Startups, Look Out for Unfair Employment Terms in the Contract

In labor law, one of the commonest issues that crops up is a disagreement over the employment contract. If the disagreement is not properly handled, it could transform into a dispute. Hence it is very important to carefully draft your employment contract so that the possibility of disagreements is minimized.

Having said that, no matter what precautions you take, there is a possibility of an employee disagreeing with you and claiming that his / her contract is unfair. And most often, they point to a few clauses which include:

SALARY

Remember, a poor or low salary by itself does not amount to an ‘unfair contract’. It only becomes a legal problem if it is below the minimum wage prescribed by law. In that case, you have to increase the salary so that it is at least equal to the minimum wage.

The minimum wage differs from state to state and from sector to sector, so just check the relevant Government notification that applies to you to see what the minimum wage for your business is.

Apart from the salary being below the minimum wage, you have to ensure that you do not discriminate against one employee for any reason. Discriminating against female employees on the ground of gender or against employees on the basis of caste or religion is a constitutional violation. If there is a difference in salary to different employees performing the same work, you will have to justify it on some reasonable basis or else it could cause you legal trouble.

BOND

The ‘unfair contract term’ most employees complain about is the bond. A bond essentially is a restriction on the right of the employee to leave the employment for a specified period of time.

A bond, depending on how long the period is, may be unfair. But it entirely depends on that period and what kind of investment has gone into training the employee, or what kind of investment the company has put into the employee.

If the company has invested heavily in the employee, a longer bond period may be reasonable. On the other hand, if the investment in the employee is low/negligible, then the company might find it difficult to justify any bond period at all.

Often, and you find this even in Government bodies, a high bond period is associated with super-specializations. For instance, in many hospitals, the contract with super-specialist doctors stipulates that the doctors cannot leave for a considerable period (sometimes upto 8 – 10 years), justified by the investment in that doctor and the scarcity of super – specialists.

Technology companies can justify bond periods for their engineers, and technology start-ups for their employees by showing that they incurred expenses in training and education of the employee. Remember to keep the receipts and bills showing the expenses handy in case the worst happens, i.e. in case the matter goes to Court.

NOTICE PERIOD

A continuation of the discussion on the ‘bond period’ is the notice period. A contract may be unfair even if it does not contain a bond period, but contains an unusually long notice period. For instance, if a contract stipulates a notice period of 8 months – 1 year, it is clearly unreasonable. A notice period of 1 – 3 months is reasonable in most cases.

However, as in the case of the bond, no single rule or formula can be applied here either. In the case of a company which has invested heavily in training an employee from scratch, it is entitled to insist on a longer notice period (of even upto a year) on the ground that it will need that much time to find a replacement and train the replacement.

Unfortunately for companies in India, Courts are strongly in favour of the employee and are often unwilling to consider and understand legitimate business interests. But if it is properly set out in writing what the training and education of the employee will be, your case will be considered by the Courts.

In Part II, we shall be discussing two more controversial components of an employment contract, which are the ‘forfeiture fee’ and the ‘bonus’ clauses. It suffices to remember that there is no golden rule as regards an employment contract, and every case has to be individually studied.

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