1. To understand the importance of employment agreements and why an agreement should be preferred over a unilateral letter of employment;
2. To learn about the key aspects that must be addressed in the employment agreement;
3. To understand the relevance of clauses such as the non compete, lock-in, and non solicit clauses;
4. To understand the interaction of the Indian Contract Act, 1872 with employment-related terms.
Employees are essential to any business and setting out clear rights and obligations of the employer and employee are very important. From the junior-most employee to the CEO, everyone in an executive position is employees, and it is important to enter into employment contracts with them.
This is not only for clarifying issues such as compensation package, holidays, work hours, and job descriptions, but the company also secures important rights through the contract, such as rights over intellectual property created by an employee in the course of employment, confidentiality, and various warranties.
Do you want your employee to work with you exclusively while he is employed by you? Better mention that in the employment contract then.
Many organizations simply issue a unilateral letter of employment to the employee. In comparison to a letter issued by the employer, a stamped agreement which is signed by the employee is preferable, as it is a legally binding contract that is enforceable in a court. Even an employment contract in the form of a letter should be signed and stamped.
An employment agreement contains typical clauses relating to the terms of employment – e.g. description of duties of the employee, salary, date of payment, work-hours, leave, bonus, termination etc. These terms will vary from one employee to another, depending on the role of the employee and the nature of his job.
In addition, it contains certain other ‘standard’ terms, which are common to a broad spectrum of employees. These clauses must be carefully drafted to protect the organization’s interest. From the perspective of an employee looking to work with an organization, such clauses must not impose unreasonable restraints.
Key clauses in an employment agreement
1. Job-specific terms
Some of the key aspects of employment (specific to the employee’s work profile) that must be addressed in the employment contract are described below:
a. Description of duties – Merely specifying the designation of an employee in the organization may not adequately describe the nature of the employee’s work. In recent times, there can be designations which are creative and are not reflective of what exactly the employee is expected to do, for example, Chief Storyteller, Social Media Lead etc.
b. Compensation – The compensation package typically consists of a salary, a bonus and certain other perquisites such as accommodation, insurance premiums, access to the company car, etc.
c. Term – For entry-level employees, usually there is no duration specified for the job. There may instead be a period of probation (when the employment is not confirmed).
d. Leave policies – The employment contract should also state how many leaves one would be entitled to take. Various labour laws specify number and nature of leaves in certain cases, and the contract must not provide for terms which are any worse than what is provided in such labour statutes which are applicable to the establishment.
e. Termination process – The organization may terminate the employee’s employment for some ‘fault’ of the employee, or without any reason (termination without cause is also referred to as termination for convenience).
2. Reference to company policies
An employment contract is not an ideal place for addressing internal processes observed by the company in relation to its employees. Such issues are better addressed through internal policy documents. Companies usually have policies relating to the following issues: dress-code of employees, social media policy, confidentiality policy, leave policy, reimbursement policy, policy against sexual harassment, etc.
3. Non-compete clauses
A non-compete clause typically prevents the employee from competing with the business of the employer during the employment, and after termination. Although a prohibition against competing with the employer’s business for the duration of the employment is legally valid, post-contractual restrictions on employment are usually considered a restraint of trade and are not valid under Indian law. It must be limited in time and geography.
4. Lock-in and penalty clauses
It is common for organizations to impose a minimum lock-in period in employment contracts, as per the lock-in clause, the employee cannot cease employment without paying a heavy sum (the sum is stated in the contract) by way of damages. Whether a company decides to include it in an employment contract for top executives purely depends on its opinion on how easily the manager can find another job.
A non-solicit clause prohibits the employee from encouraging the employer’s clients, consultants, agents or other employees to terminate their relationship with the employer, in the event that he ceases employment. The clause is inserted to protect the organization’s interest. An employee would, by virtue of his employment, learn the key operational aspects of the business, and it is against the legitimate commercial interests of the employer entity to have the employee leave with its customers and employees. The clause is usually applicable for a finite period of time after the employment ceases.
6. Stock options
Granting stock options is an excellent way of incentivizing the employees, especially in startups and those companies which are in their growth stage. Generally, the agreement will mention the number of stocks granted to the employee (in case of senior management, the number of stocks granted is heavily negotiated) or it will mention that the number of such stocks to be granted would be decided by the Board of Directors or the Compensation Committee. However, such stocks would usually have a vesting period of three to four years, since stock options are a retention tool.