Necessity of Contracts of Employment

“…..On July 16, 2004 when he was stationed in Hong Kong and was still serving with the Company an obvious breach of employment contract was committed by the appellant. Thus, the Plaintiff Company on May 28, 2005, filed a Civil Suit (OS)...”[1]

“Any breach of contract in such a case is enforced by a suit for wrongful dismissal and damages. Just as a contract of employment is not capable of specific performance similarly breach of contract of employment is not capable of finding a declaratory judgment of subsistence of employment.”[2]

“Termination or dismissal of a pure contract of master and servant is not null however wrongful or illegal it may be. The reason is that dismissal in breach of contract is remedied by damages.”[3]

A perusal of the above 3 paragraphs which are excerpts quoted from landmark cases of Indian Employment Law will reveal two things they share in common:

  1. A contract of employment existed between employer and employee.

  2. There was a breach of the aforementioned contract of employment resulting in litigation.

Naturally, it may appear that all employees and employers must then have a valid written contract of employment so that their respective interests are protected. However, according to Indian Law there exists no such compulsion. The law indicates that there is no need for a contract of employment to exist between the employer and employee. Before delving into why that is problematic, let us understand what typically forms a part of a contract of employment.

A contract of employment, much like any other contract described under the Indian Contract Act, 1872 is a bilateral agreement. The prerequisites of a valid contract like offer[4], acceptance[5], consideration[6], competent parties[7], legal object[8]and free consent[9] are all necessary for the formation of an employment contract. There are several laws governing the relationship between the employer and employee besides the Indian Contract Act, 1872, Specific Reliefs Act, 1963, The Industrial Disputes Act, 1947, the Factories Act, 1948, Trade Unions Act, 1926, Minimum Wages Act, 1948 and nearly 50 other national legislations to govern the employment sector. This list is not inclusive of the 200 other State legislations like the Karnataka Shops and Establishments Act, 1962.

Any contract of employment must be made with the provisions of these laws in mind although the labour laws in India have been criticized as being overly inflexible. [10]

Acts that regulate conditions of work are:

Factories Act, 1948

The Contract Labour Act (Regulation and Abolition) Act, 1970

Shops and Commercial Establishments Act (in various states)

Acts that regulate Wages and Remuneration are:

Minimum Wages Act, 1948

Payment of Wages Act, 1936

Acts that provide social security are:

Employees Provident Fund Act, 1952

Workmen’s Compensation Act, 1923

Employees State Insurance Act, 1948

Acts that provide employment security and industrial relations are:

Industrial Disputes Act, 1947

Industrial Establishments (Standing Orders) Act, 1946

These are among many of the legislations that govern the employment sector and contracts of employment that are created need to adhere to these regulations as and when they are applicable.

Typical clauses in a contract of employment include the details with respect to a person’s employment. In other words, the terms and conditions which need to be abided by both the employer and the employee. These include but are not limited to the following:

Rate of pay

Hours of work

Duties pertaining to the job

Benefits provided

Job procedure involved

Termination requirements if employee/employer wishes to end the contract

Notice clause must include certain details such as the amount of notice period to be served by the employee and compensation to be paid upon such termination

Grievance procedures in case of wrongful dismissal

Overtime requirements and extra pay

Confidentiality and nondisclosure clauses (Signing a nondisclosure agreement means that disclosure of company information or misuse of that information will lead to a contract breach. The Indian Penal Code and the Information Technology Act, 2000 provides for Criminal prosecution and imprisonment or fine (or both) as consequences for breach of confidentiality and disclosure provisions. The Information Technology Act, 2000 under Section 66(e) talks about the punishment for violation of privacy policy and various other related acts such as tampering with computer source documents (Section 65), hacking (Section 66) etc.)

Length of the employment term and leave (along with the date of hire and date of termination)

Non-compete clauses (These cannot be enforced in India after the term of employment is completed. This is described in section 27 of the Indian Contract Act. According to this, a contract whose object is restraint of trade is prima facie void. However, restrictive covenants applicable during the employment can be questioned on the ground that they are unreasonable. [11]In the famous case of Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co. Ltd. (1894), it was held that both general and partial restraint of trade are prima facie void. Article 21 of the Constitution of India also guarantees the right to livelihood.)

Non-solicitation clauses are usually included in a noncompete and will be governed by the same rules.

In India, there is no compulsion for a written agreement to exist between an employer and employee. According to the Indian Contract Act, 1872 even an oral agreement can have legally binding effects and can be considered to be contractual. However, it is a lot more difficult to prove an oral agreement in a court of law and hence written agreements are preferred in the organized sector. In saying that, it must be noted that most contracts of employment are framed by the employer and will more often than not, work in their favour. It is now commonplace to include restrictive covenants in contracts of employment. In order to protect the employer, these covenants circumscribe the permissible range of actions of the employee. Damages could be provided for breach of a contract of employment. These are the reparations enforced by the court that the party wronged is entitled to in case any terms of the contract are not kept.

When the employer breaches the contract of employment:

Employees generally get compensatory damages if the employer breaks an agreement and it is proved in court. This implies the person in question gets monetary reparations equivalent to what in particular would have been gotten if the agreement was not broken. Typically, the employer is answerable for addressing out the full cost of the agreement.

When the employee breaches the contract of employment:

At the point when an employee breaks the contract, the employer likewise gets compensatory damages determined by deciding the expense to supplant the employee above what it would have cost for that person to complete out the agreement as initially concurred. In the event that the employee can be substituted with another who will accomplish the work for a similar value, the court will ordinarily give the employer limited damages.

Although it is clear that there are very many laws in place for the protection of the worker, the contract will typically be framed by the employer and it is the employee’s duty to be aware in order to protect themselves from exploitation.