Employment Contract: Clauses that are important

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By Guest
6 minute read ● December 15, 2016
Employment Contract

Most of us would have heard of the dialogue made by Salman Khan “ek baar jo maine commitment…”, right? In real life though, most people are not just as committed; which is why contract law in India transitioned over the years from ‘oral’ to ‘written’. When written commitment was not enough and fell short of what was required to be done, the concept of ‘witness’ was brought in to spice matters up. Indian contracts have proved that ‘more’ does not always mean ‘merry’.

Humor aside, Indian Contract Law has been the bulwark of many Indian laws for almost a century now. A written contract is in effect a reproduction of understanding between two or more persons. Persons here mean real people (like you and I) as well as artificial persons (companies like Infosys and banks like HDFC fit the bill here). Thus, there can be a contract between an artificial person, say a company, and a real person for executing some work, and employment contracts are one of the most popular contracts that one would see a company enter into.

Whenever a company is desirous of employing people, it enters into a contract with the employee. Here, the company takes on the role of an ‘employer’. Employment contracts, if well drafted, protects the rights and interests of both the employee and employer. On the other hand, if the contract is poorly drafted, it may turn out to be an absolute nightmare. This article makes an honest attempt to rid you of these nightmares. We present you the clauses that are sine qua non in any employment contract. Let's begin.

Designation and job description

Did you ever get the feeling that your existence on this planet has been given a new glorified definition by your employer? Did you ever feel that without your support, a $ 100 billion company could collapse within a few moments? Or did you ever feel your hitherto hidden talents were being wasted away and that your employer has just given wings to your career? If you have, chances are that your interview has been fantastic! Our advice: snap out of the dream sequence and understand clearly what your role would, in the most exact terms, be. If it is likely that you may be warming the bench or for that matter, working on behalf of your colleagues as well, it is better you move on to the next available opportunity.

Your employment contract should clearly state what your designation in the company would be. Further, the contract should also go on to state what work you would be called on to do. While the latter is not so common, it is always a good practice to have your job description in writing. Employees usually feel that they are being made to do something very different from what they had signed up for. Contracts are ambiguous too as they state that the employer may assign any work to the employee that befits his or her talent. It is always better to clear the ambiguity and understand your role in the company.

Probationary period

It is not just employers who create a fairyland to convince their new found talent; employees are very good at it too. You can never know whether the employee is as good as his resume speaks unless you test the waters yourself. If the employee does not meet the mark, the employer should have an option to terminate the contract at the earliest possible time.

The Karnataka Shops and Commercial Establishment law, indirectly states that the probation period can extend up to 6 months, post which the employer has to give the employee a notice of at least 30 days. That means, the employer can terminate the contract with the employee during probation period, immediately. The industry practice is that even during probation, the employee is given some notice period {say a week or 10 days).

Further, termination cannot happen at the whim of the employer but only after sufficient opportunity is given to the employee to make amends. There should be enough proof to show that the employer did their best to train the employee and despite sustained efforts, the employee did not perform well.

Notice period

Except marriage, there are not many agreements that would survive till your last breath. Thus, it is important that the employment contract provides a mechanism through which the employer and the employee can part ways, amicably. The clause on 'notice period' does just that. It gives the employer and the employee sufficient time to put matters in order before they move on. The employer on his part would need time to identify new talent to take up the vacated role and would also need time to train the new talent. The employee on the other hand, would need time to find a new job opportunity.

Some clauses on notice period read that the employer may terminate the employment at a shorter notice provided that the employee is compensated in terms of pay for the time he would not have to serve. As described above, the Karnataka Shops and Commercial Establishment prescribes a notice period of 30 days. A notice period higher than 30 would always be allowed under law.

Salary

Could any discussion on employment contracts be meaningful without discussing about the salary agreed between the company and the employee?
I have often debated as to what should be the first clause on the employment contract; if I were to take a vote, the clause on salary would win hands down.

It is important that the employee understands the various components of the salary structure and components that he or she is entitled to based on performance. Performance linked pay or variable pay can range anywhere between 10%-30% of the salary of the employee. Some employees are also entitled to annual statutory bonus and some are statutorily covered by employee welfare funds like Employee Provident Fund and Employee State Insurance. In case of any ambiguity, it is best that the employee discusses these matters with the HR Manager.

Intellectual property created during work

This clause is of special relevance to the startups being set up all over India. The Indian law recognises the creator of an intellectual property as its owner. Thus, if you are into development of a unique product, the employee who actually creates the product through his work becomes the owner. Matters are far more complicated when the creation is a by-product of what you originally set out to do.

Thus, it is always good to have a clause in the employment contract, that any intellectual property that arises out of employment belongs to the employer & that the salary agreed to is the full settlement for the transfer of rights over such intellectual property. When it comes to patents, the creation should be formally assigned to the employer by the employee/ inventor.

The business model of many startups are primarily driven by intellectual property and it is this property that investors put money into the business for. It would come as a rude shock to the employer and the investor if any employee lay claim to the IP so developed. Thus, it is best that all employment contracts have a clause on transfer/ ownership of intellectual property.

Non-solicitation

Have you, as an employer, ever witnessed a procession that when one employee leaves, a few more leave in quick succession? And how many unfortunate ones have witnessed all these ex employees coming together to form a new company themselves? The most unfortunate ones by far, however be, those who lose their business to this new company.

While we sincerely hope that you are not one amongst this lot, we advise you to scrutinize your contracts with a magnifying glass to ensure that you have included the clause on non-solicitation. This clause prevents your ex employee from soliciting work from your existing employees and from soliciting business from your customers. While non-solicitation clause is often debated to be non-competitive, we believe a reasonable restriction would be valid under law.

Confidentiality

Employers around the world lay great emphasis on confidentiality. The Chinese Wall between the public and the employees exists to safeguard the interests of the company. No employer would like sensitive data floating around. In a fiercely competitive world that we live in, data is emerging as the most valuable asset of any organisation. The employment contract should protect the employer from any kind of data leakages. The confidentiality clause will however not apply to those matters that are already available in public domain.

Other matters

In addition to the above, the contract should explain about the hours of work that the employee is expected to put in. If the employee is made to work beyond these hours, he or she, under law, is entitled to an overtime bonus. The contract should also state that the employee is not entitled to execute orders or agreements on behalf of the company unless he or she is expressly authorised to do so by the Board of Directors.

Lastly, not every contract sails through smoothly. There could always be a need to resolve disputes and the contract should provide for grievance redressal and dispute resolution.

This blog is written by Pavan Sharma, partner of Balakrishna Consulting. He can be reached at: pavan@balakrishnaconsulting.com

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