Employment Agreement: Clauses and Legal Validity

Published On: Aug 6, 2020Last Updated: Aug 6, 20205.4 min read

What is an Employment Contract?

An Employment Agreement lays down the rights and obligations of both the Employer and Employee during the Employment Period. From junior-most level to the CEO, everyone is an Employee and to strategize and systemize the Employment one needs to have an Employment Agreement. It provides clarity to Employees regarding their pay scale, bonus, leaves, working hours, job descriptions, and much more. An Employment Agreement is the sole legal document an Employee has which can help him safeguard his rights as an Employee. For an Employer, an Employment Agreement can help in streamlining the Employees. This Agreement acts as evidence in case of conflict and a source of legalities to which both the parties are bound.

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What are Important Terms and Clauses in an Employment Agreement?

We are listing down the important terms and clauses which should be included in the Agreement. Though this list is exhaustive, an Employer or organization can always come up with some more terms and conditions to safeguard their interests as an Employer. 

  1. Parties– Parties shall include both the Employer and Employee and both must sign the document. 
  2. Effective Date– The effective date is the date from which the Agreement comes into force, in this case, the joining date of the Employee shall be considered as Effective date.
  3. Location of Work- The place at which the Employee shall be operational should be mentioned in the Agreement.
  4. Work Timings- The Agreement should clearly state the work timings and the working hours. 
  5. Job Description- The Agreement should mention the primary responsibility to be taken by the Employee and it must also include the description of job stated in the offer letter delivered to the Employee. The details of the department in which the Employee shall be working and details regarding his trainer/reporting head should also be mentioned.  
  6. Probationary Period- A probationary period may be agreed upon at the beginning of the employment. The time limit for a probationary period shall not exceed six months. In fixed-term employment, the probationary period shall not exceed half of the employment contract duration. During this period, employees are paid normal remuneration.
  7. Leave Policy-Leave policy should contain the details regarding the public holidays and paid leaves an Employee is entitled to within a year. 
  8. Notice Period- Notice period has to be provided for both Employer and Employee. Neither party should be allowed to terminate the Agreement abruptly, in case of immediate termination except upon breach of Agreement and reasonable terms the non-terminating Party should be entitled to compensation.
  9. Remuneration– The Agreement must specify the gross salary that is being offered to the employee. Any deductions made to the salary such as tax, insurance, etc. must be specified in the contract. The method of payment of remuneration must be mutually agreed upon by both parties. 
  10. Term-Every Agreement needs to have a term and in case of employment. Generally, Employers keep fixed terms for the Employees. In most cases, it is for a year but is subject to renewal. 
  11. Termination– Termination is a right for both the Parties. The grounds on which Agreement can be terminated should be clearly mentioned. 
  12. Arbitration– In order to avoid ambiguity in case of disputes arising out of this Employment Agreement or employment in general parties should specify whether to go for arbitration first or not. There has to be mutual consent of both the parties in order to reach an amicable settlement which can be made possible by having a well-structured Arbitration clause.
  13. Jurisdiction– By including a Jurisdiction clause, the parties to the contract may clearly specify the judicial court or forum which will have the right to resolve the legal dispute between the employer and employee in relation to the Employment Agreement. A governing law clause in an Employment Agreement sets out the choice of law of the parties to the contract.  Laws relating to employment vary from state to state and hence it is advisable to state the set of governing laws clearly in the contract.
  14. Non-disclosure And Confidentiality-No Employer or organization want their sensitive data like trade secrets, financial information, clients details etc. to be out in public or amongst the competitors. It is important to have a Non-Disclosure and Confidentiality clause in the Employment Agreement in order to bind the Employee from disclosing the information.  In the case of officials at senior level or employees exposed to secret data of the organisation, separate Non- Disclosure Agreement can be executed.
  15. Intellectual Property Rights- Every organization puts a lot of effort into training the Employees, and in turn, they provide a plethora of output in terms of crucial business data. This data is the intellectual property of the organization and should not be misused by anyone, in order to prevent this misuse, the Agreement needs to have a clause stating that the Intellectual Property created at Employer’s premise and by using Employer’s infrastructure shall belong to the Employer.
  16. Non-compete Clause

This clause restricts the Employee from opening a similar business or joining another organization with a similar business of that as an Employer for the time period provided within the clause. 

How to Execute the Employment Agreement? 

An Employment Agreement has to be executed in two identical copies, one each for both Employer and Employee. 

Is Employment Agreement Valid in India?

Employment Agreement has not been defined anywhere in the Indian Contracts Act. Still, it is legally valid in India as far as it does not impose any unreasonable restrictions on the Employee. Section 27 of the Indian Contracts Act renders an Agreement in restraint of trade void only to the extent it restrains the trade. Therefore, there is not an absolute restriction and is intended to only apply for partial restrictions. During the term of employment, the Employer has an exclusive right on the services of the Employee.

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Is it Mandatory to Get the Employment Agreement Notarized?

An Employment Agreement need not be notarized by a public notary but stamp duty has to be paid on the same. Stamp duty rates can be checked in the schedule of the applicable Stamp Act as it differs from state to state. 

Are There Any Laws for Regulating Employment? 

Employment policies such as leaves, maternity leaves, working hours, etc.  are governed by the applicable Shops and Establishment Act. Other relevant laws that govern various aspects related to employment are Factories Act,1948, The Maternity Benefit Act, 1961, The Payment of Gratuity Act, 1972, etc. 

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Karan Dave
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Karan Dave

Karan Dave is a seasoned writer associated as a content expert with Legalwiz.in. He has blended his interests in business solutions and starup economy with the writing capabilities to provide resourceful information for varied audiences.