Why is an Employment Contract Important for a Small Business?

A transparent and legally compliant employment contract is essential for all business owners and managers in India to establish a firm platform for long-term business growth.
An employment contract, also known as an employment agreement, is a legal document that frames the terms and conditions of employment governing the working relationship between an employer and an employee.
This article outlines the important components of an employment contract, as well as its types and benefits.

What is an Employment Contract?

If you are wondering what a contract of employment is, it is a legally binding agreement that explains the terms and conditions of employment between an employer and an employee.
The employment contract drafting clearly outlines the job role and responsibilities, compensation, benefits, and other essential details in the contract. Also, it ensures that both parties have clarity on their rights and obligations.

Types of Employment Contracts

Employment contracts vary based on the job type and its requirements. The following are some common types of employment contracts that are practised in India:

Permanent Employment Contract

Permanent employment is one of the primary employment agreements that outlines the long-term relationship between the employer and employee. It should include the details of salary, benefits, job responsibilities, holidays, and the notice period.

The advantage of having a permanent employment contract is that it is helpful for employers to retain their employees and to maintain stability within the organisation. However, it also has disadvantages for an employer as it may limit flexibility in adjusting to changing business need or economic conditions.

Therefore, consider seeking legal advice from a qualified attorney when drafting a permanent employment contract to ensure that it follows labour laws.

Part-Time Employment Contract

Individuals who work for a company or an organisation part-time, typically less than 30 hours per week, are needed to sign a part-time employment contract. The contract is also similar to a full-time employment contract but with specific provisions related to work hours, pay rate, and benefits eligibility.

Fixed-Term Employment Contract

It is another type of employment agreement that clearly mentions the period for the employment relationship, as well as the start and end dates. This type of contract is commonly used for project-based work or seasonal positions.

For example, businesses in the tourism and food industries may hire additional staff during peak seasons like summer. If you are hiring an employee for a fixed time period, it is important that contracts clearly explain the duration of employment and other essential details.

Temporary Employment Contract

Temporary contracts are often used to fill the gap of an employee’s absences or to meet short-term business needs, such as substituting for employees or managing increased workloads during busy seasons. These contracts specify the duration of employment and may not include benefits that are offered to full-time employees.

Remote Work Agreement

It is a type of employment contract that frames the terms and conditions for employees working from a location other than the employer’s office. This remote work contract includes the work hours details, communication protocols, and data security measures to ensure productivity and compliance with company policies.

Other than these, there are many employment contracts, such as freelance employment contracts, zero-hour contracts, casual employment agreements, and agency worker contracts. Each type of contract has its own purpose and explains the employment terms for both of them.

Benefits of an Employment Contract

Having an employment contract provides more benefits for both the employers and employees. The following are some of its benefits:

• Clarity on Job Expectations: It explains the employee’s responsibilities and duties, as well as the employer’s expectations.
• Protection of Rights and Responsibilities: It protects the rights and responsibilities of both parties, ensuring that each knows what is expected of them during the employment period. This can help prevent misunderstandings and disputes in the future.
• Stability: It provides stability for both the employer and employee, outlining the terms of the agreement and providing a sense of security. Additionally, it sets clear boundaries between the two parties.
• Legal Contract: A legal contract also serves as a reference point in case any issues arise that need to be resolved through legal means. It ensures that both parties know the consequences of a breach of employment contract as outlined in the agreement.

What Clauses Should be Included in an Employment Contract?

When drafting an employment contract , the employer should include all essential clauses to prevent misunderstandings or disputes in the future. A clear employment agreement format typically includes the following sections:

• Job Description: Explain the role and responsibilities, team/department assignment, and skill requirements.
• Compensation and Benefits: It details the salary, bonuses, benefits, and any other forms of compensation offered by the employer. These clauses play a significant role in employment contract drafting, which outlines the financial aspects of the employment agreement and ensures that both parties are clear on what is expected in terms of payment.
• The Relationship Between Parties: The employment contract should clearly outline the relationship between the employee and the employer. In addition, it falls into three categories. They are at-will employment, binding authority, and no exclusivity.
• Duration of Employment: The contract should include the starting date, employment status, type, location, end date, and opportunities for extension, along with a contingency plan in case of emergencies.
• Termination Protocols: Termination protocols are very important clauses in drafting, and they must be clearly defined, including reasons for termination and notice periods.
• Resignation: The resignation policy should be outlined clearly to ensure a smooth transition for both parties. It should include the procedure for giving notice, any required documentation, and any potential consequences for not following the policy.
• Termination “For Cause”: “For cause” termination occurs when an employer terminates a contract prematurely due to employee actions, such as intentional misconduct, breach of employment contract, job abandonment, or felony charges and the termination process should include steps for conducting a fair investigation and providing the employee with an opportunity to respond before making a final decision.
• Termination “Without Cause”: An employer ends an employee’s contract without a reason, typically involving a notice period and severance pay.
• Death or Disability: When drafting the employment contract, it is essential to focus on clear guidelines for handling situations where an employee passes away or becomes disabled.
• Confidentiality: Every organisation and company need to maintain its business confidentiality. Therefore, employment contracts outline company practices for protecting trade secrets, business information, and intellectual property and may require employees to sign a Non-Disclosure Agreement.
• Dispute Resolution: When disputes arise between employees or between an employee and the organisation, it is crucial to have clear procedures for resolving conflicts fairly and promptly.
• Religious and Educational Needs: The employment contract includes a provision for religious practices and educational needs, ensuring that employees can practice their beliefs and pursue their education without discrimination or hindrance.

Download our free employment contract template along with a terms and conditions of employment sample.

(Download Here!)

Difference Between Employment Contract and Appointment Letter

Many MSMEs are unclear about the difference between an appointment letter and an employment contract letter, which can lead to confusion and potential legal issues down the line. It is important for businesses to clearly outline the terms and conditions of employment in both documents to avoid misunderstandings between the employer and employee.

Employment Contract

An employment contract letter is a legally binding agreement that defines the terms and conditions of the relationship between an employer and an employee.
The terms and condition of employment contract letter in India should include the following data:

• Duration and terms for renewal
• Compensation structure, bonuses, and salary increases
• Worked hours, vacation time, and holidays
• Pay and benefits
• Duties and job responsibilities
• Confidentiality and non-compete clauses
• Notice periods and termination processes
• Dispute resolution methods

Appointment Letter

An appointment letter serves as formal confirmation that the individual has accepted the job offer, and it outlines the basic important terms and conditions of employment.
The appointment letter includes the following details:

• Employee and employer names and addresses
• Hire date and employment duration (if applicable)
• Job title and responsibilities
• Compensation details (salary, benefits)
• Probation period (if any)
• Work hours and leave policies
• Code of Conduct and confidentiality
• Termination clauses

Conclusion

Employment agreements are regulated by the Indian Contract Act of 1872, along with other labour laws. For small businesses, having well-defined and legally sound employment contracts is essential to ensure clarity and protect the rights of both employers and employees.
If you are unsure how to create an employment contract, seek support from a legal professional at Contract Bazaar to ensure your business complies with all relevant laws and regulations.

Written by Mounika Legally Vetted by Advocate Siddharth Bansal