Appointment Letter : Unveiling The Legal Framework

An appointment letter establishes the relationship of employment and lays down the terms and conditions of employment of an employee by an organisation.

However, it has been observed that many companies show the least importance to this document. Many are unaware of the consequences of an ill-drafted appointment letter. An appointment letter acts as the centerpiece of the employee-employer relationship along with the policies of the organization and the applicable law. For example, an ambiguity in the termination clause in an appointment letter as to the computation and buyout of the notice period may give rise to conflict between the employee and the organization with each keeping in mind their own interests. Again, if the retirement age is not stipulated in an appointment letter, the employer may not be able to retire an employee as long as they are mentally and physically fit.

Further, the labour laws are employee friendly, and the courts in India have given a liberal interpretation to clauses in appointment letters and/or policies and practices of the organizations in favour of the employees. Therefore, in order to avoid legal and financial complexities, it is always recommended to include appropriate and precise verbiage with regard to the rights and obligations of the employer and employee. In case there is no explicit verbiage regarding the payment of statutory benefits such as gratuity, it can give rise to a claim for payment, for example, gratuity by employees even before completion of the requisite period of continuous service as per the Payment of Gratuity Act, 1972[1]. In the case of non-statutory payments, these payments may fructify into a service condition in case of the absence of a clause to qualify the eligibility of such payments and the employees may claim it as a matter of right leading to disgruntlement and a non-conducive work environment.

Likewise, in the scenario of the globalized economy, businesses are establishing their offices across geographical territories, giving rise to the need to move their resources between offices. Though transfer has been held to be a matter of business exigency[2], there is always scope for disgruntlement by transferred employees in case of failure of the organisation to stipulate a transfer clause in the appointment letter or in the policies of the company. Further, moonlighting[3] has threatened businesses across the globe for breach of confidentiality and/or disciplinary issues, and the absence of clause declaring moonlighting as misconduct may cause potential damage to the organization in terms of its ability to deal with moonlighting and also to the finances and reputation of the organization in the long run.

In recent times, cases of failure of asset submission by an exited employee and failed background verification are on the rise. Despite this, many companies have failed to incorporate a recovery clause in the appointment letter, thereby, restricting the rights of organisations to recover the cost of assets from the full and final settlement of those exited employees who have not submitted the assets[4]. Further, submission of forged documents may declare an employee unfit for employment[5], leading to termination due to failed background verification[6], most companies have failed to incorporate clauses in the appointment letter which shall strike a balance between the organization’s and the employee’s interest.

A clearly worded and precise appointment letter will allow the organisation to avoid moments of “getting hoisted by one’s own petard”, with potentially detrimental effects on the financial health as well as the reputation and brand image of the organisation.

To ensure that the organisation’s appointment letter is fit for the purpose, it is advisable that the following aspects be kept in mind:

1. Clear provisions as to the job description, compensation and benefits, working hours, place of work and transfer. As, an informed employee cannot claim to have the right to work at a particular place[7].

2. Compliance with state-specific legislation as applicable to the location of the establishment, for example, the Delhi Shops and Commercial Establishments Act, 1954[8]and the Karnataka Shops and Commercial Establishments Act, 1961[9]both lay down specific requirements to be met in appointment letters.

3. Provisions as to the payment of statutory obligations, keeping in mind the requirements of law.

4. A clause regarding the granting of bonuses other than statutory bonuses and increments to qualify the employee to be eligible for such increment and to ensure that such payments are not taken as a matter of course[10].

5. The rise in the number of cases with regard to probationers claiming permanency[11] and termination[12] has shed light on the need to draft better policies and clauses with regard to the period of probation, confirmation method, and extended period among others.

The aforementioned are just the tip of the iceberg of the consequences of the failure to incorporate clauses in an appointment letter. It is also to be noted that an appointment letter is the beginning of an employment relationship with an employer. It has been held in a plethora of cases[13] that an appointment letter is one of the determining factors to establish an employee-employer relationship. Accordingly, it is essential that the terms are precise and detailed as well as acceptable to both parties.

Given the judicial weightage to appointment letters and the pedestal given for the employer-employee relationship, any change in the appointment letter cannot be made unilaterally[14] by the employer.

To conclude, the key document which establishes and continues to hold both employer and employee accountable to each other must be given the right importance and any change to be made must to be given due consideration from a legal as well as from a human resources perspective, as it has the potential to impact an organisation’s finances, work culture and reputation.