement and for a period of one (1) year thereafter, Deepika agrees not to engage in employment, consulting, or in any other capacity in any activity that competes with the Business, any proposed business, or the interests of the Company without the Company’s prior written consent.
Note: The above clause capitalises one of the terms, ‘business’, which indicates that it may be a defined term. It is better to determine the employer’s business for such clauses so that there can be no ambiguity later on.
Under a non-solicit clause, an employee is prevented from soliciting any clients/employees of its ex-employer after the termination of employment. This restriction helps prevent a former employee from poaching away clients/employees and hampering the previous employer’s business. It also prevents the employee from soliciting other people working with the employer and luring them into recruitment elsewhere, especially with a competitor.
During the Term of this Agreement and for one (1) year after that, Deepika shall refrain from either directly or indirectly soliciting or attempting to solicit the business of any customer of the Company or employee of the Company for her benefit or that of any third person or organisation and shall refrain from either directly or indirectly attempting to obtain the withdrawal from the employment of the Company of any other employee of the Company.
Enforceability of post-termination restrictive covenants: Please note that post-termination of employment, a non-compete restriction clause may not be strictly enforceable as it is regarded as a restraint of trade or profession under the Indian Contract Act, 1872 and, therefore, may be void under Indian laws. The enforceability of non-solicit clauses post-termination of employment depends on facts and circumstances and the nature of the restriction. In certain instances, the Indian courts have given effect to non-solicit clauses where the non-solicit clause did not amount to a restraint of trade, business, or profession. Although there are issues in enforcing such restrictions, employers usually incorporate such restrictive covenants in the employment agreements to deter the employees.
Exciting read, right? If you know your contracts well, you can make a living.
Drafting, reviewing, and negotiating contracts are skills any lawyer or even law students (especially non-litigation practitioners) do for bread and butter.
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