Understanding an Employment Contract – Clauses & Confusions

Last Updated at: Oct 30, 2020
Image of business partners handshaking over business objects on workplace


When we think of assets that a business owns, possibly, the most crucial asset is its human resources. Employees are the driving force, the brain and the working hands of the company and hence, it becomes extremely important to reward, recognise their efforts with not just remuneration but also positive enforcements like appreciation, motivation and showing possibilities of growth. In contrast, employees also present a threat, as they may switch jobs and make confidential information about business contacts, sales and other details public, acquired during their tenure.

What is an employment agreement?

An employment agreement is a legal document which binds the employer and the employee into a contractual agreement. An agreement, where employee is willing to work for the stated role in the organisation and sharing responsibility for their designated work, while the employer agrees to remunerate the prior with salary and other perks & benefits. An employment contract generally includes minute details about salary, working hours, responsibilities, notice periods etc. Hence, this document requires a careful scrutiny by the employee before one decides to pen down their signature.

Employment Agreement

As a business owner looking out for employees or as someone actively seeking jobs, reading-between-the-lines of the following clauses will help you make a more informed decision:

Variable salary component

A job is primarily assessed by a prospective employee, by how much “Pay” an employer offer. While most remuneration offered is bifurcated into Base Pay, Allowances and Perquisites, one may often mistake a variable pay component to be a part of the salary package. This portion is dependent on one, company earning enough profits during the year and two, company willing to pay a bonus to employees. The advantage it offers to the employer is reduced responsibility during a lean period, while more salary can be expected by the employee during peak season.

Notice period

A Notice period is the defined time period that one must serve from the date of submitting the resignation letter, till the date of being relieved from the services of the organisation. A very long notice period is a deterrent in future employments as most organisations are reluctant to wait for months for a new employee to join. Not serving the stated notice period can result in a legal ramification against the employee. It may be a good idea to negotiate your notice period before joining, to avoid hassles at a later stage. Some organizations also withhold pay in exchange of a no-notice period.

Terms of employment

Most organisations do not allow their employees to carry out any other profession or business parallel to employment thereby ensuring full commitment to the assigned work. Hence, it is best to clarify with the employer first hand and have them included in your contract.

Will you be allowed to join a similar organization?

Since competitors are always keeping an eye out for employees with access to critical information about a competitor, an employment agreement may include a Non-Compete clause, where the company may legally bar an employee from offering their services for a given period to other employers working in the same industry segment (competitors). One should be careful about the length of such period. Such clauses have also been struck down by courts as being unreasonable in several cases.

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Transfers & promotion policy

While the HR may refuse to disclose their policy on promotions or transfer to a new employee, it is in the interest of the prospective recruit to ensure the frequency of transfers within the company and the basis of being promoted in the company. There are several websites these days that mention about these policies, and it is a good idea to read about what is publicly available about the company and further the discussion before joining.

Probation period

This is the time that the company takes to form an opinion about the suitability of the employee to work, commitment & willingness towards the job, work ethics etc. The organisation can terminate the employment during this period without any cause.  A shorter time is naturally beneficial for the employee, after which termination or retrenchment may be difficult.

Supplementary perks and their impact on taxation

House rent allowance, travel allowance, medical reimbursements, medi-claim policy,  insurance cover for self and family are some essential benefits that most standard employment contracts contain, which may affect your overall tax liability. Hence, it is important to know the values of these benefits and manage your finances better.


Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.