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Employment Contracts - Indian Perspective

14th May 2010
By Clark_Taylor in Legal
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A contract of employment is a bilateral agreement for the exchange of service and remuneration over a period of time. Employment contract is that form of contract for personal service which the courts recognize as expressing the social relationship of employer and employee, as opposed to the other relationships.

Essential features:
The essential features of a contract of employment are offer, acceptance, consideration, competent parties, legal object and free consent.

Legal provisions:
In the Indian Contract Act, 1872 there is no provision that an offer or its acceptance should be made with the intention of creating legal relation. But it is now accepted that "to create a contract there must be common intention of forming legal obligation." Employment contracts need not be written, it can be oral also. A written employment contract is preferable to avoid disputes at later stage. The employer and employee should enter into such a contract after getting acquainted with all terms and conditions of the employment provided in the agreement and must agree upon them in the same sense. The acceptance of such contract must be absolute and unqualified, be expressed in some usual and reasonable manner as provided under Section 7 of Indian Contract Act, 1872. The parties cannot accept a part of its terms which are favorable to them and reject the rest. The contract of employment should have free consent of both the parties and should not be caused by fraud, misrepresentation, coercion and undue influence. The promise to employ and be employed may be of short period but still it forms an integral part of contract.

A contract of employment also contains various other terms and conditions to which both employee and employer are bound. A breach of such terms and condition will repudiate the contract. The terms and conditions are regarding wages, status designated, place of working, timings, list of benefits to be given during employment, restraint of trade, if any etc. Another important condition is regarding the settlement of disputes between the employer and the employee. The terms and conditions must be provided to the employee before or at time of signing the agreement, so that he can understand the terms he is going to be bound by. After reading all the terms and conditions of the agreement, it should be signed by both the parties. A subsequent notification will indeed amount to modifications in the original contract and will not bind the other party unless he has assented thereto. In a normal contract the negotiating parties stand at equal footing. But in case of employment contract, the employee is always at the receiving end and necessarily at the mercy of the employer and cannot be expected to possess the equal bargaining power. Normally, all employment contracts contemplate the employee not to divulge any confidential information and trade secrets. An employee has a duty even after termination to protect the trade secrets and other confidential information of business until and unless they are made public. Similarly, the employer is under obligation, it will give to the employee sufficient work to enable him to earn what the parties have contemplated he should earn.

Section 27 of Indian Contract Act, 1872 declares in plain terms- "Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, to that extent, is void." The above does not mean an absolute restriction and are intended to apply to a partial restriction. During the period of employment the employer has the exclusive right to the service of the employee. But a restraint operating after the termination or retirement is for freedom from competition from a person who no longer works within the contract. And holding the same is declared void by a court of law. The reason for upholding restraint of trade against employee is to protect the proprietary rights of the employer i.e. the trade secrets or trade connections but it is not available if directed to prevent exercise of extra skill or knowledge acquired by the employer during the course of employment.

Termination covenants
Any question as to duration and termination of employment depends upon the intention of the parties. It is open to the employer and the employee at any time to terminate the contract by mutual agreement. An employee is entitled, on the wrongful dismissal, to the damages for loss of earning and other benefit he would be entitled to, had this employment been terminated according to contract and if no period is fixed for termination he is entitled to reasonable, and for loss of earning for such a period. In any other case, damages are to be measured by the amount of remuneration which the employee has been prevented from earning by reason of wrongful dismissal including the value of any other benefit he is entitled by virtue of his contract. An employer is also entitled to interest or reasonable compensation on the event he is not paid due salary. Moreover, if an employee fails to discharge his duties properly, he is obliged to indemnify his employer for loss. And where the employee is guilty of grave misconduct in his capacity as an employee, he may be dismissed without notice. Thus it can be concluded that employment contract is a contract of service between the employee and the employer to serve the latter fulfilling all terms and conditions provided in the contract. There are certain conditions, which become statutory responsibility of the employer and thus protect the employee in certain circumstances even without having been covered by the terms of an employment contract.

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