Feature

Employee contracts get complex

Sudipta Dev analyses why employee contracts have become so complicated in the last few years

One of the burning issues in the IT industry is the employee contract system which has been getting increasingly complicated with time. The employer wants to play safe and include clauses which are not always acceptable to the candidate. Adding to the complexity is the demand-supply mismatch in the recruitment market for people with specific skills and experience. These few people only want to join an organisation on their own terms and conditions, which the company is not willing to accede to. This might lead to a situation in which the finalisation of the contract might drag on for months with the two parties not willing to compromise and agree to a middle-path.

While most organisations want to protect their own business interests, the candidates obviously take care of their personal ones and are not afraid to voice their demands. Both the employer and the employee know that they do not have a long-term relationship and want to get the maximum benefit as long as the association lasts.

These contracts are not particular to the whole organisation, but “tailor-made” for certain individuals. “Each of these contracts is unique and has to address both employer and employee needs,” says Kris Lakshmikanth, Founder CEO & Managing Director, The Headhunters India. The trends common these days are joining bonus, buyout of notice period, compensation for stock option, performance bonus, etc. Lakshmikanth however believes that while today candidates are well aware of their rights, they often have half-baked information which leads to very high expectations.

New clauses

Organisations have started including clauses in the contracts which were unheard of a few years back. Vikram Bhardwaj, Partner with executive search company Redileon, points out that there are clauses known as “restrictive covenants” which are getting popular amongst MNC & Indian origin companies alike:

• Roles have become highly specific and any senior person walking out of the company can potentially result in a huge impact on the overall business of the firm. Consequently, companies seek to include a non-compete covenant which would prevent a former employee to directly work for competition or create competition for a set time period.
• Employees with information of the company’s internal processes, clients, business practices, etc, are easy targets for competition. Hence, non-poaching clauses which seek to prevent an ex-employee from recruiting a former colleague.
• Non-solicitation covenants are being incorporated to prevent ex-employees to enter into working relationships with customers whom they got in touch with while working with their former employer.
• Detailed description of knowledge transfer, invention and IPR ownership, patents and even going upto works of authorship (whether copyrighted or not).
• Not just a mention of notice period but detailed employment termination terms which define involuntary and voluntary termination.

  Bhardwaj gives a few examples from the employee’s perspective:

• Clear description of the role with deliverables and reporting. Defining and clearly enumerating terms for redundancy, wind-up, etc.
• Mention and description of the severance payout along with other terms for involuntary separation.
• No change of location or nature of work without mutual consent.

  In the eventuality of a dispute, the employee favours litigation while the employer likes to go for arbitration.

Level of hiring

These complications are generally witnessed at the senior management level and for people with specialised skills, which are not readily available in the market. “One has observed this trend for critical functional leadership (like the head of sales) as well. At any other levels, cash is still the king,” says Bhardwaj. Lakshmikanth suggests that people with rare skills should be taken on board as consultants and can be paid market driven salaries, etc, without upsetting the existing apple cart.

Coping with increasing aspirations

It is currently a supplier’s market as far as talent acquisition is concerned. For an organisation it is often difficult to cope with the increasing aspirations of the talent it wants to hire. Lakshmikanth feels that if it is a large organisation like the top 10 software services companies who have an in-house management bandwidth, then they can promote internally. This is however not always the best solution—they do so to please some of their senior people. “I have personally seen in a number of cases, the negotiations breakdown on compensation. The client is unable to go beyond a point, because he has to take care of his existing people,” he adds.

Future trend

In the future, the contract system will continue to witness a more dynamic equation. On one hand will be the increasing number of opportunities for employees, and on the other employers will be more cautious about guarding their interests. Concedes Bhardwaj, “In the knowledge economy, with increasing competition as well as opportunities/ avenues, the ability of employees to go out on their own and create competition or join other enterprises would only increase. Thus companies would continue to further incorporate more stringent restrictive covenants and non-compete clauses, and aim for tactful termination clauses.” He believes that more M&As in the future would result in employees asking for ‘parachute clauses’ to protect themselves. Employers would also start seeking severance and release agreements from departing employees, to ensure no litigation at a later stage.

But then, is it possible to bring about a balance where the interests of both sides can be taken care of? “The contract is only a sort of a pre-nuptial agreement. Ultimat-ely, contracts are drawn with an intention of not having to view it ever again. Both the employer and the employee have to act in ‘good faith’ and find a balance,” says an optimistic Bhardwaj. Albeit, the increasing polarisation of interests caused by a competitive market makes it a difficult probability.