Most Important Clauses To Have In Your employment Agreement

contracts-and-agreements,Employment Law
Employment Agreement

5 Most important Clauses you must check in the employment agreement to avoid future legal disputes

If you are an employer or work in the HR department of your company, you should certainly read this article till the end. You would have drafted many employment agreements but have you unchecked all the clauses given in the checklist below? Employment agreement contracts are contracts drafted by employers to safeguard the interest of the business. Contracts are agreements enforceable bye-laws parties to the contract define their rights and liabilities towards each other.

One such type of contract is an employment contract. In these contracts, the employers define various terms of business to be executed between the parties.

What is an employment agreement?

An employment agreement is a contract between an employer and an employee that sets forth the terms and conditions of the employment relationship. The agreement may be written, oral, or implied, and it may be structured as a standalone contract or as part of a larger employee handbook or policy manual. The key elements of an employment agreement are the duties of the employee, the compensation to be paid, and the length of the employment term. In some cases, the agreement will also include a non-compete clause or other restrictive covenant that limits the employee’s ability to work for a competitor after leaving the company. There are many benefits to having a written employment agreement in place. For the employer, it provides certainty as to the terms of the employment relationship and can help to avoid disputes down the road. For the employee, it can provide clarity on the expectations of the job and the compensation to be earned. It can also give the employee some negotiating power if they are able to secure more favorable terms in the agreement. While an employment agreement can be a helpful tool for both parties, it is important to make sure that the agreement is entered into willingly and without coercion. The agreement should also be reviewed by an attorney to ensure that it is legally binding and enforceable.

There are three types of employment contracts: 

  • Permanent employment contracts
  • Fixed-term contracts
  • Casual employment contracts.

Why do we need an employment agreement? 

  • The law does not mandate employers to have employment contracts. However, it is always recommended to define the terms of employment to avoid any further complications.
  • It avoids misunderstanding
  • It makes the working of the business easy.
  • Defined terms, it simplifies the relationship of both parties.
  • It reduces the chances of disputes between employers and employees
  • It limits the liability of the parties.

What you should have in your employment agreement: 

  1. Parties to the agreement – name, and address of the employer and employee,
  2. Term of offer: the period of validity of offer for providing acceptance by the employee and date of joining
  3. Term of employment: whether the employment is for a fixed period or valid till the employee resigns or terminates the employment.
  4. Place of work and duration of work
  5. Designation: the title of the employee in the employment
  6. Role and responsibilities: the job description, duties of the employee at work, and nature of work to be performed by the employee
  7. Breach remedies: the liability, remedies for liability if the parties breach any of the terms of the contract.
  8. Termination: conditions leading to termination, the period of notice to be given to the employee, equivalent remuneration to the employee on termination.
  9. Probation period: a probation period is a period given by the employer to its newly joined employees until the full term employment offer is given to that employee. This period should not be more than six months.
  10. Leaves and vacation
  11. Jurisdiction of dispute (in case any) and governing laws of employment
  12. Benefits: maternity benefits, employee provident fund, pension scheme, and other initiative schemes.

Most Important clauses of the employment agreement 

There are specific clauses that form the basics of the employment agreement, and it is imperative to have them in the agreement to ensure that the relationship between the employer and employee is always on good terms. These clauses are also termed covenants. In its simplest terms, these covenants are an agreement to do or not to do something. Covenants are unconditional promises found in contracts. affirmative covenants are specific clauses in the agreement that defines the roles, responsibilities, and actions to be performed by the employee in employment. a restrictive covenant restricts an employee from competing with his ex-employer for a specific period after the termination of the employment.

Types of restrictive or negative covenants in the contract: 

1.Non-Competent Clause:

This clause protects the employers’ trade secrets, expertise, and knowledge. The clause states that the employees are not allowed to indulge in the same profession as that of the employer or perform any similar duties performed by the employee in the current employment. This clause acts as a shield for the employers, safeguarding them from any unauthorized disclosure of the trade or business secrets to their competitors, leading to any intellectual loss in the business. From the legal standpoint, this clause violates the rights of the people to practice any profession for the betterment of their livelihood, but stating an exception to this right, the court, as well as the law of the land, considers this clause to be valid to protect the interest of the employer. In iec school of art & fashion vs. Gursharan goyal and others, the court has laid down various categories concerning the non-competence clause:

  • Goodwill;
  • Competitive business during the term of the contract, franchise/collaboration agreement in a specified area during the period of the contract;
  • The partnership agreements provide for restraint of trade after the dissolution of the partnership;
  • Restrictions put on employees joining during employment in another business; restraint of using information acquired during employment, after employment, etc.

In Gujarat bottling co. Ltd. And others v. Coca-cola and others, the court held that any agreement containing a clause restricting the parties to carry out any similar trade practices forming part of the business would not amount to restraining trade and such clause is valid to protect the interest of the business.

2.Non – Solicitation  Clause:

according to this clause, restrictions are imposed upon the employees- whether existing or former from indulging with employees or customers of other business, which might harm the company’s interest or business, he is or was employed. In simple terms, the employees are restrained from indulging themselves with any other employee or customer of other companies with a similar business to harm the growth and prosperity of the current business. In the famous wipro case, the delhi high court held that the non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by section 27 of the indian contract act, 1872 as being void”.

3. Non- Disclosure Clause:

The non-disclosure clause restricts the employees from disclosing any information about trade or business secrets, business connections, or trade-related practices, whether he is or is not part of the employment. This clause restricts the employees from sharing their business-related information with outsiders, but it also binds them to keep the information related to the customers confidential. This clause comes with an exception that, if demanded by any provision of law, under certain circumstances, the employees can disclose the information to the concerned authorities. With respect to the protection of the intellectual property rights of the business owner, it is essential to define the boundaries of the employees very clearly in the employment contract.

4. Return of the property and office material:

The return of property clause implies that upon the termination of employment, the employee has to return the property to the company. The employees have to return all the property, in any form whatsoever, and its respective copies stored in any form upon the termination/expiration of such an employment contract. This clause ensures that the employer possesses all property belonging to the employer. This clause warrants that all the information, including but not limited to intellectual property and confidential information, is retained with the employer.

5. Non–Poaching clause:

Poaching refers to the hiring of employees- current or former by a competitor or similar business. Employers invest a lot of time and energy, in training their employees to have optimum business growth. Such poaching practices might lead to immense loss to the employers. Although such clauses violate antitrust laws, they are considered essential in a business’s normal run.

Section 27 of the Indian contract act, 1872:section 27 of the contract act is the governing principle of such agreements and has been evaluated to determine which restriction would amount to be reasonable in law.

The provision states that “every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The contracts concerning “restraint to trade” are particularly null and void. As far as covenants to restraint to trade are concerned about employment contracts, certain things have to be considered:

  • Such contracts to restraint trade are particularly null and void.
  • The onus of proof is upon the employer to prove that such clauses do not come under the ambit of section 27.
  • The employer has to prove that the covenants are to protect the interest of the business
  • The employer also has to prove that these restrictions are not injurious to the public.

However, various judicial pronouncements state that employers’ restrictions upon an employee not to engage in any other business are not hit by section 27 and therefore cannot be classified as a restraint to trade.

Things to keep in mind while drafting the employment agreement:

  • Understand the purpose of hiring
  • Determine the need of the company
  • Draft a job description based on the need
  • Make sure you list down all the policies and code of conduct of the business/company
  • Draft clauses that will protect proprietary information of the business/ company
  • Use contract terms

Consult your lawyer while and after drafting the employment agreement.

Legal Disclaimer: The information contained in this blog post is for general information and educational purposes only. Nothing contained in this blog post should be construed as legal advice from The Aran Law Firm or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter.

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