पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 09 · Start

Employment contracts and offer letters that hold up

Since November 2025 the four labour codes require an appointment letter for every employee and redefine wages. The offer a founder copied from a friend’s company probably no longer fits.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

An empty office with rows of desks and large windows letting in daylight. — Photograph: cottonbro studio · Pexels

The first engineer accepts on WhatsApp. The offer letter, adapted from a friend’s company, promises ₹18 lakh a year, a six-month probation, a two-year non-compete and a notice period of ninety days for the employee and seven for the company. Eighteen months later the engineer leaves for a competitor with thirty days’ notice, the non-compete turns out to be unenforceable, and the company discovers that the salary structure it chose changes what the law counts as wages. Every one of those surprises was in the letter.

This lesson covers what changed when the labour codes came into force, the two documents every hire should sign, the clauses that hold up under Indian law and the ones that do not, and a check to run before each offer goes out. The figure shows the one calculation most startup salary structures now fail.

What changed on 21 November 2025

The Ministry of Labour and Employment announced that the four labour codes, the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020 and the Occupational Safety, Health and Working Conditions Code 2020, came into force on 21 November 2025, rationalising twenty-nine existing labour laws. Three changes reach a startup’s offer letter directly. Appointment letters are mandatory: the OSH Code requires one for every employee in a covered establishment, setting out the terms and conditions of employment. Wages have a single definition across the codes, with a rule that pulls allowances back into wages when they exceed half of pay. And fixed-term employees, according to KPMG’s note on the notification, receive the same benefits and wages as permanent staff and become eligible for gratuity after one year of service.

The same note records that rules under the codes were still being framed, and that the provisions of the old laws and their rules continue in the meantime where the new ones are not yet in place. States also frame their own rules, and the shops and establishments law of your State still governs working hours, holidays and registration for an office. So the honest position, checked on 10 October 2026, is a new frame with some of its detail still arriving. Build the template on the codes, and have an employment lawyer check it against the rules of your State once a year.

Two documents, not one

The offer letter is short. It names the role, the start date, the location, the annual cost to company with its fixed and variable parts, any joining bonus or ESOP grant described as subject to the plan and a board approval, and the date by which the offer lapses. It makes the offer conditional on the documents the company needs: identity and address proof, PAN, previous employment records and, where relevant, a background check. It says that the detailed terms are in the appointment letter to follow.

The appointment letter or employment agreement is the contract the codes require. It sets out designation and reporting line, place of work and whether it may change, the salary by component, working hours and leave, probation and confirmation, notice and termination, confidentiality, IP assignment, non-solicitation, the policies that apply, including the code of conduct and the prevention of sexual harassment policy, and governing law. Keep policies that change, like leave and travel, in a handbook the letter incorporates by reference, so that a policy change does not require a new contract with every employee.

Probation and notice, written for the bad day

Probation is a contractual term. Write down its length, three to six months is usual, what will be assessed, whether it can be extended once and by how long, and the shorter notice that applies during it. Confirm employees in writing at the end, so that nobody has to guess later whether probation was still running. Notice should be the same in both directions. A ninety-day notice for the employee and a seven-day notice for the company looks one-sided on paper and in front of anyone who has to decide a dispute. Thirty days during probation is common, then thirty to ninety days after confirmation depending on seniority, with the company free to pay salary in lieu of notice and to put the employee on paid garden leave.

Termination for cause needs a list of what cause means, misconduct, fraud, a serious breach of policy, and a fair process: a written allegation, a chance to reply, a written decision. Remember who is protected beyond the contract. The Industrial Relations Code excludes managerial and administrative staff, and supervisors earning above ₹18,000 a month, from its definition of worker, but the Code on Wages covers every employee. An engineer doing technical work who supervises nobody may well be a worker, with the protections that brings.

Pay: the wage definition that moves your numbers

Section 2(y) of the Code on Wages defines wages as basic pay, dearness allowance and retaining allowance, and then lists what is excluded: house rent allowance, conveyance, overtime, bonus, the employer’s contribution to provident fund and several others. The first proviso is the one that matters. Where the excluded payments together exceed one-half of all remuneration, or another percentage the government notifies, the amount above the half is deemed to be remuneration and added to wages. Many startup salary structures keep basic pay well below half of gross and fill the rest with allowances, to lower the base for statutory contributions. Under the codes that structure no longer achieves what it was built for, because wages are recalculated as if basic were at least half.

This matters wherever a calculation refers to wages under the codes. Move the slider below to see the effect on a salary you are about to offer. The practical answer for a new template is to set basic pay plus dearness allowance at 50 per cent of gross or more, so that what the offer letter says and what the law counts are the same number, and to model the cost of statutory contributions at that level before the offer goes out.

Confidentiality, IP and what you cannot restrain

The agreement should contain a present assignment to the company of everything the employee creates in the course of employment or using the company’s resources, a schedule of prior inventions, an undertaking on moral rights, and a confidentiality obligation that survives the end of employment. The [IP assignment lesson](/library/ip-assignment-company-owns-what-you-built) gives the wording and the statutory reasons; do not leave it to a separate document that half the team never signs. Where an employee will handle personal data, add a duty to follow the company’s data-protection policy, because the company is answerable for what its people do with that data.

Then remove what will not hold. Section 27 of the Indian Contract Act 1872 makes every agreement restraining a lawful profession, trade or business void to that extent, with an exception only for the seller of goodwill. A clause stopping an employee from joining a competitor after leaving is therefore void. What survives is confidentiality, which protects information rather than restricting where someone works, a reasonable non-solicitation of colleagues and named customers for a defined period, and exclusivity during employment itself. A template full of void clauses tells an investor’s lawyer the company does not know its own law, and tells the employee the same.

Write the clauses you could defend in front of a judge. The others only teach the employee which promises you cannot keep.

Leaving: two working days

Section 17(2) of the Code on Wages requires that where an employee is removed, dismissed or retrenched, or resigns, the wages payable be paid within two working days. The rule covers wages as the Code defines them, not every item in a full and final settlement, and two working days is not long. Build the exit process around the new clock: a resignation acknowledged in writing, the last working day agreed, the handover and asset return scheduled before it, payroll told on the day the resignation is accepted, and wages paid within two working days of the last day. Gratuity, leave encashment and reimbursements follow on their own timelines. The exit letter should confirm the last day, restate the confidentiality obligation and confirm that company accounts and devices have been returned.

Assorted metal keys hang from hooks on a wall and cast shadows. — The exit is a checklist too. Keys and devices come back and final wages go out inside two working days. Photograph: halilibrahimxq · Pexels

Before every offer goes out

Run six checks on each offer, in this order. The offer and the appointment letter are on the current template, reviewed by a lawyer within the last twelve months. Basic pay plus dearness allowance is at least half of gross, or the cost of the add-back has been modelled. Probation, notice and termination are the same in both directions and stated in days. The IP assignment, prior-inventions schedule and confidentiality clause are in the signed document, not a promise to sign later. There is no post-employment non-compete. The payroll calendar can pay final wages within two working days. Once a quarter, look for new rules under the codes from the Centre and your State, and update the template the week they are notified rather than at the next hire.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.