Genius might be the ability to say a profound thing in a simple way
Charles Bukowski
Employment Contract, is that-
‘legally enforceable bilateral agreement encompassed upon an offer, acceptance, between competent parties based on their free consent, for a legal object with a lawful consideration for an agreed duration pertaining to exchange of service and remuneration, stipulating the terms and conditions of the employment subsequent to valid acknowledgment of rights, duties and obligations of both the employer and the employee’.
1. What is the nature of an employment contract
1.1 There isn’t a specific requirement to provide a written contract of employment or statement to employees under the Indian legislative framework. The common intention of the parties to create legal obligations is determined from the appointment letter being the written letter of their mutual understanding to employ and be employed. An employment relationship can either be express or implied, written or oral.
1.2 If you have had to make sudden and quick changes to this Employer-Employee relationship because of COVID-19, it would serve you best to take up your Employment Contract and consider a substantive revamp to it. This may well serve the next 5-7 years.
2. What do you sign up to in an employment contract?
2.1 The ususal clauses of your written Employment Contract must imbibe:
i) Description of the parties
Details (name, full address, contact) of the proposer i.e. employer, the person to whom the proposal of employment is made, proposee i.e. employee.
ii) Appointment
Acceptance of the employment proposal by the proposee is validated against a stipulated appointment date and a commencing date of the employment. Special provisions regarding remote joining for the employee, details of confidentiality and security.
iii) Location of employment
The full address of place of workplace where the employee is expected to work from alongside all categories of probability of future transfers both internally and secondments etc. We talk about WFH and the points for consideration in a different note.
iv) Description of the employment
Primary responsibilities of the employee during employment with details of work department/division, reporting person. If you have had to make quick changes to the employer-employee relationship with changing times, it will help to get granular on the description of the employment.
v) Schedule and employment period including hours of work
Stipulating employment period i.e. continuous period or a set time period clearly indicating the fixed or expected number of work hours and terms of overtime, working at night, especially for females provision for work from home during emergency etc. How are you proposing to define this in times of WFH in the COVID 19 times is very pertinent for the productivity and culture of the employer.
vi) Applicable Probationary period
Any mandatory trial or probationary period which the employee is expected to serve before being confirmed as permanent employee alongwith the possibility of extension of the probationary period.
vii) Provision for payment including salary and deductions
Specifics of calculated break-up of the gross salary offered for the employment. Tax, insurance deductions or otherwise should find a mention. While you may want to make this tax efficient and land more cash in hand for the employee, please review the recent GoI schemes and benefits offered for COVID-19 and SC judgements on the treatment to be given to PF contributions.
viii) Miscellaneous expenses
Stipulate exact work related reimbursable expenses. This is a vital point, it is your safety valve preventing and blocking avenues of unethical payouts.
ix) Leave entitlement
- Casual leave
Specify exact number of leaves that can be availed during employment tenure. A separate list for public and national holidays. Employer’s Leave Policy should indicate how the suffix and prefix of holidays operate with the leaves. It is imperative to make a separate provision for carry-forward/ elapse of unutilized leaves into the next year or reimbursement in lieu of such leaves. The terms of unused leave can be determined contractually. There is no separate law on leave encashment in India, under the Income Tax Act, 1961, if leave encashment is provisioned in employment contracts, then the maximum number of leaves to be encashed in a year is 30. At the employees hand such encashment is taxable as income from salary. Leave encashments are on your last drawn salaries.
- Sick leave
Sick leave entitlements are linked to procedural requirements employers can link to such leave, eg., medical evidence beyond a certain days is a common procedural requirement.
- Vacation
There should be a vacation clause in the contract of employment that calculates the amount of vacation days an employee is entitled to enjoy annually or monthly during his employment period. Some employers extend this benefit to roll-over unused vacation into the coming year.
- Special Leave
In some mature organisations, HR provisions for extra leave, which can be gratuituously extended to the employees in exchange for completion of certain number of years in service or performing well during a particular project or having worked very hard. Mature HR policies typically, provision special leave category to be dipped into as an when required.
x) Notice and Severance
The notice period applicable in case of pre-mature termination (termination before retirement or promotion) for both employer and employee stated unambiguously in the employment contract and process/ options to be considered where the documented notice can not be served against the notice. Whether a severance pay will be entertained by the employer, whether a the employee will be entitiled to a severance payout. The rights to waive, adjust with pending leave, payment in lieu of are some options employers seem open to consider. Typically, in key employee contracts, propmoter employee contracts a severance fee is provisioned by the parties.
xi) Retirement
The employment contract can set out the compulsory retirement age of an employee alongside the options of pre-term voluntary retirement.
xii) Indemnification
Indemnity provisions are rarely included in employment contracts, I personally prefer using these only in event of dire circumstances. Employers can inisist on these provisions in employment contract for wildful default, gross negligence, anti bribery violations and material breach by employee of the terms of his/ her employment. Most employers who are faced with a situation of invoking its rights under these clause, would probably evaluate, whether a data breach and other violations, criminal in nature have occurred.
xiii) Pension
Employment Contractss can have express provision for pension to employees on compulsory termination due to reaching a certain age of statutory retirement. Some organisations can look at having pension schemes, though this is rare in private organisations.
xiv) Confidentiality
Employer, typically restrict employees from disclosing sensitive and confidential information, largely trade secrets, client data to any third party without explicit consent of the employer. Wrongful use of such information by the employee is considered a material breach of the employment contract and can result in disciplinary action against the employee. A sub-set, ‘non- disclosure confidentiality agreement’ can also be executed for this purpose. This is an opportunity for the employer to think through this clause carefully and include aspects which it wishes to keep confidential.
xv) Restrictive Clauses
Restrictive provisions, disallow an employee from doing certain acts during and after the employment term is over. The intent of such provisions is to prevent the employee from misusing invaluable information which the employee becomes privy to during the term of his employment. Under Indian law restrictive covenants are not encouraged and are difficult to be enforced. Some ways by which employers can make such provisions legitimate include, paying a fee towards a non-compete commitment to last beyond one’s employment term. To demonstrate that the employers business would suffer irrepairable harm and loss if the employee was allowed to work with a competing business. Make restrictions time bound and /or geographically specified.
Different types of restrictive clauses are as follows:
- Non-compete
It deters an employee from entering into or starting a substantially similar trade or profession in competition against prior employee/organization during employment or post termination. If such engagement would substantially jeopardize former employee/organization’s goodwill or reputation in the market.
A non-compete provisions is hard to be enforced, since in India, Section 27 of the Indian Contract Act, 1872 makes contracts in restraint of trade or exercising a lawful profession or bsuiness, void.
- Non-solicitation
It deters an employee from dealing, soliciting, rendering advice, indulging into business activities to the current client of the former employee/organization post disassociation from employee/organization. Organisations, are known to make this provision applicable for non-poaching of other employees of the employer. This is a protective provision aginst mass exits which is a risk for employers if senior employees leave. These get a little hard to prove, since the employees chosing to leave are free to leave the organisation as per their free wish.
xvi) Termination
A clause to be drafted with utmost care, to provision for, both termination with or without cause. Without cause could be employee’s (resignation, unable to return from leaves, health concerns etc.) and with cause could include (violation of rules and regulations of the employment contract, grave misconduct against interests of employer, or disability to discharge employee duties etc.). Terminations, should always be preceded with a period of notice. The termination clause has a few procedural steps which are required to be adhered to by the employer and the employee.
xvii) Compensation
Compensation and Benefits for the employment include salary, bonus, incentives (accommodation and commute facilities), benefits (health, car insurances etc.)and other compensation of the employees.
xviii) Governing Laws
The law governing the contract. If the employee is an expat, the contract is governed by the laws of the country of origin of the employee or the country where the employer is registered. Employment Laws of the expats country of origin will apply, but employers can cultivate cross border rules/ service rules applicable to the expat community during the term of their employment.
xix) Jurisdiction
For cross border employment contracts, it is very critical that the judicial court/forum which has the right to resolve legal dispute under the terms of the employment, be mentioned. In absence of a non-exclusive jurisdiction clause, the concerned parties have liberty to refer to any judicial authority as they deem appropriate. Lack of a specific clause for jurisdiction, may cause complications. For cross border employee relationships, the terms of employment are as governed under the host country and yet, it is possible that the cause of effect arose in India. Similarly, Indian employees working in foreign lands.
xx) Resolution of Disputes
It would be ideal to include an arbitration clause for resolution of disputes prior to approaching a judicial authority. It is best to draft a descriptive arbitration procedure (binding nature of the arbitration award, appointment of arbitrators, the place and seat of arbitration etc.) Typically, organisations will follow internal rules and protocols in event of a dispute, which may not be the employees’ preferred option in case of a hostile dispute. In such a case, the employee will largely want to invoke the dispute resolution provisions.
xxi) Death and disability
Progressive organisations, have some detailed provisions around death and disability. It makes for refined provisioning. It is advisable, for organisations to work some provisions for accident (on and off duty), death and diability. Detailed policies of the oganisations can set out the terms around these.
xxii) Return of employer’s property
Property of the employer, including assets like laptops, company vehicles, any other assets which are offered to the employee. It would be helpful for Employment Contracts to set out the treatment and protocols to be followed for handing over of assets. It might help employees to know that failure to perform a clear handover of Company assets could compel companies to initiate a criminal action against the employee for loss/ misplaced company owned asset.
xxiii) Intellectual property
Company owned Intellectual Property is protected under law against misuse and theft. It is imperative that Companies set out in detail as to what is company owned Intellectual Property and the manner of handling the same.
3. Legal rights of an employee under an employment contract
i) Discrimination at workplace
The Indian Constitution through Articles 14,16(2),19 and 21 prohibits discrimination against any individual engaged in a trade or professing a business or rendering ineligible for any employment or office under the central or state government, local authorities etc. on the grounds of religion, race, caste, sex, descent, place of birth or residence or any of them.
This discrimination is not a very apparent one, employees may have to remain vigilant for identifying this and even more determined to be able to call it out.
ii) Entitlement to Maternity benefit
The pre-natal and post-natal benefits envisaged under the Maternity Benefit Act, 1961 are deemed as a legal statutory rights of every female employee irrespective of her age, designation, religion etc. in an establishment. They are also granted strict protection against illegal discharge or dismissal on account of absence owing to maternity complications. If dismissal is accepted by a female employee, she still remains entitled to claim due maternity benefits.
Paternity Leave is a discretionary benefit, organisations can extend. Paternity Leave is not supported under any statute in India.
iii) Entitlement to Provident Fund
It is a legal statutory duty of an employer/organization to render employees reserved provident fund income upon maturity. Both the employer and employee are bound to contribute (either by sharing or deducting) 12% of the basic salary to the employee to this fund. Violation of this provision is judicially addressable in Provident Fund Appellate Tribunal.
With the pandemic taking the toll it did, GoI made some relief announcements through modifications to the EPF contribution and payouts. For the private sector, these are not mandatory benefits, they are more like flexible benefits, corporations can offer to employees to reduce the financial burden on themselves.[1]
iv) Entitlement to Gratuity Fund
It is a statutory right of employee engaged in the service for considerable period of time, pegged at 5 years or more. It is a gratuitous payout to be made to the employee. It is calculated as per a gratuity calculator formula on last drawn salary of 15 days salary devided by 26 multiplied by number of years of service.
Gratuity is payable to the surviving family even if the employee is disabled or dies durig the course of his employment. The benefit can be terminated only on grounds of riotous, disorderly conduct of the Employee or termination due to moral turpitude.
v) Entitlement to Fair salary and bonus
The Indian Constitution through Article 39(d) provides for equal pay for equal work alongside specific legislations such as Equal Remuneration Act, The Payment of Wages Act etc. If an employer has failed to oblige with legally due remuneration and compensation as per the employment contract, or the remuneration is not timely, fair and reasonable according to market standards, the employee is entitled to approach the Labour Commissioner of concerned state or file a civil suit for recovery of arrears. There could be a risk of unfair labour practices as well.
Most organisations, loose sight of this, and tend to create the disparity through subsequent HR policies or communication models.
vi) Entitlement to payment of bonus
It is a statutory duty of an employer/organization to disburse bonuses to an employee with salary beyond INR 21,000 irrespective of loss incurred in a financial year in lieu of procedure envisaged in the Payment of Bonus Act, 1965.
Organisations have a small flexibility here, they can create a discretionary bonus category in addition to the statutory bonus. The discretionary bonus can be rewards, one-time in nature or any other type.
vii) Entitlement to reasonable work hours and adequate compensation for overtime
All employees are legally entitled to a secure and safe workplace with basic amenities, hygiene disposal mechanisms. An employment contract should specifically state statutory work hours (9 hours per day or 48 hours per week for both males and females) and extension of work hours with explicit permission and compensation for overtime in addition to safe transportation facility.
The safety norms differ state to state and are implemented through Police Orders too. Organisations, need to be vigilant on what applies to the jurisdiction they are in.
viii) Entitlement to leaves
It is a statutory right of employee to avail himself of paid public and nationals holidays in addition to casual leaves, sick leave, maternity leave , annual leave etc. Unavailed leave is adjustable and enachsable.
Organisations can have gratuitous leave kitties. There is no statutory restriction on leave to be extended beyond stipulated under law.
ix) Liberty to engage in any business post disengagement/ Restrictive Convenants
A non-compete restriction in an employment contract is considered void when it restrains an employee from carrying on a trade or engage in similar business activities after disassociation from former employment. If this restriction is imposed solely to cater to monopolistic market compulsions of the former employer, then it is deemed against both interest of both employee and protentional employers. It is also considered violative of the freedom of profession, trade and business Article 19(1)(g) of the Indian Constitution.
While this restriction is not enforceable and neither is it encouraged legally, most organisations include these restrictive covenants and link it to a fee paid towards it. Sometimes, they also link it to a specific training and knowledge enhancement which the company invests in for the employee and classify it as the benefit the company is entitled to due to this investment.
x) Prevention of Sexual Harassment at workplace
It is mandatory for an organization with 10 or more employees to constitute an Internal Complaint Committee (“IC”) for adequate complaint and redressal mechanism for acts of sexual harassment at workplace Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
The prevention of Sexual harassment laws in India require all organisations to train and conduct awareness for the employees as prescribed under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
Disclaimer: This Note is for general information only and not intended for solicitation. Please do not treat this as a legal advice of any sort. Views contained in this, are personal with interpretive value of the author and teams assisting the author.
Readers are encouraged not to rely solely on these contents before making any decision.
[1] Reduction in PF contribution from 12% to 10% to increase the take home pay of employees. Reduction in cost to the employers, especially for offshore / international workers.
Extension by three months of a scheme under which the government pays the EPF contribution of 24% of employees and employers, employed in establishments having up to one hundred employees, with 90% or more of such employees earning monthly wages less than ₹15,000. This scheme will be now available till August. It is offered under the Pradhan Mantri Garib Kalyan Yojana (PMGKY)