Six Employment Contract Mistakes Indian Companies Keep Making, and the Labour Codes' Effect on Each

Employment contracts in India are often adapted from US templates, which assume at-will employment, enforceable non-competes and no statutory gratuity. None of those assumptions holds here. The result is contracts with clauses that are void, missing clauses that matter, and, since 21 November 2025, a statutory backdrop that has changed. This guide covers the six mistakes seen most often and the fix for each. Position as of October 2026.

First, the backdrop: the Labour Codes

The four Labour Codes were brought into force with effect from 21 November 2025 by notifications of the Ministry of Labour and Employment: the Industrial Relations Code, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 in full, and the Code on Wages, 2019 and the Code on Social Security, 2020 in substantial part. Commentators noted at the time that the regime is not fully operational until the central and state rules are notified and that employers should keep complying with existing enactments meanwhile. **** Two Code provisions bear directly on contracts and are discussed below: fixed-term employment under the Industrial Relations Code, and gratuity for fixed-term employees under the Code on Social Security.

Mistake 1: A post-employment non-compete

Section 27 of the Indian Contract Act, 1872 voids agreements in restraint of trade, with a narrow exception for the sale of goodwill. The Supreme Court in Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan (22 March 2006) stated that "a restrictive covenant extending beyond the term of the contract is void and not enforceable", while confirming the doctrine "does not apply during the continuance of the contract". A clause barring an employee from joining a competitor for twelve months after leaving will not be enforced.

Fix: a confidentiality clause that survives exit; a narrow non-solicitation of clients and colleagues the employee dealt with; a notice period that keeps the employee on payroll (and off a competitor's) for a defined time; and, for senior staff, a garden-leave clause during the notice period. The Delhi High Court in VFS Global Services v. Suprit Roy treated garden leave operating after the employee left the payroll as a restraint, so keep it inside the notice period.

Mistake 2: Confidentiality that forgets the data

Confidentiality clauses protect the company's information. They rarely address the employee's own data. Section 7(i) of the DPDP Act, 2023 permits processing of personal data "for the purposes of employment or those related to safeguarding the employer from loss or liability" as a legitimate use, but the Act's notice and security duties still apply once sections 3-17 commence on 13 May 2027.

Fix: add a short employee-data clause (what is collected, why, retention), separate from the confidentiality clause, and keep a privacy notice ready for May 2027.

Mistake 3: "At-will" language and vague termination

Indian employment is not at-will. Termination of "workmen" is governed by the Industrial Relations Code (previously the Industrial Disputes Act), with notice, compensation and procedure requirements; state Shops and Establishments Acts add notice rules for other employees. A clause saying either party may terminate "at any time without cause" invites a dispute.

Fix: state the notice period for each side, payment in lieu, the grounds and process for termination for misconduct, and the post-termination duties (return of property, final settlement timeline).

Mistake 4: Fixed-term roles disguised as contractor agreements

Where a role has a genuine end date, companies often use a "consultant" agreement to avoid employee obligations. Indian courts apply control, integration and economic-reality tests to the real relationship (Sushilaben Indravadan Gandhi v. New India Assurance, 15 April 2020), and the Industrial Relations Code now provides the honest instrument: fixed-term employment, defined in section 2(o) as engagement on a written contract for a fixed period, with the fixed-term employee entitled to hours, wages, allowances and benefits not less than a permanent worker doing the same work, and gratuity on completion of one year of service under the Code on Social Security, 2020. Expiry of the term is not retrenchment under the Code's definition.

Fix: use a fixed-term employment contract for fixed-term jobs; reserve contractor agreements for genuinely independent service providers.

Mistake 5: Probation with no end mechanics

A probation clause that does not say what happens at the end leaves both sides guessing. Courts have treated silence as continuation of probation or, in some contexts, deemed confirmation.

Fix: state the period, the review process, that confirmation will be in writing, and the shorter notice that applies during probation.

Mistake 6: Gratuity, leave and statutory benefits left to "as per law"

"Benefits as per applicable law" is accurate and useless to an employee or a payroll team. Gratuity under the Payment of Gratuity Act, 1972 is payable on five years' continuous service at fifteen days' wages per completed year, subject to the statutory ceiling (currently Rs 20 lakh), and the Code on Social Security, 2020 adds pro-rata gratuity for fixed-term employees after one year once its provisions operate. ****

Fix: list the benefits, cross-refer to the policy document, and keep the policy updated as the Codes' rules arrive.

Execution

Employment contracts are not excluded by the IT Act's First Schedule and can be e-signed under sections 5 and 10A; some states charge stamp duty on employment agreements, so check the state schedule and stamp before signing. Keep the signed contract, the audit trail and later amendments together.

Where Legatio fits. Legatio holds the employment, fixed-term and contractor templates with the positions above, routes exceptions to HR and legal, executes electronically with the audit trail, and can trigger a template review when a law changes. The clauses and the law are the same on any platform.

Position stated as of October 2026. General information; employment disputes and Code applicability should be reviewed with counsel.