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Important Terms in Employment Contract


Important Terms in Employment Contract

One of the important legal document executed by most businesses is the employment contract. It is important that employment contracts be drafted by Professionals to ensure that all relevant employment laws are taken into consideration while drawing up the contract. In this article, we look at some of the important terms that must be included in all employment contracts.

Duties & Responsibilities

The duties and responsibilities of the employee must be clearly defined in the employment contract. Further, it is important to add clauses prohibiting the employee from taking up any other employment during the course of this employment contract.

Working Hours & Days

The normal working hours and days for the employee must be mentioned in the appointment letter or employment contract. Also, mention the terms for payment of over-time. Working hours are governed by the Shops & Establishment Act. Hence, its important to be keep in mind the same while drawing the employment contract.

Salary & Wages

The salary to be paid to the employee must be clearly mentioned in an employment contract. If the employee is eligible to receive any allowances for house or travel or others, the same should also be mentioned clearly. Terms for an increment of salary or other perks or ESOP can also be mentioned, if applicable. The most employment contract or appointment letters provide a detailed breakup of the salary of the employee as follows:

The calculation for taking Home Salary

  1. Basic Salary + HRA + DA
  2. Conveyance + Medical + Other / Special Allowance, if any
  3. Employers Contribution for PF (12% of Basic), if applicable
  4. Employers Contribution for ESIC (4.75% of Gross), if applicable
  5. Employees Contribution for PF (12% of Basic), if applicable
  6. Employees Contribution for ESIC (1.75% of Gross), if applicable
  7. Gross Salary = (1) + (2)
  8. Cost to Company (CTC) = (1) + (2) + (3)
  9. Take-Home Salary = (1) + (2) – (5 + 6)


If the employer has a bonus policy, then the same must be mentioned in the employment contract. Bonus policy must also state the eligibility for receiving a bonus and the amount of bonus paid.

Leave Policy

The leave policy of the employer and the entitlement of the employee to leave with full pay or half pay should be mentioned in all employment contracts. Some of the types of leaves mentioned in the contract include earned leave, casual leave, maternity leave, paternity leave and sick leave.  Many employers in India provide 10 days of earned leave and 12 days of casual leave in a year.

Termination of Employment

It is important for all employment contract to have a clause for termination of employment. The grounds and terms on which the employment contract can be terminated must be clearly provided. Termination of employment comes under the purview of many employment laws in India. Hence, it is important to consult an employment lawyer while drawing the termination of employment clause to ensure its as per the law.


If the employee’s duties and responsibilities involve him/her working in a position wherein they would come to know about trade secrets or confidential information, it is important for the employment contract to have a confidentiality clause. In the case of highly specialised employment involving extensive disclosure of confidential information to the employee, a separate employee non-disclosure agreement can be executed as well.

Period of Service

If the employment contract is in the nature of a contract for a fixed amount of time, then the period of service and terms for renewal of employment contract can be mentioned.