Your offer letter and employment contract are the cheapest legal insurance a founder can buy. India has no single statute that dictates their format: they are governed mainly by the Indian Contract Act, 1872, and your state's Shops and Establishments Act, and since 21 November 2025 by the four new labour codes (the Code on Wages, the Industrial Relations Code, the Code on Social Security and the OSH Code), which are now in force even though several central and state rules are still being notified. Below are the clauses that matter, and the one classification mistake that costs founders the most.
Offer letter versus employment contract
The offer letter is the short document that states the role, start date, CTC, location and reporting line, usually made conditional on background checks and document verification. The employment contract, often issued as an appointment letter, is the binding agreement that spells out the full terms. Many Indian startups merge the two into one signed appointment letter. Whatever you call it, put every material term in writing, because a vague or oral contract shifts the benefit of the doubt to the employee in any dispute.
The clauses that matter
- Probation: A probation period of three to six months is standard practice for Indian startups, and some state Shops and Establishments Acts regulate its length and the notice that applies during it. State the length, whether it can be extended, and the shorter notice that applies while on probation (commonly 7 to 15 days).
- Confidentiality: A confidentiality clause protects trade secrets, customer lists and source code during and after employment. Unlike a non-compete, courts do enforce reasonable confidentiality obligations, so this is your real protection.
- Intellectual property: Under Section 17 of the Copyright Act, 1957, the employer is the first owner of copyright in work created in the course of employment, absent a contract to the contrary. But this does not automatically cover patents, nor work done by contractors. Always include an express IP assignment clause so that all inventions, code and designs vest in the company.
- Notice and termination: Fix the notice period for both sides (often 30, 60 or 90 days after confirmation), allow pay in lieu of notice, and align it with your state's Shops and Establishments Act minimums.
A word on non-competes: under Section 27 of the Indian Contract Act, 1872, any clause restraining an ex-employee from working or starting a competing business after they leave is void and unenforceable. You can restrict competing activity during employment, but not after. Rely on confidentiality, IP assignment and non-solicitation clauses instead of a post-termination non-compete.
Employee versus contractor
This is the distinction founders get wrong most often. Labelling someone a "consultant" does not make them one. Courts and authorities look at the substance of the relationship: degree of control and supervision, integration into your team, who provides the tools, fixed hours, and whether the person bears financial risk or can send a substitute. The burden is on you to prove genuine independence.
- Employees trigger Provident Fund (EPF, mandatory at 20 or more employees, 12 percent from each side), ESI (typically 10 or more employees, for wages up to ₹21,000 a month), gratuity after five years of continuous service, paid leave, and TDS on salary under Section 192.
- Contractors get none of these statutory benefits. You deduct TDS under Section 194J on professional or technical fees (10 percent on professional fees, 2 percent on fees for technical services) once such payments cross ₹50,000 in a financial year, or under Section 194C on works contracts (1 percent for individuals and HUFs, 2 percent for others) once a single payment exceeds ₹30,000 or total payments cross ₹1 lakh in the year.
Misclassification is expensive. If a "contractor" is later held to be an employee, you can face backdated EPF (both employer and employee shares) with interest and damages, ESI arrears, gratuity liability, and TDS shortfall interest. Use genuine contractor terms only for genuinely independent work, and put anyone who works like an employee on a proper employment contract from day one.