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Employment Agreement – Overview

An employment agreement is an all-inclusive record on paper that discourses all clauses that govern the employment, as well as the rights, obligation, and responsibilities of the parties involved, concerning one other.

When hiring, an employment agreement contract becomes a mandate irrespective of whether the hiring is full time or part-time. Some of the probable points of an employment agreement letter comprise of salary break-up, joining date, notice period, and non-compete clause

What Are the Benefits of an Employment Agreement?

Certain benefits of an employment agreement contract are mentioned below-

Minimal Liability

A definite, well-devised clause in an employment contract format will keep things on the right path and steer clear from uncertainty. A well-drafted employment contract sample also minimises future legal liabilities.

Gives Assurance

Once the staff and the employer sign the employment contract, it develops a feeling of mutual respect. The employment contract also sets the responsibilities and obligation for the involved parties, making sure that both the parties are treated fairly.

Checklist for Employment Agreement Letter

A valid employment contract should include the following key provisions:

The Parties

The parties between whom the agreement will be executed (the employee and the employer) should be stated clearly. The details of both the parties (names, addresses, etc) should be mentioned.

Job designation & profile

The job designation and profile for which the employee is hired should be mentioned in the employment agreement. It will also include the duties and responsibilities for which the employee will be held accountable.

Remunerations and reimbursements

The remuneration to be received by the employee, instead of his services, should be mentioned clearly in the agreement. It will include the breakup of the salary components such as the basic salary, health benefits, travel expenses, PF contribution, etc due to him.

The agreement should also mention the reimbursement due to the employee for any expenses made while fulfilling his duties.

Leaves and other benefits

The contractual employment agreement must include a clause to specify the number of paid leaves the employee is entitled to during any given year and also how he can claim these. Other benefits the employee is due to receive (incentives, bonus, appraisals, etc) should also be mentioned in clear terms.

Confidentiality and non-disclosure

If the responsibilities and the duties of the employee put him in such a position where he comes to be aware of certain confidential information and/or trade secrets, the employment agreement needs to have an appropriate confidentiality & non-disclosure clause.

Termination of employment

The contract employee agreement should mention the process in which the employee or the employer can terminate the agreement. The terms and grounds on which the employee can be terminated should be mentioned clearly in the work contract agreement

Dispute resolution

The work contract agreement must mention the remedial measures the parties will resort to, to resolve disputes, if any. It will include alternative forms of dispute resolution they may choose to employ, such as arbitration.

General terms & conditions

These may include the obligations and rights of the employee and the employer, penalty conditions, and other important provisions applicable to both the parties.

Employment Agreement Clauses

  • Variable salary component: This portion is dependent on the company earning enough profits during the year, and its willingness to pay a bonus to employees.
  • Notice period: It is the defined time period that one must serve from the date of submitting the resignation letter, till the date of being relieved from the company.
  • Terms of employment: Most companies do not allow their employees to carry out any other profession or business parallel to their employment.
  • Non-compete clause: It legally prevents employees from offering their services, for a given period, to other employers working in the same industry or segment (competitors).
  • Transfers & promotion policy: Details on the frequency of transfers within the company, and the basis of being promoted.
  • Probation period: This is the time that the company takes to form an opinion about the employee, work ethic, commitment & willingness towards the job, etc.
  • Additional allowance: House rent, travel, medical reimbursements, insurance cover, and other allowances are part of most standard employment contracts.

Employment Agreement Format

This agreement is between [organisation name] and [ name of the employee] of [city, state] and is dated as of the _____________ day of _____________ in the year 2022. The laws of [state or district] shall apply to this document as an employment agreement between the parties.

Since both the employee and employer retains the employee services the following terms and conditions are provided.

The parties accept the following terms and conditions IN CONSIDERATION of this shared understanding:


The underlined employee promises to take care of the tasks in the obligations signed by the employer to the best of their abilities in a faithful manner. At all times, the Employee shall adhere to all company policies, rules, and procedures.


It is the Employee’s responsibility to carry out all necessary job functions and duties in their capacity as [job title]. The Employer may occasionally add additional responsibilities that fall under the proper scope of the Employee’s job.


The employee will receive a wage of ₹__________ [per hour/per annum] in exchange for the services rendered, and their work will be the subject of [quarterly/annual] performance reviews. The payments should include all the employment deductions like taxes, social security and medical care.


Any benefit programme that the employer offers may be enrolled in by the employee. At present the employer provides (list of benefits) only following the completion of the probationary period will access to these benefits be granted.

Probationary Period of Time

It is acknowledged that the initial [period] of employment serves as a probationary period. The employee will not be provided with any paid time off and other benefits during this period. During this time, the employer may also exercise its right to immediately and without prior notice terminate employment.

Paid Vacation Days

The following paid time off is available to the employee after the probationary period.

[Distance between vacation days] and [Distance between sick/personal days]

If necessary, bereavement leave may be granted.

Any policies relating to paid time off may be changed by the employer.


Both parties want to establish a long-lasting, mutually beneficial relationship. This arrangement can be terminated by either of the parties at any time as long as the written notice is provided to the other party within the proper time duration. Upon termination, the employee promises to return all employer property.

Confidentiality and Non-Competition

You will have access to private information that belongs to the Employer as an Employee. The information will not be shared with anyone outside the company.

You are not permitted to work for any employer that is affiliated with or in direct competition with the Employer while you are an employee. Any other employment relationships you have must be fully disclosed to your employer, and you are free to look for other employment so long as it does not interfere with your ability to perform your job duties and does not put the employer’s interests in jeopardy.

Going ahead the employee acknowledges that they will refrain from approaching any of the clients of the employer for at least (required time period) post completing the employment.


Any prior written or verbal agreements are superseded by this contract, which serves as the entirety of the two parties’ understanding. This contract employee agreement can be altered anytime with the return consent of the employer and employee.

Legal Permission

The employee certifies that as per the law the employee is fully authorised to work in (Country). The Employer will obtain this documentation for its legal files.


In the event of this agreement being determined or unenforceable the party agrees that the remaining provision shall remain in force and effect.

Judicial System

The laws of [state, province, or territory] shall govern this agreement and be applied in its interpretation and construction. With the Employee’s written consent and with due process, the Employer has executed this contract with the assistance of authorised company representatives in witness and agreement thereto.

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Employee Signature                                     Date

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Company Official Signature                       Date

What is an ESOP or the Employee Stock Option Plan?

Top talent is managed and recruited by businesses using ESOPs (Employee Stock Option Plans)! Under this employee benefit programme, the business encourages its staff to purchase shares of ownership at a predetermined rate. Employee stock ownership plans (ESOP) are frequently offered by employers to encourage long-term loyalty from their workforce. It encourages workers to deliver better work and show devotion to the organisation.

Let’s say a worker receives 400 shares. 100 shares will vest once each year has passed. The value of the shares to employees rises together with the company’s value. This controls the staff turnover as well. Read through to find out more about ESOP, pros and cons of ESOP, stock option plan and so on.

Uses of ESOP

  • ESOPs are a tax-advantaged method that provides shareholders with fair value.
  • A ‘low and slow’ ownership shift is possible with an employee stock option plan.
  • People that contribute positively and work for the company for a long time benefit from ESOPs.
  • It produces independent, long-lasting businesses that are tax-favoured.
  • A legacy is established and maintained by the Employee Stock Option Plan.

The Pros and Cons of an employee stock option scheme

One might have the doubt, what are the pros and cons of an ESOP? Here, let us see a few points explaining few advantages and disadvantages of an ESOP:


  • High Price These schemes are comparatively expensive to administer and exceedingly complicated. An owner should budget at least ₹ 40,000 simply to get started on the most basic design. The business will have to pay annual fees to third parties for trustee, legal, administrative, compliance, and valuation services during the life of the plan. Transaction costs apply to both the hiring of new employees and the retirement of existing ones.
  • Reduced Value An ESOP bases its decision to buy stock in a company on a notional valuation study from a licenced firm. This valuation may be considerably less than what a competitive selling procedure with numerous potential bidders and investors may produce. Depending on the industry, a company might often earn a selling valuation that is 20 to 30 percent greater than an ESOP valuation.
  • Exhausting Resources Less money is available to invest in the expansion of the company, the employment of talent, the exploration of new markets, etc. as a result of these fees and payments as well as the buyback requirements of an ESOP. The business may find it difficult to invest in development and innovation because supporting the strategy currently takes priority over cash flow and liquidity, which are under constant pressure.
  • It’s Challenging Many of the parties involved benefit in the form of third party fees, it is difficult to obtain an unbiased judgement about this type of stock ownership plan from the industry. Many plans employ an independent trustee to represent member interests and external companies to handle plan administration and record keeping in order to avoid conflicts of interest. Fiduciary Liability Insurance is also advised to safeguard the company against any allegations of improper handling of employee benefits.


  • Built-in Buyer An ESOP can help the enormous number of baby boomers wishing to sell their companies find a buyer in a market that is rapidly becoming saturated with companies up for sale.
  • Tax Benefits If the company complies with a comprehensive list of requirements, ESOPs can provide a number of tax benefits. And while establishing an employee stock ownership plan is quite expensive, depending on the firm, its structure, and a wide range of other circumstances, it may be less expensive than selling the business.
  • Owner and employee advantages Middle-market businesses can frequently achieve their objectives with a thoroughly thought-out exit strategy. The ESOP then has the potential to protect the legacy and stability of the company while rewarding key management and employees for their performance and commitment. The ownership of the business is still held by individuals the owner knows and trusts. This can reflect very favourably on the owner who decides to give their staff the reins, and a sale to an ESOP can be made gradually or all at once, allowing the owner options in how to exit the company.

How Does ESOP Work?

Let us see on how an ESOP work from the explanation given below:

When a company offers ESOPs, they are held in trust for a specific amount of time. The vesting term is the time frame in question. Employees may then exercise their ESOPs after the vesting time has passed. The quantity of shares to employees that may be offered, their price, and the recipients are all determined. Following this, the chosen employees will have the opportunity to exercise their ESOPs and purchase company shares at allowed prices, which are below market value.

Checklist for Employee Stock Option Plan 2022-23

  • Check the articles for any specific provision on the issue of share under ESOP.
  • The date and members of the compensation committee should be included in the board meeting.
  • Notice of general meeting including the number of ESOP to be granted.
  • Likewise, hold a general meeting for approval of shareholders by way of ordinary resolution. Additionally, include the authorization for the issue of shares under ESOP and the formation of the compensation committee.
  • There must be a compensation committee (CC). The CC shall be a committee of board directors consisting of a majority of independent directors.
  • Approval of shareholders by separate resolution.
  • The requirement of a draft copy of certificates.
  • Filing of Form-PAS-3.
  • Disclosure in Director Report (DR).
  • Maintenance of the register of ESOP in SH-6 at the registered office of the company or such other place as the board may decide.
  • Entities in the register shall be authenticated by CS or any other person authorised by the board.

Eligibility for ESOP

According to the IRS (Indian Revenue Service), the maximum age an employer can impose to be eligible for an ESOP is 21. Moreover, he/she must be eligible for ESOP in the year of joining the company. An employer can restrict eligibility to employees with two years of service but only if the plan has immediate vesting.

How to register an Employee Stock Option Plan

Draft The ESOP Rules

Your ESOP rules set out the terms that apply to all options granted under the plan, including the process for granting options, how and when employees can exercise their options, and what happens to the options on an exit event, or if an employee leaves. The document will include the following schedules:

  • Schedule 1: A grant letter setting out the terms of the options you want to grant to recipients.
  • Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
  • Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
  • Schedule 3: An option certificate which records the number of options, exercise price and vesting provisions.

Approve The Rules And The Option Pool

Once you are satisfied with the ESOP rules, your directors and shareholders will need to sign some corporate approval documents to adopt the ESOP rules and set up your option pool.

Board And Shareholder Approval

There are some resolutions which include:

  • The approval of the Employee Stock Option Plan rules.
  • The total number of options in the ESOP pool.
  • Authorization for the board to grant options to recipients of their choosing, and
  • Authorization to issue shares on any exercise of the options.

Shareholder Waivers And Consents

Your constitution and shareholder’s agreement may include pre-emptive rights on the issue of new shares. If this is the case, these shareholders with preemptive rights will need to sign a waiver in respect of any options granted the ESOP.

Grant your options

Prepare Your Directors’ Resolutions:

Each time you want to grant options, you should ask your corporate secretary to prepare a new set of directors resolutions in writing, approving the grant of options to a specific recipient.

Send Each Recipient Their Grant Letter:

  • Once you have received the letter, you can issue them their option certificate. You can find the option as the certificate form in schedule 3. Here the schedule should be left blank and a separate option certificate provided to the recipient. That is, you need to create a fresh, separate word doc.

Update Your Register Option

Internally, you should also be keeping an option register, which is a record of all the options the company has granted, the vesting schedules, expiry dates, and exercise dates.

Documents for Employee Stock Option Plan

  • Minutes of a board meeting.
  • Special resolution approving ESOP along with the explanatory statement.
  • Minutes of the general meeting.
  • Boards report.
  • Register of employee’s stock option plan.
  • PAS- 3, MGT- 14.

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