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Learn more about Employment Contract in India

An Employment Contract stipulates and specifies an employee’s employment status in the organization for which he works or will work. An employment contract is a contract usually entered into when a company hires a new employee. Protect your employment relationship with your employees with this Employment Contract drafted by lawyers. It can be used for a range of employment different types, including full-time, part-time, and fixed-term. As such, the employment contract sets out all the employment terms and conditions, including fees, wages and benefits, hours of work, confidentiality, vacation time, and various other key terms and conditions. If you want to make a job offer before hiring your future employee, you can download our Employment Application template

Table of contents

What is an employment contract in India?

First and foremost, an employment contract in India exists when a person (the employee) undertakes to work,receiving a payslip, for the account, and under the orders and control of another person (the employer). The contract execution entails several obligations for both the employee and the employer. An employment contract in India is a binary agreement between an employer and an employee governing their rights, duties, and responsibilities. One of the main advantages of executing an employment contract is that it allows for employment detailed terms and conditions to be specified to ensure compliance with laws and industry best practices. It promotes a structured employer-employee relationship and sets out the expectations of the job.

Secondly, it is advisable to make employment contracts in India comprehensive and detailed to address employment key aspects and ensure compliance with applicable laws or an employer’s internal policies. However, it is also significant to remember that due to the unequal bargaining power between organizations and most of their employees, overly aggressive or unilateral clauses are likely to be struck down by the courts. For this reason, and given that employment in India is highly regulated, it is essential to carefully review the employment contract terms before signing it and to seek practical advice if in doubt.

What is the labor law in India?

Firstly, employment contracts in India between employer and employee are governed by the Indian Contract Act 1872.

Secondly, according to section 10 of the Indian Contract Act 1872, all agreements are made if they are entered into free of goods by the parties’ consent, which allows the contract to be valid in contract consideration. Section 14 of the Indian Contract Act 1872 defines free consent. Consent is said to be free when it has not been obtained under certain conduct:

➤ Coercion : Article 15
➤ Indue influence : Article 16
➤ Fraud: Article 17
➤ Misrepresentation: Article 18
➤ Mistake of fact: Article 20

Finally, the Indian Contract Chapter VI Act, 1872 (Sections 73, 74 & 75) deals with the remedies available for contract breach. Section 73 deals with compensation for loss or damage caused by a contract breach and compensation for a breach of an obligation similar to that created by the contract. Section 74 deals with compensation for contract non-performance where the penalty is provided for. Finally, section 75 deals with the fact that the party who rightly terminates the contract is entitled to compensation.

What are the different types of Employment Agreements?

In India, the types of employment contracts in India can be classified into three main categories and include:

1. Fixed-term contract

As the name suggests, this is a fixed-term contract and usually for a period of fewer than four years. If the contract term exceeds four years, it is considered a permanent job rather than a fixed-term job. The reason people offer a fixed-term job is that it gives them job security and all the benefits that an open-ended employment contract would provide. There are many nuances that people need to consider before writing a fixed-term employment contract. In the event, the work legal documents suggest that any employee works for a period of three years but continues to work for the set period and no one objects. In such a situation, it is considered that there was an implicit extension agreement created between the employer and the employee.

2. Employment contract for an indefinite period

The open-ended employment contract is considered a permanent employment contract in India as it is the most common and widely used form of employment throughout the country. The employment contract in India depends heavily on this employment type as it is a driving force of our economy. As such, employment is considered continuous until it is expressed that it is terminated either by the employers or by all the employees. Thus, an open-ended employment contract may cover full-time employment or part-time employment. Usually, all kinds of benefits and legal rights are granted to employees under this contract.

3. Employment contracts or self-employment contracts

This contract type only ends in the situation or scenarios where services are needed for a particular job or hours. These job types can be offered on a daily, weekly, or monthly basis. The work pattern in this employment type is usually dependent on the employee rather than the employer. The payments in these job types usually depend heavily on the services rendered by the employee. Then there is talk of additional benefits and perks that other employment contract types have, there is not much that is delivered in this employment contract type. There is no requirement for an employment contract bond, or an employment contract notice since this is an hourly-based job.

In addition, whether the employee was hired under a fixed-term contract or an open-ended contract, the contract law common principles such as offer, acceptance, certainty, consideration, and competence of the parties must be observed when drafting an employment contract. Similarly, the entitlement to various benefits remains the same in both types of contracts and the employment contract must comply with the requirements of various labor laws, such as the Science and Technology Acts, the Industrial Disputes Act of 1947, and the Industrial Employment Act of 1946, which specify the minimum employment terms and conditions.

Finally, in India, most disputes raised by employees concern employment contract termination. In the case of an open-ended employment contract in India, the employer must pay severance and comply with other applicable provisions and legal requirements at the termination time. These requirements would not apply when the contract is terminated due to the expiration of its term. However, before entering fixed-term contracts for permanent or perpetual roles, care should be taken.

Why is it necessary to use an Employment Contract?

A good employment contract in India is valuable to both the employee and the employer. It sets out the privileges and obligations of each party, protects the employee’s job security, and protects the employer from risks such as disclosure of confidential information about the employer after the employment period has ended. Here are some things that employment contracts in India regularly contain:


Most employment contracts in India have a specific employment term. This ensures that employees have a secure position with the company if they do not disobey the contract terms and allows employers to release the employee at the end of the term.


A good employment contract in India will state precisely what actions may amount to the termination of the employee. In a way, this helps both parties, as it allows the employee to know which activities are permitted and prohibited, making the possibility of a serious breach less likely. The employment law of the relevant jurisdiction should be cross-referenced to ensure that the contract terms do not conflict with legal requirements.

Non-competition clauses

If the employee has access to the company’s confidential information, it is imperative from the employer’s perspective to include a clause preventing the employee from revealing that information to others as part of a privacy policy. An employer may also wish to prevent the employee from working for competitors, although the labor laws of various jurisdictions differ as to whether such a clause is satisfactory. In either case, non-competes clauses generally bind the employee for a period after the employment ends.


The employer and employees’ duties should be set out in the employment contract in India. This section should include an employee’s duties, salary, benefits, and overtime premiums. The employer’s right to move the employee to a better position should also be stated.

Dispute Resolution

A good employment contract in India will outline dispute resolution procedures that reduce the time and expense of a court battle. Arbitration procedures offer less time and expense, although appeals of arbitration decisions are usually complicated, it is a more preferred resolution method.

How to write an Employment Contract?

To properly draft an employment contract in India, it is significant to include certain clauses in the contract. The following clauses are commonly included in the employment or service contract:

Salary: the salary to be paid to the employee should be clearly stated. If the employee is entitled to any allowances in addition to salary, these allowances must be clearly stated;

The service’s period: the period of employment must be specified. If the parties intend to renew the service contract by extending the service’s period, the terms and conditions under which the contract will be renewed must be stated;

Time off and bonuses: if the employee is entitled to time off at full or half pay, a bonus, or commission, this must be clearly stated in the contract;

Scope of work: the employee’s duties must be clearly defined in the contract. It must be stipulated that the employee will not be employed in any other department or company during the term of the contract;

Hours of work, rest, and holidays: the employee’s hours of work, rest periods, and several holidays must be clearly stated;

Confidentiality clause: if the employee’s position is such that he is likely to be privy to trade secrets or any information relating to the employer’s business, it must be stipulated that the employee must not disclose this information to a third party. The employee’s undertaking not to disclose confidential information acquired during employment cannot extend beyond the employee’s employment;

Incentives: Any incentives that may be granted to the employee as part of his employment must be stated in the contract;

Termination of the contract: the reasons for which the contract may be terminated before its expiration must be stated;

Grievance procedures may be specified in the contract or the employer’s employment rules or policies;

Miscellaneous provisions: depending on the employer’s business nature or the nature of the job, other miscellaneous provisions may be included in the contract.

In addition, once the company has completed the employment contract drafting in India, it is essential to seek the lawyer’s advice to methodically review the contract. In this way, the risk of facing litigation arising from the contract can be reduced in an unforeseeable way. The legal document should be combined with any prior oral or written negotiations that have taken place between the parties.

Finally, it may also be significant to specify the trial period length and the notice period in India in the contract. The general market trend in India is to have a probationary period between 3 and 6 months, especially in the technology and service sectors. During the probationary period, the employer generally has the right to terminate employment without notice. The terms of an employee’s probationary period must be specified in the employee’s employment contract or letter of appointment.
Workers who have completed at least one year of continuous service are entitled to one month’s notice or equivalent pay in lieu thereof. In addition, the employer is required to pay “severance pay” to the worker, calculated at the rate of 15 days’ wages for each full year of service. Since India does not recognize the doctrine of employment at will, judicial precedents have established that termination without notice would render the employment contract an “unconscionable agreement”, and therefore illegal.

Is it mandatory written Employment Contract in India?

Although current Indian labor law does not strictly require an employment contract to be written, the prevailing market practice is for all employment terms and conditions to be agreed upon and signed by both parties. However, a few states have specific legislation that requires a written contract to establish an employer-employee relationship. From the perspective of certainty and enforceability, it is strongly recommended that all employment contracts be in writing, whether it is a simple appointment letter or a fully detailed contract setting out the relevant terms and conditions agreed between the employer and employee.

What are the advantages of an Employment Contract in India?

An employment contract in India provides certain advantages for both the employee and the employer. Indeed, the employment contract in India protects the interests of both the employer and the employee. The employment contract in India allows to correctly define the expectations of both parties. Finally, it allows preventing the resolution of a possible dispute by stipulating the applicable laws on employment.

What is the relationship between the employee and the employer in India?

First and foremost, under Indian law, employment contracts with negative clauses are considered valid and enforceable if the parties agree to have their free consent without fraud, coercion, undue influence, mistake, and misrepresentation. The Indian courts are of the view that in a contract breach event by the employee, the employer will only be entitled to recover damages if it has incurred substantial expenses. Thus, Indian law requires that employment obligations be “reasonable” to be legitimate.

Secondly, the term “reasonable” is vague because it is not defined in Indian law, and thus the courts have given connotations to “reasonable” depending on the facts and case’s circumstances. Therefore, the suggestion that has emerged so far is that the situation predetermined in the contract should be vital to protect the employer’s attention and reimburse the losses caused by the contract breach. In addition, the penalty or mandatory employment period set should not be disproportionate.

How to hire a foreign employee in India?

First and foremost, with the increase in foreign investment in India, it is common for multinationals and Indian companies to hire foreign employees in various capacities. Foreign employees can be employed in India either under a direct employment contract with the Indian entity or under a secondment agreement. In the case of the employee’s secondment, the foreign entity, the Indian entity, and the employee normally sign a secondment agreement governing the secondment terms. In most cases, a local employment contract in India between the employee and the entity in the host country is also executed to ensure compliance with immigration laws and mitigate tax risks.

Secondly, while the central plethora and state labor laws in India generally leave employers facing complex interpretation issues, these issues prove even more difficult when one of the parties involved is a foreign national. However, aside from labor law concerns, the main issues to be evaluated concerning foreign employee secondment arrangements are compliance with immigration and tax laws. The foreign nationals’ secondment raises several issues such as visa requirements, registration with the Foreign Regional Registration Office, and tax implications under the Indian legal system.

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