High Value Employment Contracts – Nuances and Challenges

A majority part of the previous financial year is embroiled in the pandemic leading to the evolution of a new normal regime – whether it be doing business, performing daily routine tasks or discharging professional duties. While “living with COVID” may very soon become a reality, the new phase is calling upon us to revisit practices followed till date to continue the order of things in the wake of calamities.

This post aims to explore the key practices involved while finalising high value employment contracts especially in these times and highlights the key terms of employment of senior management level personnel employed by the organisation.

Senior Level Employment Contracts – Unique or not?

The fundamental question to be raised before we start is – is there even a need to distinguish “Key Employee” contracts from the other employee contracts? Key senior personnel of the organisation – popularly termed as “CXOs[1]” – are recruited for performing quintessential functions of the organisation relating to the growth, prospects and future of the organisation. These Key Employees are attractive on account of their expertise and experience. As a result, these contracts go to affect the health of the organisation and are quite expensive, if there were to be any dispute with such employees, if not comprehensively drafted keeping in mind the uniqueness of such employee.

Further, such Key Employees carry on the responsibility of executing policy decisions taken by the board of directors of the organisation as well as duties imposed under law. As a result, every action performed has a long – lasting impact on the organisation and they are the front-facing of all external communications and are accountable to regulatory authorities as well as the general public. As their role pans out to be more of a strategic nature rather than purely executive or management functions, hiring of Key Employees is a process of careful scrutiny and sifting from the portfolio of expertise, thus causing a significant financial investment on the side of the employer.

Management Level Employment Contracts – Contractual or Legal Relations?

While the nature of contractual documentation and the high value character of Key Employee contracts is established, it is pertinent to note that the legality of such employment documentation lies only in the contractual relations created between the Key Employee and the employer. So far, there is no protection to Key Employees. The reason for this classification being that the state legislations regulating shops and commercial establishments do not offer protection to such Key Employees in most states of India. For instance, the shops and establishments laws in the states of Maharashtra, Karnataka and Tamil Nadu specially exclude employees / workers exercising managerial functions in the establishment whereas states such as Delhi and Andhra Pradesh have all encompassing provisions to cover even the employees at managerial level.

Under the new labour codes a new definition of “employee” has been added which includes managerial and supervisory employees. However, no real benefits are accorded to employees. The codes still deal with workers and provides protection only to workers.

High Value Employee Contracts – Key Clauses

The “high value” nature of employment contracts depends not only upon the substantial amount of consideration underlying the contract in the form of salaries and perks but also the rights and liabilities flowing from such contract. The nuances of high value employment agreements are explained below:

Detailed Roles and Responsibilities: Key Employee roles more often than not, entail a large scale of managerial duties such as overseeing of team functions, review work performed by team members, report the team’s performance and perform administrative tasks like sanctioning / rejection of leave.

Well – defined exit structure: High value contracts have definite exit structures clearly laying down the processes to be followed in case of exiting from the organisation such as notice periods, grounds for termination with cause and defining the consequences of the exit under the contract. For instance, contracts of highly skilled and heads of technical operations commonly known as Chief Technical Officers, have clear cut exit procedures. Moreover, it is also a practice to list out the grounds under which the employment of such technical heads can be terminated with immediate effect such as for: (a) Not meeting targets; (b) Causing reputational or other loss to the organisation; (c) Failure to comply with statutory requirements for the organisation; (d) Fraud, gross negligence and wilful default.

Benefits other than annual remuneration: The relationship between many Key Employees and their employers is not merely a pure employment relationship but is also connected with other benefits arising on account of past performance of the employee or in consideration of the high level of duties and responsibilities undertaken by the employee in not only overseeing the performance of the workforce of the organisation but in upscaling the business activities and overall performance of the business. Such benefits could also be in the form of equity interest such as participation in employee stock options scheme, issuance of sweat equity shares or securities which are eventually convertible to equity shares if the organisation is a company or a share of profits / variable pay in a pre – defined ratio in the event the organisation is not a company.

Covenants during employment and post – employment: Another typical characteristic of Key Employee contracts is covenants which are to be adhered to by the employee during the term of employment and for a specific period after termination. Such restrictive covenants are in the nature of (a) exclusivity due to which the employee is bound to devote his / her entire time to the organisation; (b) non – compete clause i.e., a covenant on the employee to restrict such employee from engaging in any business / venture competing with the organisation’s business; (c) non – solicitation clause prevents an employee or a former employee from indulging in business with the company’s employees or customers against the interest of the company; and (d) confidentiality clauses to give protection to sensitive information, intellectual property and trade secrets.

In light of the sensitivity of the job roles and responsibilities assumed by senior employees, protection of confidential information and intellectual property imposes several contractual restrictions to bind the employee. Regard should be had to whether the confidential information/ proprietary information or IP originates from such employee and additional protection should be sought through IP assignment provisions. This is particularly relevant for promoter level employees or acqui-hires.

High Value Employment Contracts – What Lies Ahead?

The past year has brought about a considerable change in trend in work culture in light of the on – going pandemic. However, following key considerations will be essential to complete any high value employment documentation:

  • An oft debated issue from time to time is regarding detailed versus short form contracts for Key Employees. It is suggested that organisations should ensure that all terms and conditions of employment as may be negotiated with every Key Employee should always be translated to an employment contract in writing recording the complete understanding and indicating acceptance of terms by the Key Employee. The same also poses an advantage in favour of the employer in terms of ringfencing the employer from any frivolous claims and mitigates disputes in the future.
  • Specific terms of remuneration (by way of salary, benefits, and other special grants) should always be comprehensively spelled out in the employment contracts. Further, the occurrence of events due to which remuneration may be restructured / suspended or reviewed for enhancements may be clarified in the commercial terms of the employment agreement. For instance, employers may consider building a force majeure clause triggering a revision in remuneration on account of unforeseen events due to which the organisation’s business may be suspended or put to a complete halt. Additionally, while termination clauses in employee contracts have always captured the impact of long – term illnesses and death of the employee, these clauses may also need to be revisited in light of the pandemic and specific termination events relating to the impact of COVID – 19 on affected employees (including the remuneration and benefits so payable to them) may also be specified.
  • Further, the particular events or circumstances warranting for exit / termination of employment (including cross defaults with any other documentation to which a Key Employee is a party – such as investment documents) should be clearly linked into the employment agreement.
  • Another trend to safeguard employee documentation especially for Key Employees is building of claw back clauses which place an obligation on Key Employees to repay or return the benefits received from employment upon the commission or omissions of the employees especially for instances of fraud or non-compete. The trend for the same is catching up in India.
  • Further, as and by way of enforcing post – termination employee covenants, a number of high value employment contracts include garden leave clauses. An employer resorts to sending an employee on garden leave if the employer is apprehensive that the employee may use his presence at the premises to gather confidential information or to entice other employees away from employment of the employer or to indulge in some other activity detrimental to the interests of the employer.
  • The last substantial component which is till date not often covered in employment contracts is in relation to the personal presence of the employee to carry out his / her duties. While Indian organisations have now well adapted themselves to the work from home culture, the resuming of physical operations of the organisation is still a far cry. In light of the status quo maintained, Key Employee contracts must lay down specific terms of remote working and occasions where the physical presence of the employee will not be dispensed with, in addition to compliance of work from home policies, as may be devised by the organisation.

In Sum

High value employment contracts are unique to the nature of employment and skills each such senior employee brings to the organisation based on their expertise and thus, there is no such standardised version of a Key Employee contract. In light of the expertise of such employees including the comprehensive nature of responsibilities expected from such employees it is without an iota of doubt, absolutely essential to put in place a written contract detailing the understanding with such employees. In light of the cultural shift which has made remote working a reality with less dependence of physical meetings to carry on daily employment responsibilities, the emphasis for such high value contracts would also be the building of proper safeguards for protection of the organisation’s data, business practices, trade secrets and intellectual property. As every organisation thrives on the talent, expertise and experience of the Key Employees, a clear contractual understanding helps to inculcate a trust factor in the employer employee relationship which is inculcated only with time and may be even more difficult to build in a remote working environment.

Archana Balasubramanian, Partner; Sanjana Buch, Senior Associate

[1] Designations such as Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Technical Officer.

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