An employment contract essentially provides a framework for the employment relationship. A well-drafted robust employment contract with senior management employees is crucial, given the key roles they play in an organisation and their exposure to sensitive and confidential information of the business.
This article explores key considerations to keep in mind when drafting senior management contracts.
- Duties and responsibilities: There should be clarity as to what is expected of individuals in senior leadership roles. Since a large chunk of their incentives is linked to their ability to deliver and steer the organization in the path of growth, a level of detailing as to their role is very critical in ensuring a smooth working relationship. This also enables employers to measure the executive’s performance and productivity against these pre-agreed parameters and take appropriate action in case the employee fails to adhere to it. That said, drafting a specific list of duties which limits the scope of the role, should be avoided, as it is counterproductive and may act as a fetter to their creativeness and individuality.
- Employee benefits: Given executives are highly remunerated, their compensation and benefits mechanics should be carefully thought through. Typically, in addition to their fixed compensation, executives are also paid other incentives which may be cash based or equity-based, and are usually linked to their individual performance, the company’s performance and/or achievement of milestones. The precise contours of such pay-outs, including eligibility, trigger events, and other terms and conditions should be reflected in the employment contract and/or applicable policy. It is also common to include clawback and forfeiture provisions in senior management employment contracts. Simply put, clawback is a contractual agreement, whereby the employee is required to return previously paid or vested remuneration to the employer under certain circumstances such as breach, wrongdoing, impropriety, financial restatements etc[1]. Clawbacks act as a deterrent to employees from engaging in unethical conduct or act detrimental to the interests of the employer. Forfeiture of statutory benefits such as gratuity etc., however, can be done only under certain limited circumstances identified under applicable laws.
Additionally, employers also often include the concept of “good leaver” and “bad leaver”, and provide for differential treatment for the settlement of contractual benefits based on whether the executive is a “good leaver” (essentially an amicable exit) or a “bad leaver” (acrimonious exit).
- Confidential information and intellectual property: Some of the key aspects to consider while drafting confidentiality clauses include: (i) defining confidential information such that it covers a broad array of information, in any form, that may be proprietary, commercially sensitive or have economic value; (ii) in addition to stipulating the confidentiality obligations that are generally included, the employer would also need to assess if any specific confidentiality obligations based on organisational practices and/or requirements stemming from customer contracts etc. should be included; (iii) the consequences of breach of confidentiality obligation, and (iv) the period of operation of the confidentiality obligations. It is market practice to not limit the duration of operation of the confidentiality obligation.
As regards intellectual property clauses, there should be clear language asserting ownership of the employer over the intellectual property developed by the executive during the course of their employment, assigning rights over such intellectual property to the employer, fall-back license to intellectual property which may not be assigned, waiver of moral rights, etc. Employers, especially those in intellectual property-heavy business, may also consider including a post-employment intellectual property obligation whereby all intellectual property developed by the employee within a specified period after cessation of employment should be identified as belonging to that employer. Employers may seek to add such an obligation on the basis that any intellectual property developed by the employee immediately post their employment is most likely to have been derived from the confidential information of the employer.
- Termination of employment: The termination clause should detail the circumstances that can bring an end to the employment relationship such as expiry of term, voluntary resignation, retirement, cause/misconduct termination, poor performance, voluntary abandonment, death, disablement, continued illnesses etc.
As explained above, the type of exit of an employee could impact the benefits that he/she may be entitled to, therefore, such events should be carefully thought through and recorded.
In cases of voluntary resignation, employers may also include a stipulation that they will have the right to reject/accept the resignation and resignation will be effective only upon acceptance by the employer. This is done to provide employers with the flexibility to reject or delay acceptance of resignation based on reasonable grounds such as work exigencies, pending/impending disciplinary enquiry etc.
Another important aspect is about the length of the notice period which should be carefully drafted. It is usual to have a longer notice period say of 6 months in contracts with such senior functionaries. While so, the employers do retain the right to pay off the notice period should they believe the employees’ continuation on its rolls is not advisable. However, one will not find that this right to pay off the notice period being extended to employees, as the expectation is that it is the employer’s call (and not employees’) to accelerate the cessation date.
In case of executives who are also directors, employers should consider stipulating in the employment contract the consequences on directorship once the individual ceases to be an employee of the company and vice versa.
- Miscellaneous Clauses:
- The employment contract should also provide for the consequences of termination, which may include return of properties, completion of exit formalities, submission of the release of claims, controls on what can be put up on social media/press, indemnification protection etc.
- Non-compete and garden leave clauses: While post-employment non-compete obligations, is not enforceable in an employer-employee context, it is usual to find such a covenant especially if such executives also hold shares/ownership stake in their employer organization. As an alternative to non-compete, it is now increasingly prevalent for employers to place employees on ‘garden leave’ during their notice period which acts as a “cooling off” period prior to employee joining a potential competitor. The purpose of the garden leave provision is to ensure that an employee’s access to confidential information of the employer is cut-off during that period.
- Non -solicitation clauses: Non-solicit covenants, which basically are anti-poaching measures to protect the employer from losing its employees/customers to an ex-employee, are also routinely included in employment contracts, and could be enforced if considered reasonable by the courts. The market practice is to include a non-solicitation obligation that will continue to apply for at least 1-year post-employment.
- Disputes: Indian employment contracts generally provide for courts or arbitration as the dispute resolution mechanism. For senior hires, arbitration is the go-to dispute resolution mechanism, as it’s considered to be more efficient and relatively less time-consuming. Additionally, given that the parties are required to maintain confidentiality of arbitration proceedings, arbitration proceedings tend to be more private in nature, which is advantageous to employers who may wish to keep away the dispute from media scrutiny, and/or protect its sensitive and confidential information from being accessed by public.
In summary, drafting employment contracts, especially for senior management employees, requires careful consideration, keeping in mind the specific business requirements and legal considerations. A well-drafted employment contract is essential for a smooth employment relationship, minimising scope and impact of disputes down the line, and protecting the business interests of the employer.
[1] Section 199 of the Companies Act, 2013, provides for clawback of managerial remuneration in certain cases. The Reserve Bank of India in 2012 and 2019, have issued guidelines for inclusion of provisions of clawback of variable compensation of whole-time directors, CEOs etc. of private sector and foreign banks.
