EMPLOYMENT
CONTRACTS
IN INDIA
2 0 1 9
J A N U A R Y
The relationship between an employer and employee can
either be express or implied. While in India, employers
generally issue offer letters to employees prior to signing
a formal employment contract, the practice of executing
employment contracts is widely followed by almost all
establishments. Also, in some states, the State-specific Shops
and Establishments Acts (S&E Acts) require the employer to
issue a written appointment letter to the employees. A well-
structured employment contract can be a crucial document
to govern the terms, conditions and relationship between the
employer and employee. Apart from limited implied terms,
the rights and obligations of an employer can be enforced
only if they are stipulated in the employment contract,
applicable statute or the employer’s internal policies that
have been adequately communicated to the employee.
This primer provides an overview of key features of Indian
employment contracts.
01 EMPLOYMENT
CONTRACTS
Private employers in India typically use the following types of employment contracts:
• an open-ended contract, where the contract continues until the employer or the
employee ends it; or
• a fixed-term contract, which comes to an end after a specified duration. Such
contracts are mostly executed where the intent is to recruit the individual for a
specific tenure or when the employment is for a specific task or project of a
known duration.
Regardless of whether the employee has been engaged on a fixed term contract or an
open-ended contract, common principles of contract law such as offer, acceptance,
certainty (as any uncertainty or ambiguity risks could render a contract void),
consideration and competence of the parties should be complied with, when drafting
an employment contract. Also, the entitlement to various employee benefits remains
the same under both types of contracts and the contract of employment must adhere
to the requirements of various labour statutes, such as the S&E Acts, the Industrial
Disputes Act, 1947 (ID Act) and the Industrial Employment (Standing Orders) Act,
1946 (SO Act), which specify minimum conditions of employment.
Where feasible, the benefit in having a fixed term contract is that once the tenure
of the fixed term contract is over, no additional process needs to be followed for
terminating the contract. In India, most disputes raised by employees relate to
termination of employment. In the case of an open-ended employment contract, the
employer would have to provide severance pay and comply with other applicable
1 Employment Contracts in India, January 2019
statutory requirements (such as provisions regarding retrenchment) at the time of
the termination. These requirements would not apply where the contract comes to an
end due to the expiry of its tenure. However, care must be taken before entering into
fixed-term contracts for permanent or perpetual roles.
It is generally advisable to make employment contracts comprehensive and detailed
to address key aspects of employment and to ensure compliance with applicable
statutes or internal policies of an employer. Some clauses that are routinely
incorporated into an employment contract are: (a) job title and scope of work;
(b) probation period and period of service; (c) place of employment and provisions
on transfer; (d) salary/wages, bonus and incentives; (e) retirement benefits,
health and welfare benefits (if any); (f) hours of work, rest, holidays and leaves;
(g) confidentiality and non-compete provisions; (h) intellectual property and data
protection; (i) employee surveillance; (j) procedures for resolution of grievances;
(k) suspension of the employee pending any disciplinary action; (l) notice,
termination, resignation or retirement provisions; and (m) governing law and
jurisdiction (including an arbitration clause, which may be used for non-workmen
category employees). However, since amendments to a bilateral contract will also
require the consent of the employee, employers should examine if certain terms and
conditions that are more susceptible to changes/revisions periodically, should be
covered in separate policy documents instead of the employment contract.
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02 EMPLOYING
FOREIGN NATIONALS
With increasing foreign investments into India, it is commonplace to engage foreign
employees into various roles by MNCs and Indian companies. Foreign employees can
be employed in India, either under a direct employment agreement with the Indian
entity or through a secondment arrangement. In case of secondment of employees,
the foreign entity, the Indian entity and the employee would normally execute a
secondment agreement which would govern the terms of the secondment. In most
cases, a local employment contract between the employee and the entity in the host
country is also executed to ensure compliance with immigration laws and mitigate
tax risks.
While the plethora of labour legislations at the Central and State level in India usually
leave employers with complex interpretational issues, these issues prove even more
challenging when one of the parties involved is a foreign national. However, apart
from employment law concerns, the major issues to be assessed in relation to foreign
employee secondment arrangements are compliance with immigration and tax laws.
The deputation of foreign nationals raises several issues such as visa requirements,
registration with Foreign Regional Registration Office, tax implications etc. under the
Indian legal system.
3 Employment Contracts in India, January 2019
4 Employment Contracts in India, January 2019
03 TERMINATION
OF EMPLOYMENT
Termination of employment is mainly governed by the provisions of the ID Act, the
SO Act and the S&E Acts. These legislations stipulate the minimum period of notice
required to be provided to an employee prior to termination, the procedure for
termination, severance payment etc. and apply to the extent an employment contract
contains provisions that are comparatively less beneficial to the employee.
It is therefore critical to determine if an employee is covered by any applicable labour
statute before planning a termination. For instance, even if a workman’s contract of
employment stipulates that his/her employment can be terminated with 15 days’
notice or payment in lieu thereof, such a termination can be struck down as illegal
since the ID Act stipulates a minimum notice period of 30 days or payment in lieu
thereof.
Further, an employer-employee relationship can be terminated at the instance of
the employer or the employee (through resignation), by mutual consent, employee’s
retirement/superannuation and on the expiry of a fixed-term contract. Courts in
India have broadly categorised termination of employment at the instance of the
employer into the following two categories: (a) termination simpliciter; and
(b) stigmatic termination.
a. Termination simpliciter
Termination simpliciter refers to termination with the statutorily required
minimum notice period or payment in lieu thereof for causes other than
misconduct - the underlying principle being that the termination is not being
imposed as a punishment on the employee. This concept comes under the
bracket of the term ‘retrenchment’ under the ID Act, which has been defined to
mean termination for any reason except:
• As punishment inflicted by way of disciplinary action;
• Retirement/superannuation;
• Termination for continued ill-health; or
• Expiry and non-renewal of the term of an employment contract.
Reasons for retrenchment could range from redundancy to non-performance or loss
of confidence in the employee for various reasons.
The corresponding provisions for retrenchment under most of the S&E Acts mandate
that any person who has been in the service of the employer for a specified duration
must be given prior notice of termination (usually 30 days) or payment in lieu
thereof, except in cases where the employee has committed misconduct. Most S&E
Acts expressly require an employer to provide a ‘reasonable cause’ for the termination
and this concept of ‘reasonableness’ has also found backing in Indian judicial
precedents. Therefore, a termination without any reason or for reasons that are
wholly vague or arbitrary, even though the employee has been given adequate notice
or payment in lieu thereof, is liable to be challenged before a court and may even be
struck down in certain circumstances.
6 Employment Contracts in India, January 2019
b. Stigmatic termination
This refers to termination on grounds of misconduct. The governing provisions with
respect to dismissal for misconduct under the ID Act and S&E Acts are similar. An
employer may dismiss an employee for misconduct without providing any notice
or payment in lieu thereof, provided the employee has been given a fair hearing to
respond to the charges levelled against him in accordance with the principles of
natural justice.
Indian courts have established that habitual and unauthorized absence from work,
wilful insubordination, theft, fraud, dishonesty, wilful damage or loss of employer’s
property, bribery, engaging in strikes unlawfully, being inebriated at work, harassing
customers etc. amount to misconduct. Since the punishment is required to be
proportionate to the offence, the law requires the employer to consider the gravity of
the offence and the past record of the employee prior to dismissing the employee.
Also, termination of employment in certain circumstances is not considered valid
such as termination in violation of fair labour practices as set out in the ID Act,
dismissal on the account of trade union activity or membership, dismissal by way of
victimisation, dismissal not in good faith, dismissal by falsely implicating a worker in
a criminal case, dismissal without due regard to natural justice etc.
7 Employment Contracts in India, January 2019
04 NON-COMPETE, NON-SOLICITATION RESTRICTIONS
AND CONFIDENTIALITY UNDERTAKINGS
Most employment contracts have non-compete and non-solicit clauses and
confidentiality provisions. While non-compete provisions that extend beyond the
term of employment are invalid under Indian law, there is no restriction on the
extension of non-solicit and confidentiality provisions even after termination of an
employment contract.
a. Non-compete
Under the provisions of the Indian Contract Act, 1872 (Contract Act), which is the
principal law governing contracts in India, a contract in ‘restraint of trade’ is void. The
only exception to this is where goodwill of a business is sold.
As a general principle, non-compete restrictions imposed on an employee during the
subsistence of an employment relationship are enforceable in India. The Supreme
Court of India has ruled that negative covenants which operate during the period of
employment, when an employee is bound to serve his employer exclusively, are not
regarded as a restraint of trade.
However, courts in India have consistently held that non-compete clauses that
operate post-termination of an employment contract are a ‘restraint of trade’ as they
have the potential to deprive an individual of his or her fundamental right to earn a
livelihood and are consequently void under the Contract Act. In fact, the law does not
even permit ‘reasonable’ post-termination restrictions that an employer may impose
solely for protecting business interests.
8 Employment Contracts in India, January 2019
b. Non-Solicitation
Non-solicitation clauses are meant to put a restriction on the employee of a company,
to prevent him from soliciting other employees or customers of the company, during
and post-termination of employment. Companies assert that such restrictions are
necessary to protect their proprietary rights and confidential information.
Like non-compete restrictions, non-solicit covenants have also been the subject of
judicial analysis in India. Typically, courts have held that while restrictive covenants
for non-solicitation are enforceable during the term of employment in India, such
obligations post-termination may be enforced in limited circumstances, based upon
the facts and circumstances of each case.
9 Employment Contracts in India, January 2019
c. Confidentiality
In the absence of specific data protection legislation in India, the terms and
conditions in a contract relating to data protection and confidentiality are governed
primarily by the provisions of Contract Act.
A breach of the confidentiality clauses in an employment contract entitles an
employer to terminate the services of the employee. There are several provisions of
the Indian Penal Code, 1860 and Information Technology Act, 2000 which are also
attracted in case of breach of confidentiality and disclosure provisions, which allow
criminal prosecution and imprisonment, or fine, or both.
Indian courts also recognise that confidentiality obligations can subsist beyond the
duration of employment and can restrain an ex-employee from using confidential
information relating to his/her previous employer, even if they do not restrain the
individual from joining a competitor. In addition to seeking an injunction to restrain an
employee from using confidential information post termination or claiming damages
for breach, an employer could also take criminal action against an employee.
10 Employment Contracts, January 2019
05 CONCLUSION
An employment contract is a binary agreement between an employer and an
employee governing their rights, duties and responsibilities. One of the main
advantages of executing an employment agreement is that it allows detailed terms
of employment to be specified to ensure compliance with laws and best industry
practices. It fosters a structured employer-employee relationship and sets the
expectations of the job.
That said, it is also important to remember that due to the unequal bargaining power
between organisations and most employees in their rank and file, terms that are too
aggressive or one-sided run the risk of being struck down by courts. For that reason,
along with the fact that employment in India is heavily regulated, it is imperative
to thoroughly vet the terms of an employment contract before signing it and seek
practical guidance, if in doubt.
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D I S C L A I M E R
The contents of this document are intended for informational purposes only
and are not in the nature of a legal opinion. The information set out in this
document is based on applicable law as on the date hereof and is limited to
the laws referred to herein. Readers are encouraged to seek legal counsel
prior to acting upon any of the information provided.
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