Escalator Clause

Reviewed by Apoorva | Updated on Aug 27, 2020

What is an Escalator Clause?

An escalator clause is also known as an escalation clause, where the provision allows for an automatic increase in the wages or prices. The increase in the wages and prices are included in contracts such that they must be activated when certain conditions occur, such as when the cost of living or inflation increases.

Understanding Escalator Clause

The main objective of the escalator clause is to ensure that the people enter long-term contracts without having to worry about the changes in the markets rates in the future that could potentially affect them. The escalation clause is made a part of the contracts so that the contract remains fair and updates itself based on the external criteria.

Generally, labour unions make sure to adopt this criterion as they believe that wages must increase in-line with the rate of inflation, and that must be stated in employment contracts. Such clauses are also seen in business contracts where companies supply goods and services that involve a lot of price fluctuations, such as in the shipping sector that carries oil.

You may also see the escalation clause while renting properties. If there is a rapid rise in the rents in the surroundings, a landlord may not wish to sign a long-term agreement because he may lose out on a higher rental rate. You may have to agree for an escalation clause where you agree to pay an increased rent by a certain percentage in regular intervals. This way, a landlord can make the most of the market conditions, and the renter can secure a long-term arrangement with the property.