Press Esc to close

Read employment contract carefully

Last updated: 09 August, 2011
Sudhakar Vishwanath, August 9 18:27 IST

Dotted lines: Once signed, its terms become binding on both the parties, there is no fixed termination date

Going through an interview process and being offered a job at the end of it can be highly exciting for many young people and reason enough to celebrate. But in their eagerness to have the process wrapped up quickly and get started on the job, they often tend to just cursorily go through an employment contract, sign and hand it over to the employer as a token of acceptance.

This could be a mistake because an employment contract governs the very basis of an employee-employer relationship. A wrong or misunderstood interpretation of the terms laid down could lead to avoidable heartburn on either side. It’s best to go through an employment contract carefully ahead of signing and handing it over.

So what should you expect to see in an employment contact? Well, the specifics might vary but you should know the basics. Let us first understand what an employment contract is. Under The Indian Contract Act 1872 - yes, it’s still in vogue! - a contract of employment is a bilateral agreement for the exchange of service and remuneration over a period of time. An employment contract is a form of contract for personal service and is recognized under the law as expressing a social relationship between an employer and employee.

An employment contract is established when an offer of employment is made and accepted.

All the terms of the contract need not be mentioned in the contract document; often, companies spell them out in a company handbook.

Any attachments to the contract, though, are part of the contract and therefore, enforceable. The essential features of a contract of employment are: offer, acceptance and consideration.

What you need to check for in an employment contract?

The term or length of employment: Broadly speaking, you can be employed by a company either as a direct or regular employee or under an employment contract. A direct employee will be offered a confirmation letter at the end of successful completion of the probation period. An appointment letter is just another name for an employee agreement. Once signed, its terms become binding on both the parties.

Employees hired on contract, on the other hand, are on a different footing. There are mainly two types of employment contracts: fixed and ongoing. In an ongoing contract, there is no fixed termination date.

A fixed term contract, on the other hand, provides a specific start date and termination date. The termination date could also be on completion of a specific project for which the employee has been hired. When you are on a fixed-term contract, the document you sign is legally called a contract for employment.

When you are being appointed as a regular employee, the document you sign is called a contract of employment or service. If the contract is a for a fixed or short period of time, it’s important that you check whether it provides for a right of renewal. If there is none and you happen to continue with the company beyond the specified term, your position becomes indeterminate. In plain language, you will find yourself in a sort of limbo. And that means many of the terms of the contract you had signed when you joined the company will not apply.

The job description:
The contract should provide your job title and the nature of work you are to perform. It’s advisable that both parties to the employment contract have a clear understanding of what is expected.

Office hours: The contract should specify your office hours, or shift timings if you are to be working on shifts.

Probationary Period: Ahead of offering a long-term or regular position, many employers would insist that an employee first successfully complete a probationary period, which typically would be for 3 or 6 months.

A probationary period is meant to benefit both parties to the contract; the employee to assess whether he likes the job, the work environment and so on and the employer to find out whether the employee has the aptitude for the job, fits in to the company and its ethos, and gets along with his colleagues.

The period of probation should find mention in the contract. And if the probation period is extended, the employee should expect to be informed in writing. What an employee serving a probation period should know is that certain rights a regular employee enjoys might not apply to him. For instance, the leave entitlement for a probationer might be different. He might not be eligible for all categories of leave and vacation that a regular employee would be entitled to. His notice period, should he choose to resign before the end of the probation period or the employer fires him, would be proportionately reduced.

Most importantly, an employer would be within his rights to extend the probationary period if the employee’s performance is not up to the required standard.

But the point to note here is that contract should explicitly state that the probation period may be extended at the discretion of the employer or management. And if the probation period were extended, the employee should be informed in writing
Salary Employment can be, broadly speaking, of two types: regular and contractual. A regular employee is paid a salary. An employee on contract is paid a fee, which is also called retainer.

Normally, if you join as a regular employee, the salary offered will be in terms of CTC, or cost to the company. The CTC is the total cost that an employee incurs in a company. To put it simply, CTC is Gross Salary + Bonus, Medical, LTA and other annual emoluments paid annually.

While gross salary includes heads such as basic, DA, special allowances, HR, employer’s contribution to PF, Gratuity and other monthly emoluments, net salary is actually what a regular employee takes home.

Net salary


Net salary is what remains after deductions from gross salary, including tax deductions. It is what one, as a regular employee, will take home each month.

In the case of a contractual assignment, there will only be a monthly Tax Deduction at Source (TDS) from the fee or retainer that has been agreed to.

This TDS will be a set percentage of the fee payable. The precise percentage will be as per the applicable provision of the Income-Tax Act.

Notice period & salary: Upon acceptance of resignation, an employee is normally expected to serve his notice period. But it’s not unusual to find an employee wanting to cut short the notice period and say good bye to the organisation.

This could be for various reasons, including maybe to take up another job for which he has on offer on hand.

Sometimes, the employer might also like to expedite the departure of an employee who has resigned.

Here again, there can be various reasons including, for instance, the perception that if employee were to linger on, it would in some way be detrimental to the interests of the company, or to the team he belongs to.

General rule

As a general rule, if the employee decides to leave before the end of his notice period, he should not expect to be paid for that part of the notice period he did not serve.

Conversely, if the employer wants the employee to leave before his notice period is up, the employer will have to pay the employee in lieu of the notice period.

If you happen to be a regular or permanent employee and have resigned from your position, do not expect to collect your last pay packet on your last day of work. Your pay for the final month, which could well be for the notice period you have served, would usually reach you 30 days later following the full and final settlement process.

Non-disclosure Agreement: A confidentiality or non-disclosure agreement lays down terms and conditions that prohibit the employee from disclosing company proprietary knowledge, trade secrets, client or production information, strategic plans, and other information that is confidential to competitors.

Significantly, a non-disclosure agreement is not only valid or effective for the duration of an employee’s employment but for a period of time, which the employer has to clearly define - following termination of employment.

'Confidential’ information'

Since the kind of information termed as “confidential” might vary from company to company, it’s important for an organisation to clearly define the expression “confidential information” in its non-disclosure agreement and list under it all information that, in its view, are of critical importance from a non-disclosure point of view.

From the employee’s perspective, the terms of a non-disclosure agreement should be taken seriously as any breach may result in appropriate legal action. Apart from legal action, taking a non-disclosure agreement lightly could have other consequences: for one, if you had committed any your misdemeanors and word gets about, you may find it difficult to land another job.

In sum, what has been discussed in this article are just the main aspects of an employment contract; the specifics will vary from company to company. The key point to remember is one should not merely skim through an employment contract but read it carefully before signing it.

If you don’t understand some of the terms contained therein, you should not hesitate to contact the HR or Recruitment department and get your doubts cleared.

One last point: while you are not bound to accept whatever is offered to you in an employment contract, it would be best not to try and negotiate every point in it. If you indeed must negotiate, stick to points that, in your judgment, are the most critical.

(The writer is Corporate Counsel at Arctern, Subsidiary of Volt Information Sciences, Inc)

Go to Top

Most trending stories
Photo Gallery
BJP supporters during a BJP campaign rally attended by Prime Minister Narendra Modi...

BJP supporters during a BJP campaign rally attended by Prime Minister Narendra Modi...

Canadian Prime Minister Justin Trudeau with his son Hardien walks towards...

Canadian Prime Minister Justin Trudeau with his son Hardien walks towards...

Rolls-Royce Asia Pacific Regional Director Paul Harris at the launch of eight generation...

Rolls-Royce Asia Pacific Regional Director Paul Harris at the launch of eight generation...

Pigeons fly over the historical Jama Masjid in New Delhi...

Pigeons fly over the historical Jama Masjid in New Delhi...

BJP MP Hema Malini addresses a press conference regarding Braj Holi Rasotsav...

BJP MP Hema Malini addresses a press conference regarding Braj Holi Rasotsav...

Inmates of Netaji Subhash Chandra Bose central jail perform a tribal dance...

Inmates of Netaji Subhash Chandra Bose central jail perform a tribal dance...

A view of Sunder Nursery at Hazrat Nizamuddin in...

A view of Sunder Nursery at Hazrat Nizamuddin in...

Mahila Congress activists make 'pakodas' to protest against alleged unemployement...

Mahila Congress activists make 'pakodas' to protest against alleged unemployement...

Canadian Prime Minister Justin Trudeau and First Lady Sophie Grgoire greet visitors...

Canadian Prime Minister Justin Trudeau and First Lady Sophie Grgoire greet visitors...

Gold medalist Mariama Jamanka of Germany gets lifted by silver medal winner Lauren Gibbs...

Gold medalist Mariama Jamanka of Germany gets lifted by silver medal winner Lauren Gibbs...

Like us on Facebook

Copyright 2017, The Printers (Mysore) Private Ltd., 75, M.G Road, Post Box 5331, Bengaluru - 560001
Tel: +91 (80) 25880000 Fax No. +91 (80) 25880523
Powered by Yodasoft Technologies Pvt. Ltd.