Employment Contracts are often overlooked and are not reviewed thoroughly. India, at the moment, does not have a single comprehensive legislation that can act as a Code encompassing all aspects of Labour and Employment law. Both, the Central as well as the State Governments have the authority to legislate on the issue of Employment and Labour relations. Thus, in addition to the legislations enacted by the Central Government, each State Government has also passed their own State-specific laws as well as additional Rules based on the Central Acts. This has unfortunately resulted into a maze of regulations governing Employment & Labour law in India.
The Indian Contract Act, 1872 (“the Contract Act”) establishes the broad legal framework for Contracts in India. The Contract Act, largely grounded in the English Common Law principles, is applicable to the entirety of India, with the exception of the State of Jammu & Kashmir. It establishes not only the conditions under which promises made by contracting parties are legally enforceable, but also the governing principles for such contracts under Indian law.
Knowingly or otherwise, we enter into a variety of contracts on a daily basis, in all areas of our personal as well as professional lives and each such contract gives the contracting parties certain – often corresponding – rights and responsibilities. The Contract Act, thus, deals with the enforcement of these rights and duties pertaining to the parties in India.
The relationship between an Employer and an Employee has always been a source of extensive legal debate. In the recent past as well as in the present, this relationship can be seen constantly evolving and undergoing many changes. The Government has imposed several regulations with a view to strike a balance in the governance of this Employer-Employee relationship.
The scope and amplitude of such a discourse should be wide enough to encompass all aspects of Employer-Employee relationship, and the same should not be limited to merely contractual problems or employment discrimination.
Part I of the Series provides a general overview on Employment Contracts.
- The term ‘Employment Contract’ has not been specifically defined under any statute. However, it can be understood as a legally enforceable Employment Agreement based on the essentials of a Contract as per the Contract Act. It contains all the stipulations pertaining to the terms and conditions of the employment of a new/prospective employee.
- Section 2(h) of the Contract Act defines the term ‘Contract’ as an agreement enforceable by law.
- Section 2(i) of the Contract Act defines a ‘Voidable Contract’ as 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.
- Section 2(s) of the Industrial Disputes Act defines a ‘Workman’ as a person who is “employed to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward.” The definition, however, excludes the following persons:
- Persons employed mainly in a managerial or administrative capacity;
- Persons who, being employed in a supervisory capacity, draw a salary exceeding INR 10,000 (Approximately USD 140) per month; or
- Persons who exercise, either by the nature of the duties attached to the office or by reason of the powers vested in them, functions mainly of a managerial nature.
ESSENTIAL FEATURES OF EMPLOYMENT CONTRACTS
An Employment Contract is, essentially, a long-term arrangement between two parties for the exchange of services and remuneration. It is a type of Personal-Service Contract that the Courts consider as reflecting the social relationship between the Employer and the Employee, as opposed to other types of contracts. An Employment Contract, like any other contract in India, would include the following essential elements: offer, acceptance, consideration, competent parties, legal object, and free consent. The same are elaborated hereunder:
According to Section 2(a) of the Contract Act, a person is said to have made a “proposal” when he/she signifies his/her willingness to do or abstain from doing an act, so as to obtain the assent of the other person for such act or abstinence.
As per Section 2(b) of the Contract Act, when the person to whom the proposal is made signifies his/her assent thereto, the proposal is said to be accepted and such a proposal, when accepted, becomes a promise. Section 2(c) of the Contract Act defines that the person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”.
Section 2(d) of the Contract Act defines “consideration” as “the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promise to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”
According to Section 10 of the Contract Act, the existence of consideration is one of the essentials of a legal contract and, further, according to Section 25 of the Contract Act, “an agreement without consideration is void”.
4. Competent Parties
According to Section 11 of the Contract Act, only those persons who have attained the age of majority (under the law applicable to such person), who are of sound mind and who have not been disqualified by any law to why they are subject are and can be “Competent Parties” to a contract.
5. Lawful Object
According to Section 23 of the Contract Act, the consideration or object of an agreement can be considered to be lawful in nature unless –
- It is forbidden by law; or
- It is of such nature that if permitted it would defeat the provisions of law; or
- Is fraudulent; or
- Involves or implies injury to the person or properly of another, or the Court regards it as moral or opposed to the public policy.
The consideration or object of an agreement is said to be unconstitutional if it falls within the purview of any of the above-mentioned instances. Any agreement whose object or consideration is illegal and/or unconstitutional in the above manner is null and void.
6. Free Consent
According to Section 14 of the Contract Act, consent is said to be free when it is not caused by –
- Coercion, as defined under Section 15; or
- Undue Influence, as defined under Section 16; or
- Fraud, as defined under Section 17; or
- Misrepresentation, as defined under Section 18; or
- Mistake, subject to the provisions of Sections 20, 21 and 22.
The essentials of an Employment Contract are similar to that of a General Contract. The Employment Contract in a way embodies a social relationship between the Employer and the Employee. The Employment Contract generally includes the job description, payment benefits, salary for the agreed time period, Termination Clause, notice period and all other terms and conditions of employment.
In India, Employment Contracts, just like any other contracts, have to be in accordance with the prevailing Labour Laws as well. The practice that is generally followed in India is that instead of drafting a separate Employment Contract, the Letter of Appointment serves as the Contract for Employment.
There are certain common issues pertaining to the Employment Contracts, the most commonly seen is that of a ‘Termination Clause’. Termination which is not in accordance with the terms and conditions set out in the Termination Clause will be regarded as unlawful termination. This is one of the most common point of dispute in an Employment Contract. The Disputes and other Clauses pertaining to the Employment Contracts shall be discussed in detail in Part II and Part III of the Series on Employment Contracts.
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