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What Should An Employment Contract Contain?

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With over 90% of the economy employed in the unorganized sector, it’s about time we move towards accounting for the transactions conducted in the informal sector of the economy. This would help raise our country’s GDP, ensure liquidity and boost the productivity of our economy in the global markets by accounting for registration of business enterprises, payment of taxes, Income tax, etc. As more jobs become formalized, we will see the use of employment contracts become the norm as companies would be required to draft personalized and customized employment contracts and employees will have to acquaint themselves with the content and legitimacy of an employment contract.

employment contract

What Is An Employment Contract?

A contract is executed between two or more parties when they decide to enter into an agreement for the exchange of remuneration for a good or service. The purpose of an employment contract works the same way as any other agreement or contract, except that it is executed between an employer and an employee for the purpose of employment.

The employee agrees to provide his services and expertise to an employer in exchange for a fixed remuneration over a period of time. The terms and conditions the parties agree to in terms of duration, compensation, leaves, etc. are stated out in an employment agreement as terms of employment and are signed by both the parties.

What Is A Valid Employment Contract?

An employment contract is an agreement between an employer and an employee, describing the relationship of employment. This contractual relationship is recognized by the courts and is enforceable by law as a form of contract for the exchange of services and there are guidelines and rules stipulated for the same.

Can A Contract Be Verbal?

An employment contract can be written or oral, but the former is preferred as it serves as proof in a court of law in case any disputes arise between the employer and the employee during or after the tenure of employment.

Some of the salient features of a valid employment contract are:

1. Offer and Acceptance

The offer for employment should be made of free consent by the employer and accepted by the employee without any undue influence, coercion or force.

2. Consideration

Consideration is the payment of salary, compensation or remuneration to the employee in exchange for the employee’s services to the employer.

3. Competent Parties

Any parties agreeing to a contract should be legally and mentally competent to enter into such an agreement. That means mentally ill or challenged individuals, minors, employees under the influence of banned, prohibited or illicit substances, etc. are not competent enough to enter into such contracts.

4. Legal Object

An employment agreement has admissibility in a court of law or as evidence in a trial. That means an employment agreement has to be legally drawn for it to be valid. Contracts that are illegal or against the law are considered void.

The Indian Contracts Act, 1872

Employment contracts in India are governed by the Indian Contracts Act, 1872. Some of the essential articles of Labour law in India are:

  1. Each individual that is a citizen of India will have an equal opportunity for employment in any State in India (Article 16).
  2. Any group or individual can form a union or association (Article (19)1c).
  3. Trafficking of human labour and all forced labour is prohibited in India (Article 23).
  4. An individual under the age of 14 cannot be hired in any hazardous employment occupation (Article 24).
  5. Employees must have safe and just conditions of work along with maternity benefits (Article 43).

Structure Of An Employment Contract

Some of the essential clauses (or terms  and conditions) of an Employment Contract are:

  1. Appointment

The first and primary clause of an employment contract is the acceptance of employment by the employee, including but not limited to acceptance of the location of the office, the reporting manager, the term of appointment (if any), the primary responsibilities and job description of the employee, etc. Employment Agreements are also sometimes referred to as appointment letters.

2. Wages or Remuneration

The base salary of an individual is mentioned (as negotiated) along with the incentives, bonuses, shares, pension, insurance etc. applicable to the employee. All enterprises must adhere to the prescribed minimum wages as stipulated in the minimum wages Act, 1948 and amended from time to time. The minimum wage is set based on various factors such as location, nature of work, etc.

3. Provident Fund

A provident fund is a system for compulsory savings to ensure the financial security of a company’s employees in the future. Provident fund in India is governed by The Employees Provident Fund and Miscellaneous Provisions Act of 1952. This clause states that an employee must contribute at least equal to the amount that the employer contributes (around 10-12% of wages) and the PF amount can be partly withdrawn before retirement or fully withdrawn upon retirement. You might be interested in knowing the procedure for PF withdrawal by Nominees and Legal Heirs of employees.

4. Non-compete

A non-compete clause is an essential clause because it prevents an employee from entering a similar profession or trade directly in competition with a company after termination or expiry of an employment contract. However, in India, any restriction on employment is void under the Indian Contract Act of 1872. So Courts generally apply reasonable restraints to non-compete clauses in employment contracts.

5. Non-disclosure

A non-disclosure clause is essential to prevent an employee from disclosing any trade secrets to any third party or future employer. Trade secrets include Intellectual Property rights, Patents, sensitive data, etc. Any case of breach of confidentiality is applicable under the Information Technology Act of 2000 and the Indian Penal Code.

6. Non-solicitation

A non-solicitation clause is essential to prevent an employee from signing or taking clients, employees or customers from an organisation or company upon expiry of an employment contract.

7. Probation Period

A probation period is the initial duration (anywhere between 1 to 12 months) of employment where either the employer or the employee can terminate a contract. This serves as a trial period for the parties to see if there are job-fit, and a match between the employee and his or her new role.

8. Grounds for Dismissal

If an employee violates any company rule, policy or regulation or any general law of the land, then the employee may be subject to dismissal by the employer.

9. Payment of Gratuity

The payment of gratuity is applicable to establishments that employ over 10 employees and is regulated under the Payment of Gratuity Act, 1972. Gratuity is calculated at 15 days salary for every year worked, subject to a maximum payment of INR 10,00,000.

10. Health, Safety and Maternity

The health and safety of an individual are compensated by the Workmen’s Compensation Act, 1923. Any woman employed in an establishment for at least 80 days will be entitled to maternity benefits (such as leave, allowance, nursing breaks, etc.) regulated by the Maternity Benefits Act, 1961.

How To Get An Employment Contract?

At we have a variety of pre-drafted templates of legal documents. There are templates for employment contracts, agreements for freelancers, startups and companies. Customers can also choose to sign documents electronically by using SignDesk .

Need an employment contract? Don’t just check out a few employment contracts samples and draft your own. Click the button to order your legal documents today. If you require any customisations in the documents, our support team will be able to help you out.

28 Feb, 17

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