As India is advancing issues between an employer and an employee has also been increasing. Although Government has enacted various laws to strike a balance between an employee and employer, problems still tend to arise. Therefore, Employment Contracts are formalized to protect both parties involved from any indiscretions towards each other.

Before we try to understand – what is an Employment Contract or what it entails or which Act governs it, it is important that first, we figure out what is the difference between an agreement and a contract.

An agreement is a formulation of the understanding, aims and arrangements reached between the two or more parties related to the rights and duties and future performances.

Whereas, a contract is a particular type of agreement (oral or written) that is enforceable in the court of law and is legally binding by its set terms and elements.

An Employment Contract is a two-sided agreement for the remuneration and exchange of service for an agreed duration of time.

Essential features of an Employment Contract are:

  • offer/appointment details (acceptance of employment, office address of the employer, reporting senior)
  • term (period) of employment (if any)
  • working hours
  • job description and primary responsibility
  • details of remuneration (base salary, incentives, bonus, provident fund, gratuity)
  • payment terms
  • deductions
  • conditions related to confidentiality
  • rules and regulations related to intellectual property
  • termination conditions (termination without cause, resignation, termination for cause)
  • governing law, jurisdiction, and arbitration

Essential Elements of Employment Contracts

Offer/Proposal – As per Indian Contract Act, 1872, an offer is –

“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”

Acceptance – As per Indian Contract Act, 1872, acceptance is –

“When the person to whom the proposal is made signifies his assent to the person making the offer, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”

Mutual/ Free Consent – As per Indian Contact Act, 1872, mutual/free consent is –

“Consent is said to be free when it is not caused by

  • coercion, as defined in section 15, or
  • undue influence, as defined in section 16, or
  • fraud, as defined in section 17, or
  • misrepresentation, as defined in section 18, or
  • mistake, subject to the provisions of sections 20, 21 and 22
  • Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.”

Legal Purpose – As per Indian Contract Act, 1872, –

  • “An agreement not enforceable by law is said to be void;
  • An agreement enforceable by law is a contract;
  • An agreement which is enforceable by law at the option of one or more of the parties  thereto, but not at the option of the other or others, is a voidable contract”

Consideration – As per Indian Contract Act, 1872, Consideration is –

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;”

Competence – As per Indian Contact Act, 1872, competent party is –

“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”

An Employment Contract is a lawfully binding document. Reasonable constraints in the contract are fair, and generally, they do not lead to any legal problems. Hence, the employment contracts ensure that all the conditions of service are explicitly laid down and properly understood by both employee and employer.