How To Draft An Employment Contract

Employees cater to the smooth functioning of any organisation. Employees have some obligations that are needed to be fulfilled in return they also expect a few rights reserved in favor of their interest. To set both the employee and the employer on the same page, it is very important to agree on the obligations and rights together. An employment contract helps the organisation build a strong foundation for work obligations but also contributes to employee welfare at the start itself. 

Significance of employment contract: 

Apart from protecting the rights of employees and communicating employers' expectations in writing, there are many things that should be clear to the employees for the goodwill of the company. Employee contracts put forward the terms and conditions that specify the termination, job responsibilities, compensation, benefits, etc. This provides a sense of security from both ends. These employment contracts can also be utilized to protect trade secrets, Intellectual property, and business strategies that are discussed with employees in several instances. However, Employment contracts may differ from place to place, majorly due to the implications of the labor law of that particular country. 

Role of labor laws in the employment contract:

Labour law plays a huge role in shaping the obligations of employees expected by organisations. Some countries have minimum wage provisions for employees whereas some labor laws have provisions for maternal and paternity leave. 

Austria which is a central European country has 43 paid days off work per year. In Italy, the maximum working week is set at 40 hours and overtime must not exceed 48. So before drafting an employment contract that is valid in the eyes of law, it is crucial to dive into the technicalities of relevant laws and understand the rights and obligations of the employees and organizations. Relevant laws in India that govern various aspects related to employment are Factories Act.1948, The Maternity Benefit Act, 1961, The Payment of Gratuity Act, 1972, etc.

There are two stages that are essential to be kept in mind before drafting the employment contract: 

  1. Creation of contract-

The creation of a contract is the first and foremost step which involves framing clauses as per the labor law and the needs of the organization. It should include all the points keeping in mind the employment period and other crucial aspects. 

The building blocks for the creation of an employment contract are the following: 

  • Introductory and Description clause

When a story starts, the characters and their state is mentioned in the first paragraph itself. In the same way, the description of the parties in detail makes it clear for both parties that the purpose of legally validating is a very crucial part of the contract. The title of the contract which will either be “contract of employment” or “employment contract” is to be mentioned at the top followed by the statement of parties. Apart from the name of parties/organization, Pan number/ CIN, and address are important after which background story or recitals are to be stated. Most employment contracts do not add a list of meanings and abbreviations in the employment contract but just to be sure and avoid any confusion, it is safe to give interpretations in the contract itself.  

  • Intensive operative clauses

Intensive operative clauses can be termed as the main body of the contract. The purpose of the employment contract is to ensure that the obligations are communicated and legally acknowledged. When two people join hands, there is something that both parties owe each other. 

Clauses that state the obligations of the employee towards the organization are: 

  • Appointment and duties: It is very clear that an employee is hired as per his or her expertise to get certain things done which will benefit the organisation. Under the appointment and duties clause, the complete job profile of the employee and 
  • Non-competition/Non-solicitation: A non-solicit clause in the employment contract restricts the employee to solicit with clients and other employees of the employer after the course of his employment. Whereas a non-compete clause bars the employee from working with companies that are in direct competition with their employer. Non-solicitation comes into picture after the course of employment whereas the non-compete clause is enforced during the period of employment and after the termination of employment.
  •  Confidentiality clause: Companies that have excelled on the basis of their trade secrets, work ethics, and business techniques should make a deliberate attempt of adding this clause. The clause of confidentiality is important to prevent the spillage of trade secrets and plans for the near future.
  • Probation period clause: Most organizations have a probation period for their employees to assess their performance before they are employed on a permanent basis. In the employment contract, the period of probation should be mentioned clearly and precisely to avoid any confusion between employees and employers. 
  • Code of conduct and principles: Every organization has its own set of rules and disciplines that are framed by the management. New employees might not be aware of it since the code of conduct needs to learn about it in advance, so it is better to make it clear beforehand in the employment contract itself. 
  • Intellectual property:  To reserve the creative innovations of the company, the intellectual property rights clause will cater the best. In the employment contract, the company shall mention that all the intellectual property conceived in the term of employment shall belong to the company. 
  • Employees duty to return the company's property: Upon entering the organization, the employee gets access to things like a laptop, email, and card– upon the termination of the contract it is the employee's duty to return everything. This clause ensures that the employee follows this rule.
  •  Benefits of employees clause

Since a contract is to make both parties secure, employees in the term of their employment are entitled to consideration in return for their services also benefits.  

  • Remuneration: Under the remuneration clause, the organization must mention the CTC or the gross salary that is being offered to the employee with the method and date for the payment of remuneration. It should also disclose the taxes and insurance deductions that will be made to the salary. 
  • Leave policy: Each and every employee is entitled to a certain number of paid leaves as per the organization's rules. Leavy policy clause should expressly define all the festival and sick leaves. 
  • Term and Termination clause- The term clause simply defines the start date and the period for which the contract shall have legal effect whereas the termination clause states the provisions to end the contract by either the company or the employee. 
  • Miscellaneous 

Each and every employment contract has certain standardized clauses which complete the objective of signing a contract. These clauses are often known as boilerplate clauses and irrespective of the type or jurisdiction of the contract, they are a part of it. 

A few miscellaneous clauses that suit employment contract are: Amendment, Successors, Third-party, No-waiver, Severability, Enforcement, Governing Law, Arbitration, and Notice. 

  1. Perfection of a Contract

This is the final stage where the contract is actually made effective through execution.The formalities that are necessary for the perfection of the contract are:

  • To signify the consent of both parties on each and every part of the contract, it is important for both parties to sign the contract. This also makes it clear that both have read and this contract shall be legally enforceable. 
  • An Employment Agreement need not be registered for it to contain evidentiary value but stamp duty has to be paid.  Stamp duty rates can be checked in the schedule of the applicable Stamp Act as it differs from state to state. 

In times when the contribution of employees can make or break the vision of an organisation, it is very necessary to have an employment contract. It should be tailored as per the needs of the organization as well as keeping laws that affect employees in balance. This article covers all the aspects and steps required to draft an employment contract. The above information gives you a sufficient knowledge boost as a business owner but it is always preferable to hire a professional that can take care of the legalities of your business.