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  • Commercial Law Advisors

Structuring Different Forms of Employment Contracts

Employment contracts, like other contracts have all the basic features of a regular contract, i.e. offer, acceptance, consideration, competence of parties, etc. It is a bilateral agreement between the employee and employer with the promise of remuneration to the former in return of services offered. There are wide varieties of employment conditions in India, and therefore, contracts must be designed accordingly.

The organized or formal sector is one where workers/employees have paid jobs coupled with job and/or social security. This is the most common form of employment where contracts are statutorily mandated. Employment contracts in this sector have well-defined clauses in relation to appointment, working hours, remunerations terms of payment, statutory deductions, confidentiality, intellectual property, non-compete, indemnification, termination, etc. In recent years, clauses related to dispute resolution (arbitration, conciliation, mediation) are increasingly prevalent in such contracts in light of developments in alternative dispute resolution mechanisms.

Structuring employment contracts requires mutual collaboration between the employee and the employer. It is necessary to cater to the interests of both parties and secure their rights while ensuring that one doesn’t yield to arbitrary dictations of the other. The inclusion of employee benefits, notice periods and indemnification provisions, guarantee employees’ rights whereas clauses like non-disclosure and non-compete make a nice kettle of fish for employers in so far as securing industrial standards of competition and loss of talent.

As far as appointment, salary, deductions, etc. are concerned, these are definitive clauses that vary with each employer as per the nature of services. Hours of work, intellectual property, leaves and job description are clauses requiring adherence to contemporary labour laws and legal regulations. Any contract with an unlawful object is expressly rendered void. Besides the above, it is intrinsically incumbent upon the employer to include clauses in the contract that further social and legal morality at the workplace, by ensuring protection against acts of harassment, discrimination, security, etc.

The principle of ‘restrictive covenants’ is critical towards determining the nature of employment contracts. Clauses related to non-disclosure and non-solicitation are paramount to accomplishing an employers’ goal of preserving human resources, confidential information, business information and trade secrets. While the goal is essentially to check the conduct of rogue employers and/or unethical practices, it sits in partial contravention of Article 27 of the Indian Contracts Act which voids the operation of agreements which restrain anyone from exercising a lawful profession, trade, business, etc. It is therefore important to strike a balance in such contracts by extending as much headway to employees as possible in retaining their professional freedom while guarding resource-vitality for employers. The best way to achieve this is through the mechanism of fair compensation, where one party agrees to essentially ‘buy out’ the rights/interests of the other before severance. It is however, of utmost importance to fix reasonable compensation amounts based on tenure of service as well as affordability since there is a wide mismatch in resources between the employer and employee.

Termination is yet another aspect wherein a careful contract construction goes a long way in ensuring amicable severance of ties between the parties. Conditions of voluntary termination must be wide, to include a host of exigencies that could be borne by the employee (resignation, retirement, breach of notice, etc.). Involuntary termination must be condition precedent upon unambiguously illustrated categories such as lay-offs, retrenchment, proven misconduct, etc. In cases of institutional firing like lay-offs, adequate severance packages should be charted for payment to the employees commensurate with industry standards, notwithstanding the prevailing financial health of the company. This is, in fact, one of the biggest drawbacks of insolvency and bankruptcy laws which places employees towards the end of the scavenging chain in terms of proceeds obtained from resolution proceedings of a company.

However, in the interests of equity and fair play, the courts have favored employees while settling employment disputes. This is also in consonance with Article 21 of the Constitution which guarantees the fundamental right to a livelihood and therefore obliges the courts or arbitrators to stand by the employees’ freedom of occupation as against the employers’ interests in imposing professional restraints upon their employees either during or after pendency of employment.

The medium of arbitration is however, the most sought-after remedy for dispute resolution in the workplace, owing to avoidance of court procedures and judicial delays. Arbitration clauses must therefore be highly deliberated upon and accommodating of all parties, especially considering the governing laws and seat of arbitration. Mutual inclusion and convenience to parties is crucial to drafting these clauses.

Structuring contracts is essentially the art of compromise. Employment contracts, even more so, because they are the key to attaining employee satisfaction and a healthy work environment. Therefore, mutual agreement and bipartisan accord must be the driving factors in the minds of drafters who are tasked with structuring these contracts.

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