Issue IX |June 2010
Termination of employment of white-collar employees – Key
Considerations
Introduction
Under the Indian legal regime, there is no specific legislation which governs the
employment of white-collar workers. Primarily, none of the labour laws apply to them and
their service conditions are governed by the respective employment contracts which contain
all terms and conditions governing the employment. In the absence of any specific statue or
principles governing employment of white-collar workers except the basic provisions
applicable under the Indian Contract Act, 1872 and judicial precedents, the termination of
such employees becomes a tricky issue for the employer. There always remains an ambiguity
in the mind of the employer and the employee regarding the legality and sanctity of the
contractual termination provisions.
The present bulletin discusses the circumstances of termination, its consequences,
and contractual safeguards as well as judicial principles and suggestions to facilitate smooth
termination thereby minimizing the chances of any legal disputes.
1.0
Circumstances of termination
An employee may be terminated due to several factors like closure of business due to
change of market situations or other reasons, organizational restructuring, employee’s
inability to fulfill material obligations, misconduct, inefficiency, loss of confidence by
management etc. Below are some of the key grounds of termination:1.1
Inefficiency – An employer can terminate the services of the employee if he finds
that the employee is performing poorly and he is generally inefficient in achieving the
organisational targets. This is a valid ground as it is not prudent for the employer to retain
such employees in the organization who fails to perform consistently, are reluctant to change
the behaviour and are incapable to produce quality deliverables. Generally, the employment
contract did not provide inefficiency as a ground for termination of employment, but the
trend is now changing. In any event, it usually describes the job description and duties which
underlines the expectation of the employer and obligates employees to meet certain
performance standards specified in the employment contract. It is essential to note that
before the employer terminates he must have sufficient documentary evidence against the
employee’s incapabilities as – in the event of a dispute - the burden of discharging proof lies
on the employer to show and place such evidence on record.
1.2
Violation of confidentiality provisions – Employees are usually under an obligation
to protect confidential business information of the company which they are exposed to
during the course of the employment which, if abused, is capable of commercial
exploitation in the hands of a competitor. Confidential information is usually industry
specific but typically includes customer/supplier list, formulas, know-how, knowledge of
Disclaimer – This bulletin is for information purposes and should not be construed as legal advice.
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Issue IX |June 2010
customer or prospective customers, methods, plans, processes, products, research, financial
or personal data, techniques, and trade secrets.
Usually, “non-disclosure” or “confidentiality” clause in the employment contract
obligates employees not to disclose such sensitive and confidential information to third
parties both during the employment duration as well as a reasonable period post termination.
It also acts as deterrent for those who contemplate deliberate disclosure. The employer is
entitled to terminate any employee who breaches such obligation prescribed in the contract.
1.3
Breach of employment contract – Another common cause leading to severance of
employer-employee relationship is breach of the terms of the employment contract. Breach
can be due to a variety of causes – ranging from misleading information, failure to comply
and conform with company’s policies, willful suppression of material information which, if
known to the employer would have prevented the employer from hiring, inability to work in
accordance with allocated tasks etc.
1.4
Misconduct – As such misconduct is not defined in any statue and depends upon
facts and circumstances of each case. Black’s Law dictionary defines misconduct as
“dereliction of duty, unlawful or improper behaviour.” It is usually the HR policy of the company
which describes what constitutes misconduct. Some of the instances of misconduct are
unauthorized absence from work, negligence in performing duties, data theft,
misrepresentation of facts, and willful disobedience of the instructions of the management
or supervisor. While the courts have also not defined “misconduct”, the Supreme Court in
the “State of U.P. v. Kaushal Shukla1” considered the act of the respondent while conducting
the audit as a gross misconduct because he was acting outside his authority along with his coworker. In this case, he was appointed as an assistant auditor to conduct the audit of the
“boys local fund” in the state of Uttar Pradesh. The respondent and his co-worker irregularly
demanded a high amount as an audit fee for auditing “the boys account fund” of the college.
They also collected nominal sum of Rs. 2,000 (about $ 40) as an audit fee for which they
issued receipts under their own signatures. Following an enquiry the respondent was
terminated from his position.
As discussed above, the termination may occur due to several reasons which can
either be employee centric or organizational reasons. Regardless of the cause, the manner in
which the termination is effected assumes great significance. Therefore, it is important for
the employer to ensure that due process is followed before implementing termination.
2.
Termination clause in the Employment Agreement
A poorly implemented termination can cause enormous problems for a company,
and the employee. Therefore, it is important that the key terms and conditions of this clause
are drafted without ambiguity. The employment contract must specify the circumstances for
termination along with the process as well as post-termination obligations for an employee.
Some aspects are discussed below:-
1
1991(1) SCC 691
Disclaimer – This bulletin is for information purposes and should not be construed as legal advice.
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Issue IX |June 2010
2.1
Grounds of Termination
As mentioned above, a common ground is usually misconduct and can become the
subject of dispute because a certain level of stigma is attached. It is essential for employers to
either define precisely what will amount to misconduct in the employment contract or to
have an exhaustive uniform HR policy which will describe inclusive instances of how an
employee can be removed for misconduct. Usually a process is defined in the context of
minor or grave misconduct. The refusal to accept lawful and reasonable instructions from
the company, or continued disobedience of the company’s code of conduct after written
warnings are some of the examples of grave misconduct. The general practice is to provide
the concerned employee with a show-cause notice to justify his/her reasons for the
misconduct, conduct an internal inquiry following due process and where the reasons are not
in accordance with company regulations, the services can be terminated. The clause must
clearly reflect these points.
Companies tend to want a provision about “termination at will” i.e. without
assigning any reasons. Usually, such clauses can be challenged but jurisprudence shows a
divergence of opinion on the enforceability of such provisions. Nonetheless, despite the fact
that a contract may contain a clause entitling an employer to terminate without assigning any
reason, it must be exercised with caution.
2.2
Manner of Termination
Usually, all employment contracts must stipulate the period of notice to be given to
the employee before his/her services stands terminated. The usual practice is to provide a
“30-90 days notice or salary in lieu thereof” wherein the employer either gives the employee
a notice stating that the employment will stand terminated after 30 or 90 days, or gives the
employee 30 or 90 days salary in lieu of the notice so that the employment stands terminated
with immediate effect. The period of notice can be changed as per the company policy.
Practically, in certain situations, the employer may, at its discretion, relieve the employee
from his/her services even prior to the expiry of the notice period. The termination clause
must also provide for the notice period in the event an employee wants to resign – often
times, the duration of this notice depends on the seniority of the employee and the time that
it may take an employer to find a replacement so that the transition phase is not disruptive.
2.3
Consequences of Termination
It is crucial that any sound termination clause addresses the post-termination
obligations of an employee. Some of the common post-termination obligations for
employees which must be covered in the termination clause are (i) To hand-over to the
company all business cards, lists, files, correspondence, literature, drawings, records,
prepared in the course of the employment or any confidential information either in written
or digital form belonging to the company or relating to its business, (ii) To refrain from any
unauthorized access or usage of the company’s website and financial information, (iii) To
abstain from seeking employment with competitor(s) post termination for a defined period.
Usually, a restraint of 12 months running from the date of termination of employment is
considered to be reasonable. The clause is crucial to protect the business of the company
Disclaimer – This bulletin is for information purposes and should not be construed as legal advice.
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Issue IX |June 2010
and to prevent the potential loss of revenue which a company may incur if valuable
employee leaves to join the competitor, and uses the information of the erstwhile employer.
However, it is important to bear in mind that such a clause is often unenforceable under
Indian law and the employer is only protected against misuse of his proprietary rights, and
not against competition.
Nonetheless, usually, companies prefer to retain the non-compete clause to create
psychological pressure so that it acts as a deterrent. However, such a clause cannot help
companies in long-term to retain talent since it is difficult to enforce. The judicial position
has been varied on this subject, and in the event of breach of such a provision, the
employers have to weigh the facts and circumstances of each situation before taking legal
recourse.
3.
Judicial position in India on termination of employment
As it is apparent from the foregoing, under the Indian legal regime, the basis on
which the employer-employee relationship is governed is purely contractual and based upon
judicial precedents. The courts have considered mismanagement, misconduct, loss of
confidence, dereliction of duty, change of business as common grounds of termination of
employment.
In A. N. Shukul v. Phillips India & Others2, the defendant terminated the employment
of a person on account of change in business plan. The employee was informed that the
company went through the process of reorganization and reconstruction and due to such
changes his services were no longer required. A separate clause under the appointment letter
provided “the age of superannuation from the company’s service is normally 60 years however, the company
shall have absolute discretion to retire you at any time without assigning any reason after you attain the age of
58 years and for the purpose of determining this, the age recorded with the company at the time of
appointment shall be considered as final and conclusive. Additionally, – your services may be terminated by
either party giving the other three months written notice or salary in lieu.”
The plaintiff contented in the court that he was not aware of such termination policy
of the company because it was never made public. He further contended that the he was
discriminated with another employee who was offered retirement under the VRS and paid
termination dues on the basis of his gross salary. The plea of down-sizing was also denied as
the defendant had advertised for the position on which the plaintiff was working. The Court
denied the contentions of the plaintiff and held that in term of the appointment letter,
defendant had the right to terminate the employment of the plaintiff.
In another case3, the Madras High Court held that the reasons for termination must
be applied objectively i.e. must be based on the facts which should be proved by
documentation or evidence. In this case, the petitioner while working as the deputy general
manager in the Hindustan Teleprinters Limited managed to remove from the company
premises, 15 Novapan sheets. He also allegedly created false documents using the delivery
2
3
Delhi High Court decided on September 7, 2009 followed in Y.K Sethi vs BASF India (CS (08) 1761/2006)
M. Rajan Issac vs. The Chairman & Managing Director, Madras High Court decided on April 29, 2004
Disclaimer – This bulletin is for information purposes and should not be construed as legal advice.
© PSA
Issue IX |June 2010
order issued by another company and, in turn, causing loss to the employer. He was charged
of violating the code of conduct of the company. The management conducted an enquiry to
ascertain the charges of theft, fraud and dishonesty against him. The charges were proved
and the petitioner’s employment was terminated. However, the petitioner contended that the
enquiry was conducted without any basis. The management was unable to establish that the
Novapan sheets were removed from the company premises and were never replaced. The
court ruled that a company cannot make out charges of theft and fraud, unless evidence is
provided to show that material loss was caused. The Court ordered fresh enquiry and set
aside dismissal order of the petitioner.
4.
Suggestions
To sum up, it is clear that the contractual provisions primarily govern the
employment and its termination. Below are some of our suggestions to minimize acrimony
at the time of termination:
•
Frequent communications by the employer – both oral and written - informing the
employee of his shortcomings, and highlighting the expectations;
•
Employers must be reasonable and provide opportunities for the employee to
improve performance;
•
If lack of performance is the basis of termination and if, despite making the efforts,
the employee is unable to meet the company targets and his employer’s expectations,
he can be simply asked to resign instead of being terminated straightaway;
•
The transparent communication will mitigate anxiety levels and will help in reducing
the possibility of the employee feeling aggrieved and initiating litigation against the
employer.
Authored by:
Sunaina Kapoor
Disclaimer – This bulletin is for information purposes and should not be construed as legal advice.
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