Guide to the Employee OFFER LETTER

SV.CO Financial Documents Repository

The Guide to Employee Offer Letter

In this guide, we’ll tell you what the offer letter includes and explain

each of the sections so that you can easily understand the

document.

When a person works for someone else or company, he / she is

called an employee and the person / company he works for is

called employer.

Money paid to the employee is called salary or wages or income

(to the employee)

The offer letter is a legal contract between the employee and the

employer that spells out the various aspects of the employee’s

work details with the employer. It talks about the

Position / designation that is being offered

The location (s) where the employee will be working after

joining

All intellectual property or work that the employee does

belongs to the company

The details of the compensation offered, this is usually called the

Cost to Company or CTC

Companies have various components in the CTC but a standard

CTC will include the employee fixed salary or gross salary, bonus,

gratuity, provident fund, and insurance. Stock / equity is also

offered to employees in many cases

The Cost to Company (CTC)

Let’s first define some of the various components of salary so that

you are clear -

Salary – separate section coming!

Performance Bonus

Bonus is the amount payable to the employee based on

performance objectives determined by the employee and the

employer.

The amount is mentioned in the offer letter but the actual

objectives are usually agreed after the employee joins the

organization.

Bonus is usually paid once a year, at the end of calendar year

(December 31) or financial year (March 31). Some companies pay

bonus at the anniversary of the employee joining date.

Gratuity

Gratuity is a legal requirement of the company to pay employee a

certain lump sum amount if they leave after 5 years of working with

the same company.

It is a retirement benefit and also called a defined benefit.

However, the company should also pay gratuity if the employee

passes away or is disabled due to an accident or any illness.

Gratuity is also payable when an employee retires; the current

retirement age in India is 60!

Currently gratuity payment is tax free up to a total of INR 10 lakhs.

Gratuity Calculation = Last Drawn Salary × 15/26 × No. of Years

The ratio 15/26 represents 15 days out of 26 working days in a

month

Offer letters will have a notice period based on the company policy

– this is the time the company and / or employee have to give

when they decide to close the employment.

This notice is usually 1 month but can range up to 3 months.

All offer letters will have confidentiality and other legal clauses.

This is because the employee is dealing with information,

products, software etc. that belong to the company so companies

will ask employees to agree that they will not tell persons outside

the company about these information, products or software.

We all know of many cases where people have copied, stolen or

leaked company information that hurts the company big time.

Hence a company will ask employees to sign and confirm that they

will do no such thing.

For e.g. Apple, Google and many companies have offer letters that

run into tons of pages, most of the letter relates to confidentiality

and related clauses!

Some clauses are explained for you below

Confidentiality and Non Disclosure – this can just mean not

discussing internal goings-on with co-workers. In most cases, it

refers to not sharing trade secrets and other company information

with competitors, the press or anyone outside of your company.

Non Solicitation – this means that the employee cannot request,

meet or ask a company's clients or customers, for his or her own

benefit or for the benefit of a competitor of the company, after

leaving the company. Usually this will be for a certain period

depending on the agreement between the employee and the

company.

Non Compete – this means that the employee cannot start a

competing business with the employer after leaving the company.

Usually this is also for a certain period depending on the

agreement between the employee and the company.

Intellectual Property (IP) – the easiest way to know this is that it’s

stuff that cannot be touched / felt, and is usually a creation of the

mind, such as a patent. This includes ideas, software, code that is

written by programmers, presentations, documents etc.

Almost all companies and products, including ecommerce,

software and mobile products have IP.

Most companies will mention that all IP created by the employee

while working for the company belongs to the company and not to

the employee.

For e.g. most musicians now have IP on their songs / music so

that no one can copy their stuff!

Indemnity – this simply means that there is a repayment if one

person suffers a loss because of what the other person did.

Companies will include this offer letters because they can

sometimes suffer losses because of employees who do things

against the interest of the company – like not following the clauses

above, or destroying company property, or leaking company

information.

Employees have done such things when they are upset about

leaving or upset about something that they don’t like in the

company.

This has become common in offer letters over the last few years

We hope that this guide has helped you understand the offer letter

much more clearly.

Please feel free to provide feedback on what we can do to improve

the contents of this guide.