Employment Agreement

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Employment Agreement

An employment agreement is a bilateral agreement between the employer and the employee, which regulates and governs the rights, responsibilities, and obligations of the parties during the period of employment. These types of agreements are also known as employment contracts and are generally executed for a specific time period.

 The employment agreements generally cover topics like remuneration, working hours, termination period, and description of job. Since the employment contract is not always exhaustive, hence many terms and conditions, although not mentioned in the employment contract, are implied in nature. Hence, an employment contract can be both express and implied contracts. It can be generally inferred from the employer’s policy, official documents, or training manuals.

For example, if the contract of employment does not specify the conditions for the termination of an employee, then it is implied that employee has a lifetime-right to works as long as he is doing his job reasonably well or it is implied that both employer and employee will be honest and fair with each other.

Parties to an Employment Agreement

The parties to the employment contract are employer and employee, and it is a legally binding agreement that is designed to give both parties security and protection.

Purpose of an Employment Agreement

An employment agreement is necessary for ensuring certainty, protection, and security. From the perspective of the employee, the employment agreement gives them the security that their work is governed by specific terms and conditions and that their services cannot be terminated whimsically. Moreover, employee contracts are always in compliance with the applicable law and hence are typically tilted towards the employee.  

The employee is aware of his jurisdiction of work. For the employer also, security and protection are there that the employee is aware of the duties and obligations and will comply with the stated terms. 

An employment contract helps in regulating the conduct of the employee. It helps in enforcing the company’s policies and disciplinary codes. An employment contract removes ambiguity by clearly specifying the terms and conditions, duties, and obligations of the parties. Thus, in the situation of conflicts, the employment contract acts as a guiding force in resolving disputes.

Contents of the Employment Agreement?

While there can be numerous contents in an employment contract template, here are some important clauses which must be there in an employment letter sample:  

  • Contract Details and defining the position of an employee: The contract should specify clearly the job requirements, duties, and obligations, name of the job position, working place and hours, commencement date, etc.
  • Duration of the contract: The employment contract must specify the time duration for which the employment contract will be applicable, further the type of contract, whether it is temporary or permanent or fixed.
  • Salary and remuneration: In the employment contract, there must be a clause specifying the salary and remuneration for doing the job, methods, and calculation of salary, overtime work commission, etc.
  • Perks, Benefits, and Premiums: In the contract, there must be clear details about the benefits and perks related to the job like health insurance, pensions, stock options, and housing and conveyance facilities.
  • Termination Clause: In an employment contract, there must be circumstances specified in which either party can terminate the contract with the further notice required.
  • Dispute Resolution: There must be mentioned the method for resolving the disputes, i.e., whether the dispute will be solved through arbitration or through courts.
  • Negative covenants: Under this, clauses like non- compete for clause, non -solicit clause. A confidentiality clause is to be included in the employment contracts to protect the interest of the employer. 
  • Employment Bond: It is an agreement wherein consideration of training and money spent by the company on imparting training, the employee will remain in the services till the contract period, and if he breaches such a contract, he is liable to pay a certain sum of money. However, the same must be reasonable, and there must be a consideration and free acceptance. Otherwise, the employment bond may be declared void.

How to Draft an Employment Contract?

Following points should be kept in mind while drafting an employment contract: 

For drafting the employment contract, it is necessary to choose the right employment contract template to formulate an employment agreement with the new employee. While drafting the agreement, it is necessary for major points to be inserted in the employment contract template: 

  • Give the title to the employment contract like the “Employment Agreement.”
  • Choosing the nature of contract/ Types of employment contract: Generally, there are three different types of employment contracts: 
    • Permanent employment contract, where the employee works regularly and is paid salary, it is ongoing until terminated by either party. 
    • Fixed-term contracts, which have an end or expiry date, after which the contract ends. 
    • Casual employment contracts, which are suitable for those scenarios, the working hours, and the regular working pattern of an employee, are not fixed.
  • Identify the parties: This includes the name of the company and name of the employee hired, address of the company, etc.,
  • Consideration and Benefits: The employment contract template must be designed in such a way that it clearly expresses that both parties are willing to exchange something. For example: “Whereas the Employer desires to obtain the benefit of the services of the Employee, and the Employee desires to render such services on the terms and conditions set forth. In consideration of the promises and other consideration, the parties agree as follows:”
  • Employment verification or Sample letter: Employment sample letter is a verification tool that the employee works here, his position, salary, etc. While drafting the employment contract, an employer must always keep in mind the impacts of the employment verification letter also as the bank credit, mortgage loan, and other things could be depended on this line.
    • Always include the location of the employment and designation of the employee. 
    • A proper work description should be provided. 
    • The taxation mechanism should be included in the contract. 
    • Termination based on fault, as well as termination simpliciter, should be provided. If the agreement is open-ended, then the retirement age may be provided. 
    • Provision for social benefits such as EPF. ESI etc. may be included in compliance with the applicable laws. 
    • Salary and other perks should be included. The currency of the salary also should be mentioned. 
    • The employee should be made subject to the company policies as changing from time to time. 

How to Negotiate an Employment Contract?

Further, don’t be afraid of negotiating the employment contract. If you are not convinced of the clauses of the contract, you must speak up. Employment negotiation is about finding a balanced path so that both parties are satisfied. While negotiating the contract, find out what things are important in your employment contract, be flexible, along with focusing on negotiating salary, also focus on other benefits, perks, bonuses, negotiate on inserting a just cause of termination and an opportunity to be heard, negotiate on good working conditions, suitable working hours. But at the same time, be reasonable, i.e., while protecting your interest, you must also consider the employer’s interest.

Benefits and Drawbacks of an Employment Agreement

The employment contract has several advantages. One of the benefits of employment contact is that it brings certainty and specificity in employment. It allows a platform for negotiations and helps the parties to cooperate. This feature is very useful for the clauses like employment bond, non- compete, trade secrets clause.

Another benefit is that this contract can be used for future reference in case the dispute arises with respect to employment.  Further, it helps in building the employer and employee relationship as duties of the employee are clearly defined, hence it provides the feeling of security, protection, and stability.

For the employer, it leads to the systematic working in the organization as everything from the duties and obligations to a period of the contract, salary, hours, and company’s policies are clearly mentioned in the employment contract. Hence this brings proper uniformity and organization in the working space.

There are some drawbacks to an employment agreement also. One of the drawbacks of the employment contract is that once the terms and conditions are fixed, then it becomes difficult for either party to renegotiate the terms. With the daily changes taking place in the labor market, employment contracts make it difficult to adjust to the changing environment quickly, and they are compelled to follow the contract.

Another drawback is that it creates an implied promise, to be honest, and fair with the employer. This implied contract has a binding effect on both parties and can lead to legal consequences in case of breach of this implied contract. Further, since it is not possible to cover each and every aspect of employment in the employment contract, hence some terms and conditions must be implied from the employer’s policy, manuals, hence sometimes employee misinterprets some terms and may or may not treat it as a part of the contract.  Another drawback is the legal expenses involved in making the employment agreement.

What Happens in Case of Violation?

An employment agreement can be breached(1) by both the employer and employee by working against what was mentioned in the contract. Generally, remedies for breach of employment contracts are very few. In case of breach by the employer like unlawful termination(2) or not paying the wages as provided in the contact, the typical remedy available to an employee is compensatory damages, i.e., to put the wrongfully dismissed employee back to the position in which he was if the employer had not breached the contract.  But other types of damages such as emotional or distress damages, mental agonies are not awarded in case of breach of the employment contract.

If the employee breaches such a contract, then also compensatory damages can be claimed by the employer. The compensatory amount can be calculated by taking out the difference between the costs of replacing the old employee with the new one. Further, in cases of breach of negative covenants like breach nonconfidentiality, employment bond, or non-competence, along with getting damages, the employer can enforce those negative covenants with the aid of the appropriate court provided that the negatives covenants are reasonable.

An employment contract is a legally binding agreement between the employer and employee. This contract specifies the job description, duties, working hours, salary, and other important clauses related to employment. The purpose of the employment contract is generally to give protection, security, and proper organization in the workplace.

One of the advantages of such a contract is that it brings certainty and specificity in employment. It allows a platform for negotiations and helps the parties to cooperate with each other. It acts as a guiding force in case of disputes.

But along with advantages, it has certain drawbacks like it makes rigid to renegotiate the fixed terms, enforcing of implied contracts, legal expenses involved.  The remedy available generally in breach of employment contract by either party is awarding compensatory damages, and further, if the parties are not satisfied with the sum, they can approach the higher authorities like courts.