By Anshul Prakash (Partner), Parag Bhide (Principal Associate) and Abhimanyu Pal (Associate), Khaitan & Co.
Introduction
As Indian workplaces move from employer-governed structure towards one that embraces equal bargaining power, so will the nature of disputes that arise as a result of diverging interests, which the employer and employee would seek to protect in their interaction with each other. While the legal framework addresses these disputes, it is imperative that such organisations would seek to safeguard themselves by executing robust documentation with the employees, so as to avoid any future disputes.
The employment-related documentation can be divided into three parts-pre-employment, employment and post-employment documentation. This article seeks to analyse aspects of employment documentation and to clarify the legal position on certain covenants which are common in employment documentation in India.
Pre-employment documentation
The employment documentation usually starts with an offer letter. Such an offer letter is a formal job offer to a successful candidate and contains a brief description of the terms and conditions of employment such as designation, the amount of compensation, place of employment, probation period, date of joining, etc. Indian employment and labour laws do not mandatorily require an employer to issue an offer letter. However the issuance of an appointment letter is mandated in certain states. Nonetheless, it is an accepted practice in India amongst organisations to provide an offer letter. Background verification checks may be incorporated as an integral part of the recruitment and screening process in an organisation across all levels. The offer letter should expressly state that the employment with the employer shall be subject to a duly completed reference and background check.
The intense competition prevailing in India's job market today has resulted in candidates providing fabricated profiles and hiding or embellishing their skills or experience to appear more appealing to the recruiters. In such a scenario, background verification checks are imperative as it could help in maintaining integrity in an organisation, protecting confidential information, mitigating any legal issues related to potential employee exit due to negligent hiring, reducing workplace crimes such as theft, harassment, embezzlement, etc. Albeit the task of conducting a comprehensive background check can be a challenging and cumbersome process, it is to protect the employer and ensure the safety and security of the employees at the workplace. In this context, background verification is fast becoming an industry norm in respect of potential candidates proposed to be hired for any role in an establishment.
Such background check policy may however raise concerns of violation of the right to privacy under Article 21 of the Constitution of India. Therefore, the offer letter should be accompanied by a consent letter which will be executed by the employee along with the offer letter, on the letter head of the employer. By execution of such consent letter, the employee shall provide the consent to the employer to conduct a background verification check.
Employment Documentation
Pursuant to execution of the offer letter and conducting the background verification check and on the joining date, the employer should execute an appointment letter (or an employment agreement) with the employee on the letter head of the employer. Such appointment letter shall set out the detailed terms and conditions of employment of the employee. The terms and conditions in the appointment letter may include the following:
a) job description;
b) designation;
c) place of work;
d) probation period;
e) duties of the employee;
f) remuneration and bonus;
g) benefits;
h) leave entitlement;
i) term of the employment;
j) conditions for termination of employment - resignation, termination for misconduct, termination without cause (termination simpliciter);
k) retirement age;
l) restrictive covenants such as non-solicitation;
m) confidentiality, assignment of intellectual property, etc.
The employer should also ensure that the provisions set out in the appointment letter such as leaves, notice period for resignation or termination, etc. must comply with applicable laws, including but not limited to, the Shops and Establishments laws of the relevant state.
Enforceability of Certain Employment Covenants:
While employment agreements may contain several covenants, all of them may not be enforceable under Indian law. We have analysed below key employment covenants and legal position under Indian law:
a) Non-competition:
Non-compete covenants are governed by the Indian Contract Act 1872 ("Contract Act"). As per the Contract Act provisions, any agreement which restricts a person from exercising a lawful profession, trade or business of any kind, is void to that extent. The only exception provided under the Contract Act is in relation to the sale of goodwill, where the buyer may restrict the seller from carrying on similar business within specified local limits. Indian courts from time to time have held that non-compete clauses operating beyond the term of contract would not be enforceable.
Therefore, non-compete clauses in the employment agreements will be enforceable only during the employment tenure, but not post termination of the employment.
b) Non-solicitation:
Non-solicitation clauses in the employment agreement obligate employees to stay away from poaching of other employees and customers of the employer post their exit from the organisation. Such covenants are not deemed as a restraint in trade under the Contract Act and therefore, Indian courts in certain cases have decided that such covenants may be enforceable. Therefore, the appointment letter may set out the non-solicitation restriction post the exit from the organisation, for a term which is reasonable. The former employer is generally put to strict proof to evidence of any breach.
c) Garden leave
In case of garden leave covenants, the employees are paid their full salary during the period in which they are restrained from competing. Indian courts have held that garden leave covenants post termination of the employment are in restraint of trade under the Contract Act. The reason is that the effect of garden leave covenants is to prohibit the employee from taking up any employment during the agreed period post the cessation of the employment. Therefore, the courts have held that obstructing an employee who is no longer in the employment of a particular employer from obtaining gainful employment elsewhere, is not fair and therefore, such covenants may not be enforceable.
However, in some cases, such garden leave covenants are effective only till the date of termination of the employment. For example, an employer instructing the employee not to attend office during the notice period, but such employee will be entitled to remuneration. These garden leave covenants may be enforceable. Therefore, the employer may set out a garden leave clause in the appointment letter, however, such garden leave clause should only be exercised during the notice period and not beyond that.
d) Recovery of training costs
The courts have considered the following factors when determining the reasonableness of training costs:
expenses incurred in training the employee; damage suffered by the employer if the employee joins a competitor; the opportunity cost of training an employee who has terminated his employment prematurely; and the time left for the employee to fulfill the term agreed in the appointment letter.
Therefore, if the employer has incurred expenses in providing training to an employee, such covenants can be enforceable and employer may be in position to claim the actual training costs or reasonable compensation. However, damages may not be awarded by the courts. Keeping in mind the aforesaid and in the event the employer is imparting training to an employee and is incurring costs towards it, the employer may set out a provision in the appointment letter, related to recovery of training costs over a period of time.
Documentation to be executed upon cessation of employment
Termination of employment could be due to voluntary resignation by the employee, termination by the employer without cause (termination simpliciter), termination by the employer with cause (such as dismissal due to misconduct).
The employer should ensure that the terms of the resignation or the termination are recorded in writing by executing appropriate documentation on the letter head of the employer, to avoid any future claims from the employee. Such documentation would include and set out the provisions such as the final amounts payable to the employee at the time of resignation or termination, no claims pursuant to cessation of employment, return of the employer's property, adherence to post employment obligations such as confidentiality, non-solicitation, etc. By executing such documentation, the employer will ensure and signify the full and final release and discharge by the employee.
Conclusion
The above processes contain the optimum action steps and the considerations that an employer should keep in mind while recruiting employees in the organisation. The execution of the documentation as discussed in this article, may mitigate (or at least reduce) the future disputes, ensure clarity amongst employees and help create conducive working environments.