What is an Employment Agreement?

Role and use of an employment agreement cannot be undermined in any type of employment.


As you step into an entrepreneurship journey, you would need a team to support your dream and to build an organisation. You would need people to work with you so, hiring people with the required skill set will be the next course of action. Now, how do you ensure that a cordial relationship between two parties i.e. you as an employer and the employee/employees (individuals you hire) is established and a mutual trust is formed? How would you want the new recruits to work in your organisation? What is expected from an employee and what will they get in return and on what terms and conditions? The answer to all these questions is by having an employment agreement in place.

Employment Agreement: What it means?

Keeping a track of a verbal conversation regarding the association of an employer with an employee could be troublesome in the long run while building a community. Hence, the requirement to follow a standard way to build trust and understanding between the two parties i.e. the employer and the employee, a formal process of signing a document is created. With the help of a legal team, an employment agreement/contract is designed that states the expectations of the employer from an employee and the benefits and the wages that will be provided to an employee with the terms and conditions to be followed to avoid any dispute during the course of employment or later on. In short, a mutual agreement and expectation is set between both parties before the commencement of the employment. Thus, an employment agreement/contract defines the relationship between the employer and the employee through a written and legally binding document.

Employment Agreement: Who can enter?

An individual of stable and sound mind and reasoning is capable of entering into an agreement/contract. It is also important to understand that the agreement/contract is legitimate if it has not been created under any misrepresentation or undue influence. Thus, an individual with a sound mind willing to work can enter into a contract with the employer (that can be a corporate, non-profit organisation etc.).

Employment Agreement: Why is it required?

Employment agreement is the sole document that protects an employee or safeguards his/her legal rights. The document provides clarity and builds trust and mutual understanding between both the employee and the employer The rights and obligations of both parties are clearly defined in an employment agreement.

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The agreement or contract is legitimate if it has not been created under any misrepresentation or undue influence.

What are the mandatory clauses or terms and conditions?

Below are the clauses or terms and conditions which are mostly covered in an employment agreement or in an employment contract:

Designation

The designation or position at which the employee shall be working in the organisation is a part of the agreement/contract.

Date of Joining (DOJ)

DOJ is the date of commencement of the employment in the organisation.

Place of work

This section explains the location of employment. If an employee is required to work remotely or from a specific location in India as per the work requirement.

Remuneration/Salary and Bonus Eligibility

The agreement must contain the annual gross salary to be paid to the employee. This is an obligation of employment to prove remuneration for the services or work that will be performed by the employee during the employment period. However, adding a joining bonus or a minimum bonus amount based on employee performance or any incentives completely depends on the company policy.

Probation Period

With the probation clause, an employer gets time to review the decision if the hired employee is a right fit, understand the company culture code and is able to perform/behave as desired or meets the requirement of his/her role. Thus, a probation period of one month, three months or six months at times is enough for both the employer and employee to settle. And, if a replacement is required, the notice period process can be simplified as employment could be terminated from either side by giving a minimum notice period that us usually around 15 days or 1 month in probation period instead of 2 or 3 months’ notice period applicable for a confirmed employee.

Working Hours

This section defines how many hours an employee would need to put in for work on a weekly or monthly basis. This is usually designed by the HR team keeping in mind the requirement of the organisation and most importantly, following the labour law to ensure no employee is exploited. In fact, even the employee also justifies the salary received with the amount of time he/she dedicates at work.

Leave or Paid Time Off (PTO)

The number of paid days off at work are covered under the leave policy that is uniform for all its employees.

Duties

This clause does not always list the detailed job description or assignment; the employee will be working upon. However, it provides an insight into the possible work assignment that employee will take up post joining the organisation.

Dress Code

Having culture and setting an expectation for dressing code as per the company culture is important. So, setting the precedence since inception is a good idea especially if the work demands a formal dress code and a policy around it to adhere to.

Fringe Benefits

The employment contract or agreement may or may include all the fringe benefits such as health and dental insurance and retirement or pension benefits. The contract or agreement usually covers the health insurance provider and the beneficiary details. For instance, dependent spouse or dependent parents.

Notice Period

This is one important clause to ensure a minimum notice period is given by the employer to the employee and vice versa at the time of leaving the organisation or termination of the employment for any reason.

Amendment and Termination

Termination is a key clause and an essential part of the contract. The clause states the right of the employer to modify and terminate the employment as per the agreed notice period clause until there is a conflict of interest or any inappropriate behaviour based on ‘no tolerance company policy’. No tolerance activity performed by an employee can lead to his/her immediate termination. The termination of the employment can also happen when the employee volunteers to quit the organisation for his/her personal reasons by serving the minimum notice period as mentioned in his/her agreement or contract.

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The detailed clauses or terms and conditions not only protects the interest of an employer but also, mitigates the risk of unnecessary legal complications which may develop due to unclear documentation or intimation to the employee at any given point of time.

Indemnification

The process of compensation for any harm or loss by one party to another is indemnification. For instance, recovery amount of any training cost upon joining or any relocation expenses paid by the employer if an employee leaves before a minimum period of time or as desired by the organisation.

Intellectual Property Rights

Intellectual property created by the employer at their premises is an asset and belongs to the employer. For instance, huge cost and effort for training is incurred by an organisation. Hence, they have full right to save their intellectual property rights by all means.

Non-compete Clause

The clause limits the employee to open a similar business or to join any competitor for a limited time period after leaving the organisation. Also, the addition of this clause depends on the type of employment and the company business.

Non-disclosure and Confidentiality

As per the contract, the employee is legally bound to ensure no confidential information such as trade secrets, financial information and client details etc. are shared with any third person or with the competitors. This is one of the mandatory clauses in an employment agreement.

Employment Agreement: Why clauses are important?

No one wants to get into any legal hassle while running a company or wanting to scale their company business. Thus, the detailed clauses or terms and conditions not only protects the interest of an employer but also, mitigates the risk of unnecessary legal complications which may develop due to unclear documentation or intimation to the employee at any given point of time.

Offer Letter and Employment Agreement. Are they different?

Absolutely, an offer letter and an employment agreement/contract are different. There is a difference in legal validity. Offer letter contains the basic information like DOJ, location, salary but isn’t legally binding. However, an employment agreement is a legally binding contract between both the parties i.e. employer and employee. And, the agreement/contract must be signed by both parties to show consent on the stated terms and conditions.

Conclusion

The important note for an employer is that focus should not be only on filling up the vacant position or for an employee the idea should not be limited to get a job. Both parties should understand the agreement. Infact, acceptance of the agreement before the employment officially starts is an important factor to establish trust, provide clarity and consent between the employer and the employee. The legal binding protects the interests of both parties with proper documentation i.e. employment agreement/contract that contains essential terms and conditions enforceable in the court of law.
Entrepreneurs who are just starting off with their small new businesses must also understand the gravity and importance of building this trust with the employees they are going to hire. It is crucial to follow the latest employment laws/labour laws in India to ensure legal compliance. And, ensure to always run the contract through the legal department in case of any concern or changes required. The employment contract can be for an indefinite period of time but with clear termination and notice period clause or for a definite period of time with applicable law and Jurisdiction in case of any dispute that may arise particularly if an overseas employee is being hired and is working remotely for an employer in India.

Roopali Kotwal
Roopali Kotwal
Roopali is an industry expert with over a decade of experience. An alumna of Delhi University she writes on Human Resource Management and Business Operations.

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