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Essentials of an Employment Agreement

By May 19, 2020 No Comments

A. INTRODUCTION:

An employment agreement is a legally binding contract which lays down the terms and conditions of employment and establishes an employer-employee relationship. An employment agreement clearly details the roles, responsibilities and obligations of the employer and the employee along with various other terms and conditions. The labour laws do not explicitly mandate the issuance of appointment letters or the entering into of employment agreements but the Shops & Establishment Acts (“S&E Acts”) of a few states in India such as Karnataka mandate that an employer shall issue an appointment letter. As a matter of practice most employers issue employment/appointment letters and execute employment contracts capturing the terms and conditions of the employment in detail.

B. IMPORTANT CLAUSES IN EMPLOYMENT AGREEMENTS:

1. Roles and Responsibilities:

All the roles and responsibilities of the employees shall be clearly defined by the employer in the employment agreement, so as to ensure that the employer and the employee are on the same page with respect to what is expected from the employee. The roles and responsibilities shall not be ambiguously drafted.

2. Confidentiality and Non-Disclosure:

A confidentiality clause under employment agreements is incorporated to ensure that the information which is confidential to the employer is not subjected to unauthorized disclosure and dissemination to any third party by the employee. Through this clause, an employee is mandated to take steps to ensure that information which is confidential to the employer is not disclosed, except when to the extent, such disclosure is mandated under any law in force. This clause provides protection to information which is proprietary and confidential in nature to the employer and restricts the employee from disclosing such information to any other party. Such terms may also include requirements for personnel to return all confidential information and material to their employer at the time of termination of their employment.

In Burlington Home Shopping Pvt. Ltd. vs. Rajnish Chibber, a restraint was placed by the Delhi High Court on the use of the client/customer list on any business including the mail order business, which was included in the database of the petitioner by the Delhi High Court.[1]

In Diljeet Titus vs. Mr. Alfred A. Adebare and Others, the defendant was working at the plaintiff’s firm. The defendant was an advocate and upon termination of his employment, he took away certain important confidential business data such as various proprietary drafts and clients list, which belonged to the plaintiff. It was contended by the defendant that the defendant was the owner of the data and had a copyright over the particular data, as it was worked upon by him during the course of his employment. This contention of the defendant was rejected by the Delhi High Court and it was ruled that the information belonged to the plaintiff and the defendant was restrained from using such confidential information, which was illegally taken away by the defendant. It may be noted that the defendant was not restrained from carrying on a similar service, but the Delhi High Court restricted the defendant from making use of such confidential information.[2]

The provisions of the Indian Penal Code, 1860 and the Information Technology Act, 2000 provide for penalties with respect to the breach of confidentiality and unauthorized disclosure. Employers may also seek remedies under Section 66 (hacking), Section 43 (causing damage to computer systems), Section 65 (tampering with computer source document), Section 66E (punishment for violation of privacy policy) of the Information Technology Act, 2000 with respect to breach of confidentiality and disclosure against the employee.

3. Non-Solicitation:

A non-solicitation clause is incorporated in employment agreements for the purpose of preventing the employees or the former employees from engaging in any business activities which would be against the interest of the employer. This clause restricts and prohibits the employees from engaging with the other employees or the clients/customers of the employer for the employee’s personal gain, during the employee’s term of employment or post such employment. This clause is incorporated to protect the business interest of the employer.

In Embee Software Private Limited vs. Samir Kumar Shaw, it was held by the Calcutta High Court that ‘acts of soliciting committed by former employees take such active form that it induces the customers of the former employer to break their contract with the former employer and enter into a contract with the former employee, or prevent other persons from entering into contracts with the former employer cannot be permitted’.[3]

4. Non-Compete:

A non-compete clause is incorporated in an employment agreement to ensure that the employees are restricted from entering into competing businesses, during the term of their employment and after termination of their employment. Section 27 of the Indian Contracts Act, 1872, states that “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” Further, Article 19 (g) of the Constitution of India lays down clearly that every citizen has the right to practice any profession, trade or business. However, this clause is usually incorporated in employment agreements by the employers so as to protect the confidential information and trade secrets of the company. As it is considered to be a settled matter that the employees can be restricted during the course of their employment, from entering into any businesses or indulging in any activities which compete with the business of the company, the question arises as to how restrictions can be placed on employees post their termination of employment.

In Kumar Apurva vs. Valuefirst Digital Media Pvt. Ltd. the court restrained the CEO Mr. Kumar Apurva from carrying on any activity, which is competitive to the company, and also from soliciting, interfering with, disturbing or attempting to disturb the relationship between the company or subsidiary and third party, including any customer or supplier of the company or subsidiary.[4]

In Ozone Spa Pvt. Ltd. vs. Pure Fitness & Ors., the court restricted the defendants from establishing, running or setting up any competing business in any area that falls within a range of 4 kilometers from the premises of the plaintiff. Although, Section 27 states that all agreements in restraint of any profession are void, so long as an employee does not have the motive to cheat, mistrust or cause irreparable loss to the company, trade or business. Hence, reasonable restraints are permitted and they do not render the contract void.[5]

Therefore, the employers usually place reasonable restrictions with respect to this clause, so as to ensure the protection of the interest of the company as well as that of the employee.

5. Term and Termination:

The labour legislations in India with respect to termination depend on various factors such as the nature of the establishment, the location of the establishment and the category of employees, being either workmen or non-workmen. The termination of workmen is regulated by the Industrial Disputes Act, 1947 and the termination of the non-workmen category is regulated by the S&E Acts of the respective states. The state-specific S&E Acts, provide the term of notice period to be served upon termination of employment and the severance payments, which would be payable to an employee upon termination.

An employee can voluntarily terminate the agreement, by way of tendering his/her resignation. The clause also mentions the period of notice to be served by the employee, upon the termination of employment and shall specifically mention the terms and obligations to be complied with by both the employer and the employee upon termination. Employment can also be terminated with cause and certain causes for such termination could be a breach of the terms as laid down in the agreement, misrepresentation, fraud, misconduct, non-performance of obligations and duties, etc. Any such termination should be preceded by a domestic enquiry following the principles of natural justice. A full and final settlement will have to be done by the employer by making payment of all the statutory and contractual dues to the employee.

C. CONCLUSION:

Considering the aforesaid, it is advisable that employment agreements shall be entered into between the employer and the employee and shall lay down clauses stating the terms and conditions of employment, during the course of employment and post termination of employment of the employee. Employment agreements provide for the roles and responsibilities of the employees and a clear cut understanding to the employee about what is expected from him/her during the course of his/her employment and post termination. Most importantly, an employment agreement provides protection to the business, by incorporation of clauses such as confidentiality, non-compete and non-solicitation. These restrictive clauses play an important role in providing protection from unauthorized disclosure of information, solicitation or taking away of existing employees and clients and from entering into or setting up of any competitive business which would affect the business of the employer. In general practice, employers usually provide an appointment letter to cover the probation period and once an employee becomes a permanent employee, an employment agreement is entered into between the employer and the employee.

Authors: Anita Dugar, Senior Associate; Kriti Sanghi, Associate

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) anitadugar@samistilegla.in (ii) kritisanghi@samistilegal.in.

[1] MANU/DE/0718/1995: 61(1995)DLT6

[2] 2006 (32) PTC 609 (Del).

[3] 2012(3)CHN250

[4] 2015 SCC Online Del 8360

[5] 2015 222 DLT 372

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