Written by – Jaya pathak
Under Indian law, an employment contract (often formalized via an appointment letter) is a legally binding agreement that defines the terms of service between an employer and employee (such as job role, salary, work hours, etc.). The new Occupational Safety & Health Code explicitly mandates issuing standardized appointment letters to all employees, and these letters outline the contractual terms. As a contract of service, it must comply with the Indian Contract Act (1872) and all applicable labour statutes (wages, PF/ESI, shops & establishment rules, etc.).
Types of Employment Contracts
- Permanent (Full-Time): An open-ended contract that continues until retirement, resignation, or termination. Permanent employees typically receive full statutory benefits and are covered by labour protections.
- Fixed-Term: A contract for a specified duration (e.g. project-based or seasonal). The Industrial Relations Code (2020) clarifies that fixed-term employees must be treated on par with permanent employees – they get equivalent benefits (leave, social security, gratuity) when matched with similar permanent roles. In practice, fixed-term contracts should clearly state the end-date and conditions for renewal or termination.
- Part-Time: Employment involving fewer hours than full-time. Part-timers are still entitled to at least the minimum wage (pro-rated by hours worked) and statutory benefits. Employers must comply with all labor laws even for part-time staff. Part-time contracts should specify the weekly hours, rate of pay, and any prorated leave or benefits.
- Freelance/Gig (Platform Work): Independent contractors or gig workers engaged on non-traditional platforms (e.g. ride-share drivers, delivery personnel, freelancing professionals). The new Social Security Code (2020) even defines “gig workers” and “platform workers” as those earning outside traditional employer-employee setups.
While these are typically “contracts for service” (not full employment contracts), the Code now provides them access to some benefits (such as provident fund and insurance) and mandates registration on an online portal.
Any agreement with freelancers should clearly distinguish them from employees (e.g. no PF/ESI deductions unless required). - Probationary: A common initial period (often 3–6 months) during which an employee’s performance is evaluated. Employment on probation has most of the features of a permanent contract but often allows easier termination or shorter notice. After confirmation, the contract typically continues as regular employment.
Key Clauses in Employment Contracts
- Remuneration & Benefits: Must specify salary details (basic pay, allowances, bonuses) and benefit contributions. Under the Code on Wages, at least 50% of total remuneration must be classified as “basic wage”. This affects provident fund and gratuity calculations. The contract should also mention any promised allowances or deductions (PF, ESI, professional tax). Employers and employees must ensure no one is paid below the minimum wage or central floor wage. Leave entitlements (annual leave, sick leave, etc.) and any other perks (medical insurance, etc.) should be clearly recorded.
- Working Hours & Overtime: The labour codes cap standard work hours at 8 per day (or 48 per week). Contracts should state the normal working hours and shifts. Overtime pay (at prescribed rates) must be defined for any extra hours worked beyond the limit. Weekly days off and holiday leave should be in line with labour rules. The Code on Wages standardizes overtime calculations and insists on accurate time-tracking .
- Probation & Notice Periods: The contract should specify any probation period and the notice period for termination by either party. Typically, termination during probation requires minimal notice. After confirmation, notice periods (or pay in lieu of notice) usually range from 1–3 months as per company policy or law. For large employers, the Industrial Relations Code requires advance notice or approval for mass retrenchment, but individual termination generally follows the contract and local labour laws.
- Confidentiality & Non-Compete: It is common to include a non-disclosure clause that forbids the employee from misusing proprietary information or trade secrets. Breach of confidentiality can lead to legal action. However, any clause that restricts an employee’s future employment (a broad non-compete or restraint of trade) is generally unenforceable in India. Section 27 of the Indian Contract Act renders agreements void if they unreasonably restrain lawful trade.
In practice, only narrowly-tailored clauses (for example, preventing poaching of clients or demanding repayment of bona fide training costs) may stand. - Dispute Resolution: Contracts often include a clause specifying arbitration or jurisdiction (e.g. which city’s courts will have jurisdiction). Note that labour disputes often involve statutory considerations beyond the contract (for example, unfair labour practices under the ID Act). The Industrial Relations Code also regulates collective actions: workers must give 60 days’ notice before striking, and spontaneous “flash” strikes are prohibited.
An arbitration clause is valid if agreed by both sides, but employees should ensure it is not unreasonably one-sided (e.g. requiring arbitration in an obscure foreign location).
Changes Under the New Labour Codes (2025)
The Government has consolidated 29 existing laws into four codes. Notable effects on employment contracts include:
- Code on Wages (2019): Unifies minimum wage, payment of wages, and bonus laws. It prescribes a central floor wage and mandates that every employer classify ≥50% of pay as basic wages. This redefinition can affect take-home pay and statutory contributions. The code also standardizes overtime pay and requires accurate tracking of hours . Employment agreements should be updated to reflect revised wage components and ensure full compliance (e.g. any travel or conveyance allowance beyond special reimbursements).
- Code on Social Security (2020): Integrates PF, ESI, gratuity and other laws, and extends coverage. Crucially, it formally recognizes new work categories: gig workers and platform workers. Employers of such workers (for example, app-based companies) will need to register them under the Code and contribute to social security schemes (provident fund, employee insurance, pension) on their behalf. For traditional employees, the Code often lowers applicability thresholds (e.g.
PF is mandatory for establishments with ≥10 employees earning up to ₹15,000) and introduces social security contributions for fixed-term workers as well. - Industrial Relations Code (2020): Merges laws on unions, strikes, and dispute resolution. It raises the threshold for mandatory standing orders from 100 to 300 workers, easing compliance for smaller firms. It requires large establishments (≥300 employees) to obtain government permission for layoffs/closures. The Code explicitly states that fixed-term employees are entitled to the same benefits as comparable permanent staff.
It also governs industrial actions: strikes now require 60 days’ notice and no shutdown (lockout) during this. Contracts should be reviewed to ensure union recognition, grievance redressal mechanisms, and layoff clauses comply with these new rules. - Occupational Safety, Health & Working Conditions Code (2020): Unifies factory, shop, and mine safety laws. It mandates appointment letters for all employees (in a new prescribed format). The letter must contain details like Aadhaar number, Labour Identification Number (LIN), provident fund (UAN) number, and terms of employment. Employers must also adhere to stricter safety and welfare standards (such as providing clean drinking water, restrooms, safety officers, and periodic medical exams in certain industries.
Employment agreements should reference compliance with these codes (for example, confirming that workplace facilities meet the required norms). Women-specific provisions (e.g. safe transportation, crèche facilities) also need to be considered in policy documents.
By understanding the above points and carefully reviewing your contract, you can help ensure a fair and legally compliant employment relationship in 2025 India. If in doubt, consult a labour law expert: a well-crafted contract protects both you and your employer.
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