Labour/Employment Contracts in India

We discuss the laws and regulations in India governing employment and other labour contracts.


Pankaj Singla

3 years ago | 12 min read

The employment contracts in India are principally governed by the Indian Contract Act, 1872. An employment contract is a mutual agreement between the employer and the employee that governs the terms of employment. Similar to any other contract under the common law system, the essential requirements of the employment contracts include offer, acceptance, consideration, lawful object, competent parties and free consent.

The employment contracts may be written or oral. However, certain state specific Shops & Establishment acts and other labour/employment laws may require issuance of an appointment letter; moreover, in order to minimise disputes and for the purposes of dispute resolution, it is always recommended to have the employment contracts in a written agreement form.

The employment contracts complying with the general principals of law of contract are legally binding on both the parties. Therefore, contractual obligations of a party to the contract may be enforced through the terms of the agreement. The employment agreements must be drafted very carefully and in compliance with all the applicable laws. Although the law does not prescribe a form, various clauses of an agreement determining the terms of the employment may be subject to applicable labour/employment laws.

The employment relations are governed by various enactments and laws. It must be noted that in order to simplify the regulation of workers and employees, the Ministry of Labour and Employment has released the Codes on labour laws which are the consolidated and the amended form of the present laws. The Codes includes Code on Wages, 2019, the Code on Social Security, 2020, the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code, 2020) and the Industrial Relations Code, 2020 (IR Code, 2020).

The most commonly featured clauses in an employment agreement and the legal regulations governing the same:

The employee's position and duties: This clause usually covers the functions/ duties to be performed by the employees, his/her position/designation and general expectations in terms of work of the employer.

Remuneration: Generally, the employment agreements in India are in the form of an appointment letter, which usually and must very clearly mention the remuneration of the employee. Remuneration generally includes basic salary, dearness allowance, provision for bonuses[1], gratuity[2], contribution towards provident fund[3], house rent allowance etc., which break-up, as the case maybe, should be clearly provided in the agreement.

The Code on Wages, 2019[4] prohibits the employers from paying wages less than the fixed minimum wages. “Overtime wages” shall also be paid twice the normal rate of wages at least. The Code on Social Security, 2020[5] highlights that the fixed term employees shall be entitled to the pro-rated gratuity based upon the terms of the contract.

Working hours, holidays and leave provisions: Working hours are governed by a variety of statutes depending on the nature of the activity undertaken by the establishment.[6] Upon notification, the working hours and the leave provisions of the employees and the workers shall be governed by the OSH Code, 2020. Generally, these statutes provide for working hour limits both on a daily and weekly basis.

The normal daily hour limits range from between eight to nine hours, and the usual weekly limit is 48 hours[7]. The OSH Code, 2020 limits the daily working hours to 8 hours and restricts the maximum number of working days in a week to 6 days. Additionally, the employment agreements cover the holiday entitlement[8] of the employees.

Moreover, the employment agreements in India also include the clearly laid out holidays list.[9]Alternatively, the company policy for employees often known as Human Resource Policy/Manual or Employment Manual/Handbook tend to provide these holidays and leave provisions in detail as such documents provide more flexibility in terms of making any future changes with the ease of coverage all the employees working with the employer.

Probation period: Probation period is one of the important clauses that usually form part of an employment contract. Fixing the probation period is considered as the prerogative of the employer. It usually ranges from 3 to 12 months. Please note that certain state enacted Shops and Establishment laws also provide certain directions with respect to probation period.

Code of Conduct: It may include the following subheads: duty of fidelity, duty of confidentiality and duty to protect the employer's property. The code of conduct usually forms part of human resource policies or employment handbook. Such human resource policies or employment handbook may include provision related to the protection from discrimination and harassment.

Generally, most employment contracts contain provisions to ensure that the employee not to divulge any confidential information and trade secrets. Restriction on employees on maintaining confidentiality can also be extended for a period beyond the term of the employment agreement.

Dispute Resolution: A clear and precise dispute resolution clause to cover the cases of disputes between the employer and the employee goes a long way in resolving any disputes at early stage. An effective arbitration clause clearly laying down the procedure for appointment of arbitrator(s), number of arbitrators, place and language of arbitration proceedings and enforceability of the arbitration award has become a regular feature.

It must be ensured that such dispute resolution clauses are drawn carefully and in a fair manner. An unfair and one-sided dispute resolution clause risks being struck down by the courts.

It must be noted that the newly enacted labour codes[10] bar the civil courts from hearing any matter arising out from these Codes. The IR Code, 2020 gives immunity to certain cases from the civil court.[11] Also, if any dispute arises between the trade unions, workers, or any office bearers, then application shall be made to the prescribed Tribunal but civil court shall not have the power to entertain the dispute.[12]

Restrictive Clauses:

(i) Non-compete Clause[13]: Non-compete post-employment provisions must be considered in the light of Section 27 of the Indian Contract Act, 1872. Sec 27 states that any agreement which restrains a person from exercising a lawful professional, trade or business of any kind is void. The courts in have repeatedly rejected the contractual right of the company to restrain the employee from working with a competitor.

In India it is a common practice to include some clauses, which may be called non-competition and non-solicitation clauses in the employment contract. Whenever an agreement is challenged on the ground of it being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests[14]. For that reason, an employer should consider the careful drafting of a non-competition provision when an employee commences employment.[15]

(ii) Employment Bond: A number of knowledge-based and service industries such as information technology, financial services sector, knowledge outsourcing service providers and other industries rely heavily on signing a bond with an employee in order to keep attrition in check.

A bond may require an employee to work for a certain minimum period of time, which may be considered violation of section 27 of the Contract Act, 1872 unless drafted carefully by providing sufficient consideration to the employee for this purpose. Also, if wrongly drafted, may be in violation of the fundamental rights of citizens enshrined in the constitution of India (“Constitution”).

Termination of employment: Under Indian law[16], there are two types of dismissal: Ordinary dismissal and Dismissal for cause. Generally, the notice period for ordinary dismissal is one month, unless the employment contract provides for a longer notice period to be given.[17] A termination clause in violation of applicable laws such as the Industrial Dispute Act, 1947 (IDA), if applicable, may render an agreement void[18].

Once notified, the retrenchment or termination of employment shall be governed by the IR Code, 2020.[19] IR Code, 2020 mandates that a worker who has been in a continuous service for not less than one year shall be given at least one month notice in writing indicating the reasons for retrenchment.[20]

Severance payments: In order to minimise the legal risks, the employers have adopted a practice of having a severance payment clause in the agreements. It specifies the severance package that an employee is entitled to in the event of termination of employment by the employer[21]. However, the agreement on severance package may not curtail the right of an employee to leave encashment, if otherwise eligible under the applicable laws, and gratuity payment[22]etc.

The IR Code, 2020, once notified, will be the principal legislation dealing with the issue of compensation[23] to be paid to the retrenched workers, re-employment of retrenched workers[24] and other special provisions related to the retrenchment of workers. At the time of retrenchment, the worker shall be entitled to the prescribed compensation.[25]

As discussed above, the agreements must be drafted very carefully to avoid violation of any applicable laws. Non-observance of legal regulations governing a specific clause may render the agreement void or otherwise ineffective.

Collective Agreements

In India, Collective agreements are entirely voluntary. However, are common in labour intensive sectors, particularly the manufacturing sectors, including automobile industry, banking sector, pharmaceutical sector etc. In the labour intensive organizations the workers sought to organize themselves into trade unions and then the trade union enters into an agreement with the management, so that they can bargain with the management on equal terms with regard to their conditions of service and ensure job security.

The Trade Union Act, 1926 provides for the registration of trade unions. The Industrial Disputes Act, 1947 has given statutory recognition and enforceability to the collective agreements by providing collective bargaining power to the workers[26]. The IR Code, 2020 has been enacted which consolidates the Trade Unions Act, 1926, the Industrial Disputes Act, 1947 and Industrial Employment (Standing Orders) Act, 1946. The IR Code recognises the Trade Unions at the Central and the State level.


Pankaj Singla, Partner

Disclaimer- This Article is for information purposes only, and the views stated herein are personal to the author, and shall not be rendered as any legal advice or opinion to any person, and accordingly, no legal opinion shall be rendered by implication.

The Article does not intend to induce any person to omit, commit or act in any particular manner, and that you should seek legal advise before you act on any information or view expressed herein. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this Article.


[1]The Payment of Bonus Act, 1965.

[2]The Payment of Gratuity Act, 1972.

[3]The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

[4] Note: It is a newly enacted law but not yet notified by the Government.

[5] Note: It is a newly enacted law but not yet notified by the Government.

[6]Note: For example, if the establishment is a factory, the Factories Act, 1948 (Factories Act) applies, and if the establishment is involved in a commercial activity, then the local shops and establishments statute applicable in the region in which the establishment is located applies.

[7] Chapter VI, “WORKING HOURS OF ADULTS” Clause 51 of The Factories Act, 1948, Chapter VII, “HOURS OF WORK AND ANNUAL LEAVE WITH WAGES” of the OSH Code, 2020.

[8]Note: Where the employer is involved in a commercial activity, the local shops and establishments statutes be come applicable and these determine the minimum thresholds concerning holiday entitlement. The thresholds usually range from 12 to 21 days' holiday per year. Certain local shops and establishments statutes also contain provisions concerning sick leave and casual leave (which generally ranges from 12 to 24 days). Similarly, the Factories Act, 1948, the Maternity Benefit Act, 1961 and other applicable statues, as applicable, determine the minimum number of holidays that an employee is entitled to. Instead of these acts, the OSH Code, 2020 shall be applicable stating the annual leave given to an employee, once notified.

[9]Note: These holidays differ from region to region and range from between four to ten days' holiday each year.

[10] Industrial Relations Code, 2020, Occupational Safety, Health and Working Conditions Code, 2020 and partly the Social Security Code, 2020.

[11] Section 16, IR Code, 2020.

[12] Section 22, IR Code, 2020.

[13] Noncompetition clauses generally provide that an employee will not join a competitor in the same business for a specific period of time.

[14]Niranjan Shankar Golikari v The Century Spinning and Manufacturing Company Ltd, AIR 1967 SC 1098.

[15]The law in India is, therefore, very clear on the subject matter of non-competition clauses in an agreement. Non-compete agreements have regularly been held to be non-binding on the parties esp., a non-compete agreement between an employer and employee has repeatedly been held to be null and void in numerous judicial pronouncements. Indian courts have consistently refused to enforce post termination non-compete clauses in employment contracts being restraining to lawful profession under section 27 of the Contract Act and have held them as void and against the public policy for having the potential to deprive an individual of his or her fundamental right to earn a living.

Upon a literal construction, section 27 of the Contract Act invalidates all agreements that impose a total bar on or restrict the exercise of a lawful business. The Supreme Court of India has examined the question whether an agreement is void under section 27 of the Contract Act must be decided upon the wording of that section alone. In the case of Superintendence Co. of India Pvt. Ltd. v. Krishan Murgai, Hon’ble Supreme Court examined:

(1) whether a post-service covenant in restraint of trade between the parties was void under section 27 of the Act; and

(2) whether the said restrictive covenant, assuming it to be valid, was on its terms enforceable at the instance of the employer against the employee?

The court concluded that the negative covenant during the term of the service was not in restraint of trade, and that the doctrine of restraint of trade could never apply during the continuance of the service. However, a restrictive covenant extending beyond the term of service was void as the court held, “Restrictions on competition during that period are normally valid, and indeed may be implied by law by virtue of the servant's duty of fidelity. In such cases the restriction is generally reasonable, having regard to the interest of the employer, and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question. But if the covenant is to operate after the termination of services, or is too widely worded, the Court may refuse to enforce it. It is well settled that employees covenants should be carefully scrutinised because there is inequality of bargaining power between the parties”

Similarly, in the case of Desiccant Rotors International Pvt. Ltd. Vs. Bappaditya Sarkar &Anr., Delhi High Court held that restrictions in an employment agreement that interfere with the right to livelihood of the employee would be held invalid. However considering the required confidentiality and the integrity of the employments, the judiciary has inclined its view towards giving some regard to the non compete agreements. In the case of ‘Niranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd.’ , the Hon’ble Supreme Court observed that-“restraints or negative covenants in the appointment or contracts may be valid if they are reasonable”. Further, in one case - V.F.S. global services Pvt. Ltd Vs Mr. Suprit Roy, the Bombay High court established the principle that a restraint on the use of trade secrets during or after the cessation of employment does not tantamount to a “restraint on trade” under section 27 of the Contract Act and therefore can be enforceable under certain circumstances.

However, in Percept D'Markr (India) Pvt. Ltd vs Zaheer Khan, Hon’ble Supreme Court held that even if a restraint is reasonable, it may still be null and void under section 27 of the Contract Act.

Therefore, restrictions imposed during the term of the employment are valid, and the covenants that prohibit employees from engaging in a business similar to or competitive with that of the employer beyond the term of employment are invalid unless they can pass the reasonability test.

[16] The Industrial Dispute Act, 1947. The termination of employment shall be governed by the IR Code, 2020.

[17]Note: Under certain local shops and establishments statutes the employer is also required to notify the authorities of a dismissal event. For dismissal with cause, the ordinary principles of natural justice must be followed, and once an employer has established that misconduct has been proved at an enquiry, the employer can proceed with dismissal without providing any notice period.

[18]Note: Section 25A and Chapter VA and VB of the IDA governs the retrenchment of workmen at a workplace having workmen above a certain limit and provides for procedure to be followed at the time of lay-off and retrenchment. Chapter IX of the Industrial Relations Code, 2020 deals with Lay-off, Retrenchment and Closure.

[19] Chapter IX “RETRENCHMENT, LAY OFF AND CLOSURE” of the IR Code, 2020.

[20] Section 70 of the IR Code, 2020.

[21] Note: The employer must pay certain termination benefits, as may be applicable, to employees who are dismissed, including: leave encashment, gratuity payment and any other amounts due under the employment contract. Termination benefits are calculated on the basis of the employee's salary and length of service. However, the employer is entitled to recover any damage suffered by it on account of the employee's wrongdoing from the gratuity payment.

[22]Section 4, Payment of Gratuity Act, 1972.

[23] Section 70(b) of the IR Code, 2020.

[24] Section 72 of the IR Code, 2020.

[25] Section 70(b) of the IR Code, 2020.

[26] Section 36 of IDA.


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Pankaj Singla

Corporate Lawyer | M&As | Startups/PE/Venture Funds | Employment Laws







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