Human Capital Outlook

Growing complexity of employment contracts in India

This has been a topic most Indian companies have distanced away from, a topic which never deserved importance in corporate quarters and was considered redundant in the Indian context. However, we as search consultants are noticing an inflexion point towards the increasing complexity of employment contracts which is gradually changing the employer-employee relationship.

In the not-too-distant past, employees in Indian corporations would brag about the company they worked for by talking about its perks and during the early 2000's the stock options. Casual days, paid holidays and company maintained driver & car were held in high regard. But what impresses professionals has changed to a considerable extent due to the almost perennial boom which exists in the Indian employment market today. Employment contracts are being drafted with a great deal of cautiousness and have clauses which are progressive in nature, rule out ambiguities and are carried out in 'good faith' between the employer and the employee.

The contract is no longer a simple draft which would mention the title, date, compensation etc, it goes into details such as these:

  • Duties and responsibilities assigned to the executive would be with the consent of the executive ( with the consent not being unreasonably withheld)

  • Health benefits plan is stated in detail. Any modification of such a benefit plan is in the hands of the employer. However, any adverse modification of the plan that impacts the benefit value of the plan to the Executive would be adequately compensated by the Company by other means through mutual agreement.

  • As regards Stock Options, mentioning the quantum, vesting schedule, grant price in the contract is taken to be granted. However, the terms of an accelerated vesting schedule in the event of the Company's acquisition or merger or substantial change in the ownership of the Company is detailed out( For Example: immediate vesting of 50% of the unvested options at the time of the acquisition or merger or change in ownership. )

  • In the event of any follow-on public issue of the Company's stocks, additional stocks/stock options grant award terms are also common these days for impact making senior roles in India Inc

  • For the incentive compensation, no longer can this be left arbitrary to be closed at the year end. A detailed plan which includes mentioning the qualitative or quantitative targets and the payouts involved therein agreed with mutual consent.

  • One of the most important and pertinent topics is that of employment termination or separation. Here, the reasons for separation are highlighted under two distinct headings which have distinct ramifications- Termination with Cause and Termination without Cause/Voluntary resignation.

  • In the event of the employee taking a loan from the company, instead of the Company having the right to secure the loan against the physical assets of the employee like house, car etc or bank accounts or retrial accounts, increasingly, the option of the stock held by the executive to be in escrow with the company is being considered. Conditions for the loan becoming non recourse are being laid out ( for Example death or permanent disability of the employee) 

  • Conditions for Non Solicitation are assuming significant importance in employment contracts. Strict non solicitation terms are being enumerated to safeguard the business interest of the company and prevent the employee to either create or immediately join competition, using privileged information against the employer. Such Non Compete agreements are common and the most severe in the Management Consulting world with partners from Accenture, erstwhile PWC amongst others being effectively barred and restricted from joining any Indian Software companies. The Indian Software Companies have taken a cue and now include strict non-compete clauses for their senior management team.

  • Severance is another contentious issue. The standard 'either side three months notice' is a bygone- a full year's salary with benefits for conditions other than voluntary termination or without cause is assuming importance. Conditions are being laid out in the agreement for Constructive termination and wrongful termination to safeguard the interest of the employee.

  • Finally, arbitration versus litigation. This was the Achilles' heel in any employment agreement in the US till recently. The employee argues that for any grievance, he would not go for arbitration; he would prefer litigation, vice versa for the employer. The tricky part arises in sharing the legal costs of arbitration vs. litigation!

  • Employment contract drafting is no longer a simple affair. Lengthy clauses are being incorporated in 'good faith', both employers and employees believe that time & effort are being spent on this, prior to getting into the employment relationship in order to iron out any contingencies and eventualities which could sour a relationship later.