Importance of the Employment Contracts

author Amrita Mehdiratta , Shreyika Walia

calender November 3, 2022

Importance of the Employment Contracts

In a world of uncertainty, employment contracts can be immensely valuable to employers as well as employees as they legally establish the working relationship and lay forth key guidelines and regulations with respect to the employment. Through this article we will help you understand all rights, responsibilities and obligations of both the employer and the employee and also highlight the key points of what is expected from each party. This serves to safeguard the rights and provide job security to the employee while also protecting the employer from incurring risks during the term of the employee’s employment and thereafter.

An appropriately drafted employment contract benefits and works in favour of both the parties as stringent and clear clauses enumerated therein leaves no room for confusion. Primary clauses in an employment contract should be pertaining to remuneration, job duties and description, benefits, confidentiality, non-solicitation, among other essential clauses. A written employment contract clarifies the working relationship, prevents any future misunderstandings, and outlines the primary obligations of the employer and employee in crucial areas.

What is an Employment Contract?

An employment contract in India is a legally binding agreement extended from an employer to a new employee setting out the terms and conditions of their employment. It describes the responsibilities, roles, payments, benefits, term, and restrictions that both parties must be aware of during the course of employment and thereafter. While a verbal agreement is valid, proving its veracity may be challenging and can incur a significant risk varying from expensive disputes, irate employees to a demoralising work environment that fosters misunderstandings. 

Types of Employment Contracts

The types of clauses included in an employment agreement might change depending on several variables, including the employment status and tenure. 

1. Permanent Employment Contracts 

Permanent contracts are one of the most prevalent and commonly utilised employment contracts. These are offered to employees who put in regular working hours, including both full-time and part-time employees. This agreement continues to stay in effect until the employment term or until either the employer or the employee decides to terminate it with or without assigning any particular reason cause to the same. This kind of contract gives the workers a range of advantages and outlines their working conditions, rights, and obligations as well as their place within the business.

2. Fixed-Term Employment Contracts

Fixed-term contracts, as the name implies, if for a specific period that has been mutually agreed upon in advance. These agreements, which specify an end date for the employment, are frequently used when hiring seasonal employees or those hired to assist on a specific project. In other circumstances, fixed-term contracts lack a precise timeline but do contain a clause outlining the milestone that must be achieved. Under these contracts, employees often have the same rights and privileges as those of a permanent employee, however, factors that may be affected are the allowances, leaves of absence and monetary benefits,. 

3. Independent Contractor Agreement

Independent contractors are self-employed individuals that render expert and professional services to an organisation for a monetary compensation. They are typically skilled professionals with no legal obligation to any organisation to work exclusively for them. Independent contractors are then responsible for their own work schedule and work according to the work assigned to them as per their agreement. 

4. Agency Contracts

Agency contracts are deployed for personnel that are provided and managed by a staffing firm or an employment agency. These people are hired on temporary basis, and the length of their contracts depend on the requirements of the company and the employee's availability. It is the agency's duty to see that the rights of its employees are upheld under these kinds of contracts. 

What To Include in an Employment Contract?

Stringent provisions that are beneficial to both the employer and the employee must be included in an employment contract. There are a few provisions highlighted below that must be included in the contract without fail:

1. Designation, job description and duties

This clause describes the position that is being offered to the employee and the duties and responsibilities to be carried out by the employee. This is to ensure that the employer and employee are on the same page regarding what the job entails. Additionally, the person to whom the employee shall report must be clearly stated in order to promote efficiency and transparency through appropriate lines of communication.

2. Duration of employment

This clause specifies the timeline for the course of the employment. If the employer deems fit, provisions for job renewal may also be incorporated in this section itself. The employer and the employee should reach a consensus on contract extensions well in advance of the end of the employee's term of service. To guarantee maximum transparency between the parties, specific timelines should be included in this clause in cases of seasonal employees, milestone timelines, and/or contractors. 

3. Salary and benefits

This clause outlines the remuneration that the employee will receive in lieu of the employment and the services that are being rendered. Both the employer and the employee should make sure that this clause is fair and advantageous to both parties. The benefits and compensation that the organisation may occasionally offer should be included in this clause. 

4. Leaves and holidays

It is always ideal to inform the employees of the number of paid and sick leaves that are available to them and all the holidays that the organisation provides, in a comprehensive manner. Employees should be fully informed of how their vacation and sick time is accumulated and how it may affect their employment. 

5. Intellectual property rights

Generally, any intellectual property developed by the employee during the course of their employment belongs to the organisation and hence, to prevent ambiguities in the future, this clause should be included in the employment contract to clearly define the ownership and the obligations of each party.

6. Confidentiality 

Confidentiality clauses in the employment contract are included in the best interest of employers. These ensure that all intricate information and details provided to the employee during their employment, remain confidential and are not, in any manner, disclosed to any third party without the prior consent of the organisation. 

7. Non-compete and non-solicitation 

Employees are prohibited from joining a company that competes with their existing employer for a set amount of time or in a specific geographic area by these restrictive clauses. Additionally, it prevents employees from poaching their current organisation’s clients when they join another organisation.

8. Termination

The grounds for terminating an employment contract are laid out in this clause. In order to prevent unpleasant terminations and conflicts, it typically outlines the process by which the agreement will be terminated. In the event of any breach, a cure time may also be included.

The Importance of Drafting Accurate Employment Contracts

A well drafted employment contract will address all the terms of employment and will leave no room for ambiguity or future misunderstandings. It is crucial in the event of a disagreement, such as a breach that results in termination. The contract will also make sure that neither party will have an upper hand over the other in the event of a dispute.

With an employment contract, employers and employees can exercise all the rights given to them under the contract while also being bound by all the duties assigned to them in the contract. Covering key facets of a working relationship with a well-defined employment contract ensures job security for the employees as long as they do not breach the terms therein and provides employers the peace of mind that their business and employees are safeguarded. 

An employment contract provides the much-needed stability that both the employee and the business would want to be able to know what to expect in the foreseeable future. The fact that an employment contract in India is legally binding and provides for consequences, penalties and remedies in the event that a party violates its terms is the primary explanation for having one in place. All terms of the contract cannot deviate from the statutory obligations and hence no such contract can thwart the prevailing legislation. 


The plethora of issues faced by the employers and employees in the pandemic forced them to recognise the need of having employment contracts in place. These agreements are crucial in the workplace since they safeguard both the employer and the employee and specify their respective duties and obligations. A contract should be in place whether you're an employer or a professional looking for a new position to ensure transparency and prevent any discrepancies that could create uncertainty in the future.

Frequently Asked Questions 

An employment contract clarifies the working association between the parties and reduces disagreements, which cuts down on the time and cost of legal proceedings. Let’s now address a few queries and concerns that are usually raised regarding employment contracts. 

1. What are the most important aspects of an employment contract?

As listed hereinabove, the essential clauses of such contract are as follows:

  1. The nature and description of the job; 
  2. Remuneration and benefits;
  3. Term and termination;
  4. Leave and holidays;
  5. Penalties and remedies.

2. Is an employment contract necessary?

To assert the above, yes. If you’re working or are onboarding new employees, having an employment contract is necessary, regardless of the nature of the job and the employment status. Having a verbal agreement might have the same legal authority but can be much harder to prove and hence, a well written agreement can protect both the employer and the employee and can describe each party’s roles and obligations with transparency. 

3. What are the different types of employment contracts?

  1. Full time or part-time contracts; 
  2. Fixed term contracts; 
  3. Freelancer contracts; 
  4. Internships or apprentice contracts.

4. What do you mean by employment contract?

An employment contract is a legally binding agreement between an employer and an employee, laying out specific details about the job, remuneration, leaves, working hours and all the other essentials. 

5. What is the most common employment contract?

The most utilised contract is a permanent contract wherein the employee works for the business for an indefinite period until either the employer or employee wilfully sever the agreement. 


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