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Phone: +91 9811 253 529, +91 11 2338 7787

E-mail: info@fortunelegal.in

EMPLOYMENT CONTRACTS: CAUTION BEFORE YOU SIGN THE DOTTED LINE

​​Introduction
Employees are people who work for their employer and offer their services through their mental and physical skills in return for some compensation, usually monetary. Employers to be on safer side and to avoid any future problems prefer to get employment agreement signed by the employee containing the terms and conditions. Employment contract is legally binding contract consisting of employment conditions, term of the contract, commencement of the employment, probationary periods, termination, rights and duties of the parties, confidentiality, financial understanding, dispute resolution mechanism etc. for better relationship of an employer and its employee.

Probation Period
Before the employer and the employee enter in to an employment contract, it is usual for the employer to require the employee to complete a probation period for a few months. This period is used to determine if the employee fits in well with the requirements of the job, if the employee possesses the necessary skills to perform the essential tasks, and if the employer believes the employee to be capable and deserving of the job post. If the employee does not fulfill the requirements or does not fit well in the company, the employer can terminate his employment without needing to provide a notice or a cause, or severance pay. And if the employee passes the probation period, the employer and employee enter in a contract providing security to the employee and laying down other terms and conditions to protect the rights and duties of both the parties.

Restrictive Agreements
Employment agreement contracts often include restrictions or covenants clauses which protects the employer from circumstances that could cause the company to lose business, employees, trade secrets, or any other confidential information which may result to be adverse for the company. These usually contentious clauses are non competition, non solicitation, confidentiality and non- poaching agreements. 

Non- competition Restriction:

Some employers require the new employee to add a non- competition clause in the employment contract. This restriction restricts the employee from using any information learned during employment in subsequent business efforts, or perform any such activity or action which may harm the business of the company or may pose a potential risk to the business in any way. Employees benefit from the non- compete agreements because they receive something of value in return for signing the non- compete.

However, courts generally disapprove of non- competition clauses in the employment contract as it limits the employee’s right to earn a living. Non- competition agreements are closely scrutinized in the court system. The courts interpret the employee’s right to make a living as more important than enforcing the terms of a non- compete.In order to be considered valid, a non- competition agreement must be supported by consideration at the time it is signed, protect a legitimate business interest of the employer, and be reasonable in scope, geography and time.

Non- solicitation of Employees and Customers
A non- solicitation clause prevents an employee or a former employee from indulging in business with the company’s employees or customers. Non- solicitation clauses are usually defined for a limited period of time. The logic behind this clause is to stop the employee or the former employee from taking all the customers and clients when employment is terminated.

However, is the non- solicit clause becomes too overreaching or seems to be exploiting the rights of the employees for example if the duration of the clause is too long or the definition of who you are not allowed to solicit with is too wide, etc., the courts may amend the non- solicit clause.

Confidentiality of Trade Secrets
The employer and the employee enter into an agreement that all the confidential information learned by the employee during the course of employment should not be disclosed or discussed with a third party, unrelated to the company. “Trade secret” is a type of confidential information that has exceptional value to a business. Disclosure of the same might cause the business loss in some way.

However, if the non- disclosure or the confidentiality clause in the employment contract restrains the right of trade of the employee, the clause will be deemed void unless proved reasonable.

Non- poaching Agreement:
Unlike other restrictive clauses or agreements, a non- poaching agreement is between two employers. In this kind of agreement, the two employers agree not to solicit or poach the employees of their direct competitors. It lays down guidelines for lateral hiring so that the large amount of human capital invested by the former employer is not wasted.

Employment Related Disputes
As we stride towards an economy based on knowledge and professional skills, there has been an emergence of a new class of labour- “White Collar” workers. A “white collar” worker is a person who perform professional and managerial tasks or administrative functions in contrast to a “blue collar” worker who performs manual labour. The literate “white collar” worker, who is aware of his rights, such as proper procedure for termination and proper remuneration, needs certain protection for the same; and the employer class needs protection of his rights, such as confidentiality of trade secrets to be maintained by the employee, etc. All this has added a lot of complexities, which give rise to disputes between an employer and his employee. These disputes arise at various stages of their relationship- i) pre- hired period, ii) during employment, iii) termination, and iv) post termination.

Pre- hire Period-
Disputes between the employer and the employee may arise even before the prospective employee has been hired by the employer or has joined the company. Instances where a new employee has joined the employment without properly terminating the agreement with his previous employer may lead to disputes which may entangle the new employer also. Situations also may arise where the employee has not fulfilled some post termination obligation or agreement regarding confidentiality, non- compete, etc. Technically, these disputes occur between the quondam employer and the employee, but there are numerous cases where the new employer is also dragged into litigation.

Also, many companies have a screening policy before they employ a new candidate to ensure that the new employee does not have a criminal history, does not have a history of breach of trust in his official or fiduciary capacity, or any such activity which may prove to be a potential threat to the company. Background checks are also conducted to ensure that the information provided by the employee is correct and no misrepresentation has been made.

During Employment-
During the period of employment, there may occur various disputes between the employer and the employee regarding breach of terms of contract, misbehavior or misconduct, insider trading, etc. All these kinds of disputes are broadly classified into two main heads-

Employment Related Disputes: This category covers ay indiscipline, breach of terms of contract, indulgence in criminal activities, under- performance, breach of the code of conduct, insider trading, which usually leads to disputes occurring between the two parties.

Disputes relating to Restrictive Covenants: This category is further categorized into two kinds, which are- non-compete and non- disclosure of confidential information. The non- compete restriction restricts the employee from engaging into any activity that might result as a potential competition to the company’s business. The non- disclosure restriction restricts the employee from divulging any confidential information or misuse such confidential information. Violation of any of the above restrictions, during the course of employment, would inevitably lead to a dispute.

Termination
Termination of employment is employee’s departure from the job. Termination of the employment may be voluntarily by the employee (such as resignation or retirement), in which case there is hardly any dispute which arises, or may be involuntary and terminated by the employer, which leads to potential disputes between the employee and the employer. In cases of involuntary termination on grounds of misconduct, breach of the employment contract, violation of restrictive covenants, under- performance, misbehavior, or any such breach of terms of contract, there, more often than not, occurs a clash between the employer and the employee. The employer when terminating the employment of the employee must keep in mind the statutory laws protecting the rights of the labour/employee. For example, if the termination is being done due to misconduct or misbehavior, the procedure would involve issuance of charge sheet, conducting an internal enquiry by an unbiased officer, framing of charges, followed by a show cause notice. This process is as per the principles of natural justice, giving some protection to the employee. And if the termination is found to be legitimate, the employer would need to serve the employee a 30 days’ notice or pay salary in lieu thereof.

Post- termination Period
Even after termination of employment, certain covenants in the employment contract restrain employees from doing certain activities. A breach of the post- termination clauses leads to disputes which are settled through resolve to courts or any procedure as agreed upon by the parties in the employment contract.

The employment contracts are a necessary part of today’s modern industrial era. Employment contract gives the employee a sense of security that his obligations and rights are laid down clearly and specifically before him. To the employer it gives a sense of security that the employee is fully aware of his duties and other terms and conditions. In case there is a deficiency in complying with any clause of the agreement by any of the parties, help of the judiciary can be taken.

Employment contracts differ from country to country, but in most of the countries the labour law favours the employee. Depending on the country, there are many laws governing the employer and employee relationship. Having a legally binding agreement avoids possibilities of misunderstandings between them and gives both the parties absolute clarity about their rights and obligations.