What is an Employment Agreement?

An Employment Contract is a legally binding agreement between the employer and the employee, elaborating the terms of engagement between them. It specifies exactly what the employee is required to do and what the employee can expect from the employer in terms of his employment. A properly drafted Employment Contract is a highly effective way of protecting employer company’s financial and intellectual assets.

An Employment Agreement can be written agreement that is signed and agreed by the employee and the employer. It can also be implied from employee handbook, policies or other oral or written assurances.

Is an Employee Agreement a binding contract?

Yes, an Employee Agreement is a binding contract between the employee and the employer.

What should be included in an Employee Agreement?

An Employee Agreement should clearly define all the rights and responsibilities of the employment relationship. Following are some of the most common elements:

  • Terms of Employment
  • Employee Responsibilities
  • Employee Benefits
  • Confidentiality
  • Vacation and sick leave
  • IP Assignment
  • Ownership of inventions
  • Non-compete
  • Dispute Resolution
  • Grounds for Termination

Is an Employment Contract a legal requirement?

You would not need Employment Contract for all your employees. Like most of the other employers, you would need a contract only for the employees who would meet the criteria below:

  • hold a highly influential position (CEO, Vice President, General Manager etc),
  • work with sensitive trade secrets, intellectual property or client information (software programmer, sales persons), or
  • require a significant amount of costs to get them on-board such as relocation package, sign-on bonus or specialised training to perform their tasks

How to terminate an employee in India?

There are only two ways to terminate an employee in India:

  1. Retrenchment, meaning, the reduction of costs or spending in response to economic difficulty. You can retrench an employee for the lack of work to that employee and, only if, the total number of employees in your organisation, including management staff, is less than 100. To terminate under retrenchment, you need to give the employee one month notice and pay him a retrenchment compensation at the rate of 15 days of salaries for every year of service completed. The employee being retrenched should be the junior most in his category. This means, you can retrench a senior employee while retaining a junior employee.
  2. Removal from service, also called dismissal. In this case, a misconduct has to be attributed to the employee being dismissed. Upon receiving a complain from any co-worker or supervisor of the employee, he should be called for explanation. If his explanation is not satisfactory, charge sheet has to be issued against him and an internal inquiry has to be conducted while giving him full opportunity to prove his innocence. If he fails to explain his misconduct, then a dismissal order can be issued. Examples of misconduct includes wilful insubordination, fraud, theft, loss of property, bribery and sexual harassment.

Terminating an employee by giving him one month notice, with or without reasons, is illegal. Even if the employee’s employment terms mentions this process for termination, the court in India would set aside such termination.

Is verbal employment contract binding?

Yes. Verbal employment contracts is valid and legally binding.

Is it illegal not to have an Employee Agreement?

You can have verbal agreement with your employees. There is no statutory obligation to have written employee agreement or, signed employee agreement or to have witness for the employee agreement. Once your employee accepts your job offer, and you could have made a verbal offer, there is a legally binding contract of employment between that employee and your organization.

What makes a contract valid and enforceable?

An employee’s agreement to work for an employer and the employer’s consent to pay the employee through a verbal agreement forms an employment contract. The agreement need not be a written or signed agreement.

Does an Employment Contract have to be signed?

No. A verbal employment contract is valid and legally enforceable.

What is the purpose of an Employee Agreement?

An Employment Agreement makes both the parties, the employer and the employee, fully aware of their obligations and implies that both have agreed to comply with the terms and conditions stated in the agreement. A well-drafted agreement aims to prevent any disputes between the parties and, in the event of any dispute, helps in resolving the dispute as per the terms of employment that they have agreed earlier.

Do contract have to be notarized?

No. An employment contract need not be notarized.

What is Employment Bond?

An employment bond is an employment agreement between an employer and an employee which, in addition to standard terms of employment, includes a clause that requires the employee to serve the employer compulsorily for a specific time period, failing to which the employee has to pay the employer a penalty amount specified in the agreement.

An employer may incur huge costs in training an employee. In case the employee quits his job just after the training for better salary from a competitor, the employer may incur direct financial loss or undue delay in completing on-going projects, resulting in a loss of reputation. To ensure continuity of employment, an employer may ask an employee to sign an employment bond that requires the employee to pay penalty amount, in case he quits the company before a specific time period.

An employment bonds may deter the employee from quitting the company before the agreed time period or from committing any breach of other agreed terms and conditions of employment.

Is Employment Bond legal?

Yes, employment bond is valid and legally enforceable in India, provided (i) the compulsory employment period and the penalty amount is reasonable and necessary to safeguard the business interests of the employer, and (ii) the employee agreed to it without any coercion, misrepresentation, mistake or undue influence.

On one hand, the Indian courts have held that in the event of breach of an employment bond, the employer shall be entitled to recover damages, if the employer spent a considerable amount of money in training the employee or incurred other expenses for the employee such as joining bonus. On the other hand, the courts have also be reluctant to restrain the employee from joining a competitor.

To enforce employment bond, the compulsory employment period and amount of penalty should be reasonable and in proportion to the potential business loss that the company may incur in case of a breach.

If an employee leaves the company before compulsory employment period, he would have to pay the penalty amount specified bond agreement. Apart from seeking monetary damages, an employer may request a court to issue an injunction order to prevent the employee from joining a competitor.

What are the damages for a breach of contract?

An employment contract may be breached in several ways by an employee:

  1. the employee discloses confidential information of the company to a Thord party, adversely affecting the company’s reputation or value,
  2. the employee makes (or receives) unauthorized payment / bribe to (or from) a third party,
  3. the employee poaches or solicits the company’s clients during his period of employment or within an expiration of a set period defined in the agreement, and
  4. the employee quite the company before compulsory employment period as specified in the employment bond.

What is the most common remedy for a breach of contract?

The employer can sue an employee for damages if it can prove its losses as a result of the employee’s unlawful breach of the agreement. Apart from seeking monetary damages, an employer may request a court to issue an injunction order to prevent the employee from joining a competitor.

Do non-compete hold-up in court?

No. Non-compete, after an employee quits an employer, doesn’t hold-up in Indian courts. Courts consider such restraint on an employee, after the term of employment, as unenforceable since such a restraint would curtail the constitutional right the employee to earn a livelihood and would amount to restraint of trade.

Do non-solicitation hold-up in court?

Yes. Non-solicitation, even after an employee quits an employer, does hold-up in Indian courts.

Non-solicitation clause prevents a former employee from inducing the customers and employees of the former employer for his own benefit. Non-solicitation doesn’t curtail an employee’s constitutional rights to earn a livelihood or prohibits him from joining a competing business and, hence, it doesn’t amount to restraint of trade. So non-solicitation is enforceable.

To enforce solicitation and claim damage, an employer has to demonstrate in the court that the employee has solicited its customers and, because of which, the customers have placed business orders to the new employer of the employee.

Even without an explicit non-solicitation clause, an employer can seek restraint for non-solicitation under certain circumstances. For example, during the employment period, an existing employee incorporates a new company, carrying on the same business as the employer, and, after a while, the employee quits. The employer can demonstrate in a court that the employee had access to its trade secrets and customer information, which the employee used for his own benefits.

Is non-compete enforceable?

No, Non-compete is not enforceable by Indian courts as that would amount to restraint of trade and would curtail your employees’s constitutional right to earn a livelihood. If your non-compete clause is something like the following example clause, then it is unenforceable after your employee quits your company:

“The employee shall not join any organization carrying on any business similar to the business of the Company during the contract of employment and for a further period of two years from the termination of the contract of employment.”

Even if you are a foreign company or subsidiary of a foreign company, your non-compete would be unenforceable after the term of employment.

Can I sue my employee?

Yes, you can sue your employee under following circumstances:

  1. Negligence: If your company suffered monetary loss because of negligence of some employee, you can sue him.
  2. Moonlighting: If you find an employee engaged in a second job, which is prohibited in your employment contract that the employee has signed, you can sue him. Even if the work of the employee is not in direct competition of your business, still you would have a valid case.
  3. Not serving the notice period: If an employee, who as signed an employment bond, quits before serving the compulsory employment period, you can sue him to recover the penalty amount specified in the bond.
  4. Theft: If you have evidence that some employee stole company assets or intellectual property, yo can sue him.
  5. Breach of trust: If you have evidence that your current or former employee leaked your trade secrets, you can sue him.

Can I withdraw job offer?

Once you make a job offer that has been accepted by a candidate and, later, you withdraw the job offer, you would be in breach of contract as per Section 5 of the Indian Contract Act 1872. The candidate can sue you for damages and would have a strong case if he can demonstrate that he has suffered losses, for example, by remaining unemployed waiting to join you company. The court, after finding your breach of contract, can order you to pay compensation to the candidate.

Recently Grofers, Flipkart and L&T Infotech has been in legal troubles for withdrawing job offers.

Are Employee Handbooks legally binding?

Employee Handbooks are legally binding documents that protect both you and your employees. Following are the key terms in Employee Handbook:

  1. General policies and procedures about leave policy, dress code, holiday list, pay period, dress code etc.
  2. Discrimination policy, stating that all employees will get equal treatment irrespective of gender, religion, color, caste or language and detail-out complain procedure for distressed employee.
  3. Employee benefits such as healthcare benefits, insurance and travel allowance.
  4. Disclaimer, such as company’s guidelines and policies are subject to change.

What are the working hours?

An employee cannot work for more than 48 hours in a week and not more than 9 hours a day. A week comprise of 6 days and 8 working hours in a day comprise of 1 hour of lunch break.

Do I need to give notice before terminating an employee?

A termination needs to comply with state and central laws because these laws supersede employment contract. Depending on the place of operation of your business, you need to abide by following state laws for ordinary termination:

  • State labor law in Delhi: If an employee has been employed for more than 3 months, employer needs to give a notice of 30 days or one month’s salary in lieu of such a notice.
  • State labour law in Tamil Nadu and Karnataka: If an employee has been employed for more than 6 months, employer needs to give a notice of 30 days or one month’s salary in lieu of such a notice.
  • State labor law in Maharastra: If an employee has been employed for 12 months, employer needs to give a notice of 30 days or one month’s salary in lieu of such a notice. In case employee has been employed for more than 3 months but less than 12 months, notice period should be 14 days.

In case misconduct is the reason for termination, notice period need not be given as per any of above state laws. However, the employee should get adequate opportunity to explain the charge prior to termination. Misconduct includes

  • wilful insubordination or disobedience
  • fraud, theft, dishonesty, bribe
  • willful damage to or loss of company’s property
  • absence without leave for more than 10 days
  • habitual late attendance
  • disorderly behavior during hours, or
  • gross negligence of work


Get a Free Legal Evaluation of Your Employment Contract

Much of your Employment Contract is quite standard. Given the legally binding nature, you may want to ensure that you are covered on some certain key terms such as termination, dispute resolution and implied terms from employee handbook or policies.

Get a free legal evaluation of your Employment Agreement today.

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