Employment contracts in India: what to include and what does not work

Almost every Indian employment contract I review has at least one of three problems: it contradicts the employee handbook, it contains a non-compete clause that will not do what the employer thinks, or it was adapted from a template written for another country.

None of these matter until an exit turns difficult. Then all of them do.

The documents, and how they fit together

Employers routinely conflate three separate documents:

The offer letter states the offer and its headline terms. It is usually short, and it is what the candidate accepts.

The appointment letter is issued on joining and, together with any terms annexed to it, generally constitutes the contract of employment.

The employee handbook or HR policy manual sets out the rules of the workplace. Whether it forms part of the contract depends on how it is incorporated — and employers rarely think about this at all.

The failure mode is predictable. The offer letter says probation is three months. The appointment letter says six. The handbook, downloaded separately, describes a confirmation process neither mentions. At the first contested confirmation, the employee relies on whichever is most favourable to them, and the employer discovers it has no clear position.

Fix: draft all three together so they agree, and state explicitly which document governs if they conflict.

What an Indian employment contract should contain

Identification and commencement — parties, job title, reporting line, date of joining, place of work, and whether the employee can be transferred between locations or group entities.

Probation and confirmation — the duration, whether it can be extended and by how much, what happens if confirmation is neither given nor refused, and the notice applicable during probation, which is usually shorter.

Remuneration — the full salary structure by component, not a single figure. Indian salary is built from basic, allowances and statutory contributions, and each drives different obligations. State what is fixed and what is variable, and how variable pay is determined and when it is paid.

Statutory benefits — provident fund, ESI where applicable, gratuity, and statutory leave. These apply regardless of what the contract says, but stating them avoids arguments.

Working hours and leave — hours, days, overtime treatment where applicable, and the leave entitlement, referenced to the applicable state Shops and Establishments Act.

Notice and termination — notice on both sides, whether pay in lieu is permitted and at whose option, and the grounds for termination without notice. Be careful here: for employees who are workmen, statutory procedure applies over the contract.

Confidentiality — defined, and surviving termination. This is enforceable and worth drafting properly.

Intellectual property — assignment of work created in the course of employment. Frequently omitted entirely in Indian startups, and expensive to fix retrospectively.

Non-solicitation — of employees and, more carefully, of clients. On firmer ground than non-compete.

Return of property and full and final settlement — what must be returned, and the process and timeline for final settlement.

Governing law and jurisdiction.

Non-compete: the clause that mostly does not work

This is where foreign employers, and a good many Indian ones, get it most wrong.

Indian law treats agreements in restraint of trade as generally void, subject to narrow exceptions. The practical consequence is that a post-employment non-compete — preventing someone from working for a competitor after they leave — faces significant limits on enforceability, however carefully drafted and however reasonable its duration.

A US company arriving with a twelve-month non-compete and expecting it to operate as it would at home is going to be disappointed.

What does work considerably better:

• Restrictions during employment — exclusivity, no moonlighting for competitors. On firm ground.
• Confidentiality — properly defined and surviving termination. Enforceable and genuinely useful.
• Non-solicitation of employees — reasonably defensible, particularly where narrowly drawn.
• Non-solicitation of clients — defensible where limited to clients the employee actually dealt with, and to a reasonable period.
• Garden leave — keeping the employee on payroll through notice while away from the business. Practical, if expensive.

The strategic point: protection is better placed in confidentiality, IP assignment and non-solicitation than in a non-compete that will not hold. Employers who rely on the non-compete often have weak versions of the clauses that would actually have worked.

Notice and termination

There is no at-will employment in India.

Notice is governed by whichever of these gives the employee greater protection:

• The contract
• The applicable state Shops and Establishments Act, which prescribes minimum notice for covered establishments
• The Industrial Disputes Act, for employees classified as workmen — which imposes procedural requirements around termination and retrenchment, including notice and compensation, and at larger establishments may require prior government permission

That third category is the one that catches employers out. Whether an employee is a “workman” depends on the nature of the duties performed rather than the job title, and a designation containing the word “manager” does not settle it. Employers who assume the ID Act applies only to factory floor staff sometimes discover otherwise in a tribunal.

Practical drafting points:

• Do not draft notice below the statutory minimum. It will not save you.
• State clearly whether pay in lieu of notice is available and at whose option.
• Distinguish termination for cause from termination on notice, and set out the process for each.
• Where you rely on misconduct, procedure matters more than the clause — see the guide on domestic enquiry.

Contractor agreements are not a workaround

Engaging someone as a consultant to avoid employment obligations works only if the relationship is genuinely one of independent contracting.

Where a person works full-time hours, under your direction, using your systems, integrated into your team, with no other clients, the label does not reflect the substance. The exposure includes back-dated statutory contributions and applies to everyone engaged on the same basis, not just the individual who raised it.

The classification is a question of substance. Drafting cannot fix a relationship that is, in fact, employment.

Practical checks

• Do our offer letter, appointment letter and handbook agree on probation, notice and benefits?
• Does our contract state the full salary structure by component?
• Do we have IP assignment, and does it actually cover what our people produce?
• Are we relying on a non-compete that will not hold, in place of clauses that would?
• Is our notice period at or above the statutory minimum for every state we operate in?
• Have we assessed which of our employees might be workmen for ID Act purposes?
• Are any of our “consultants” actually employees?

Getting these right costs a few days of work once. Discovering them wrong happens at exit, under pressure, with an employee who has already taken advice.