Is it necessary under Indian employment laws to have Employment Agreement between the Company and its Sr. Executives? If so, should it be stamped?

Although the terms of employment of the Executives are not governed by statute or statutory rules under Indian employment laws, it is essential to have an Employment Agreement between the Company and it’s Senior Executives. The provisions of Indian Contract Act shall be applicable since the terms of employment are required to be decided by way of agreement. Recent trends show that the Senior Executives leave their jobs without notice and sometimes even join competitors or start similar businesses. Though Indian employment Laws do not allow restriction on joining the competitors, suitable terms providing for compensation in the employment agreement act as deterrents and help the employer protect the organization. That is why it is essential that employment agreements determining terms of employment are entered into by Companies and their Senior Executives.

Now, let us examine what the labour laws in India have to say about this;

Section 3 of the Bombay Stamp Act, 1958 mentions the instruments chargeable with duty. According to Section 3 of the Bombay Stamp Act, 1958, the following documents are chargeable with stamp duty:

  • Those which are mentioned in the schedule I to the Act and which are executed for the first time by any person in the State;
  • Those which are mentioned in the Schedule I and which are executed for the first time by any person outside the State and which are related to any property in or to any matter or thing done or to be done in the State, and which are received in the State after the commencement of the Act.

Schedule I of Article 5 sets out the different types of agreements which are required to be stamped. Though Agreement of Service or Employment Agreement is not specifically mentioned in the article, there is a residuary Clause 5(h) which, lays down the stamp duty for agreements “not otherwise provided for”.

In the light of the above, in the matter of Dhanpur Sugar Mills Ltd.,1956 it was held that:

“An agreement between a Company and its managing agent is an ordinary service chargeable with stamp as an agreement under Article 5 of the schedule I of the Bombay Stamp Act …”

Hence it is clear that an Employment Agreement is required to be stamped.

Sec 34 of the Bombay Stamp Act of 1958 speaks of four effects of a document not duly stamped;

– The document shall not be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence.

– It shall not be acted upon by such person or any other public officer.

– It shall not be registered.

– It shall not be authenticated.

In the first case however i.e. in relation to an unstamped document as evidence, provides that such a document not duly stamped can be admitted in evidence on payment of the deficit or proper stamp duty as well as penalty which will be 2 percent per month from the date of the execution provided that the penalty would not be more than the deficient duty.

This section makes an unstamped instrument inadmissible in evidence and unable to be acted upon. It does not affect the validity of the document. An unstamped document becomes effective or operative immediately on execution and the rights and obligations between the parties take effect in accordance with the terms of the document and not from the date on which the stamp duty and penalty is paid.

In Hindustan Steel v. Dilip Construction (Civil Appeal No. 2425 of 1968, decided on 18.02.1969) the Hon’ble Supreme Court has been held that if proper duty is paid at the time of admitting a document in evidence, the document can be used as evidence and further; “ Non payment is only a procedural irregularity and does not make the instrument illegal or void..”

Hence it can be concluded that it is necessary to have a contract of employment on a stamp paper but failure to do so does not invalidated the document.

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