Any startup be it fintech, cleantech, mobile, software, hardware, IT, food, health, etc. will need to invest time and effort into drafting and executing multiple legal documents with their employees such as Non-Disclosure Agreements, Offer letter, Employment Agreement, etc.
A well drafted document will capture the existing understanding between the parties and will help in mitigating conflict (if any) which may arise in the future. In this blog, we will focus on Offer Letter and Employment Agreements.
Offer Letter – On interviewing a prospective candidate, if the startup is satisfied and wants to extend an offer of employment, then as the name suggests, an offer letter is issued to the candidate by the startup on the startups letter head. It is signed by the authorized representative of the startup and must contain information about the candidate, their pay package, the breakup of the pay package, bonus component (if any), the position being offered, the probation period, confidentiality obligations, etc.
One may wonder, “what is the need for an offer letter?” An offer letter is needed because, most individuals who apply for a position may be employed elsewhere or may have reasons for which they may not be in a position to join the startup immediately. Under those circumstances, the offer letter signed and returned to the startup serves as an acceptance and contract between the startup and the candidate. This provides the startup with the remedy of Specific Performance if the candidate refuses/ fails to take up the employment once the offer letter has been accepted. The confidentiality obligation will prevent the candidate from using the offer letter as a tool for bargaining.
The next leg would be an Appointment Letter or the Employment Agreement. This is the definitive agreement entered into between the startup and the candidate. This is executed prior to/ on the date of the candidate joining the startup. The Appointment Letter will contain, the name of the candidate, address, proof of identifications, age, designation, reporting structure, the compensation, terms of employment such as probation, leave policy, company policy, employee handbook related information, benefits, transfers, termination and other similar important aspects governing the employment.
The Appointment Letter is executed and a copy is retained by the candidate. A well drafted Appointment Letter will assist in establishing process and creating transparency in functioning. It will be the document which governs the relationship between the employer and the employee. In the event of any misunderstanding or dispute, the Letter of Appointment/ Employment Agreement will provide the mechanism for the resolution of such dispute and will contain the remedies available to each of the startup and the candidate.
One amongst the many essential clauses in an employment agreement is the employee non- disclosure and non-compete. In general most Appointment Letters/ Employment Agreements contain the details with respect to non-disclosure and non-compete. The candidate, through the course of their employment with the startup may have access to client information, startup information, client and vendor related confidential information. The non-disclosure and non-compete clause is drafted to ensure that the obligations on the startup with respect to confidential information flow down to the candidate. The non-compete component is to ensure that the candidate does not use the confidential information acquired through the course of their employment to compete against the startup or provide the same to any competitor of the startup.
The employment agreement will provide the consequences of a breach and will detail on the remedies available to the startup on the breach or attempted breach of the understanding between the Candidate and the startup. This will effectively allow the startup to take immediate action to mitigate any imminent and present danger of a breach or threatened breach of the understanding. The startup may approach any court and attain an injunction to
protect its interest and the interest of its clients.
In conclusion, with authority and precedence, we can state that the absence of an employment agreement (Offer Letter, Appointment Letter) may potentially lead to a messy situation. In India most companies function without these agreements. They either have an oral understanding or an ill drafted document which fails to protect their interest. Therefor a professionally drafted document is a must have for any start-up.