Are Employment Bonds legal in India

Introduction

It is a fact that, to make employees job ready, employers invest large amounts of time and incur huge expenditure in imparting training to their employees. However, the increasing rate of attrition subjects the employers not only to financial losses but also delays in completing the ongoing projects thereby directly impacting their goodwill & reputation in the market. Therefore, in order to safeguard their interest, employers now insist on an employment bond from their employees making it mandatory for employees to serve a minimum period of employment else refund the amount specified as bond value.

1. Employment bond: enforceability?

The most simple answer to the question “Are Employment Bonds enforceable under Indian laws? is yes but subject to certain terms and conditions.

The courts in India have held in its various judgments that in the event of breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of money was spent on providing training or incurred other expenses for the employee. Further, the courts have been reluctant to restrain the employee from joining a competitor/other employer. The employment bond will not be enforceable if it is either one sided, unconscionable or unreasonable.

2. Challenging the enforceability of employment bond

The validity/enforceability of the employment bond can be challenged on the ground that it restrains the lawful exercise of trade profession or trade or business. As per section 27 of the Contract Act, 1872, any agreement in restraint of trade or profession is void. Therefore, any terms and conditions of the agreement which directly or indirectly either compels the employee to serve the employer or restrict them from joining competitor or other employer is not valid under the law. The employee, by signing a contract of employment, does not sign a bond of slavery and, therefore, the employee always has the right to resign the employment even if he has agreed to serve the employer for specific time period.1 However, the restraints or negative covenants in the agreement or contract may be valid if they are reasonable. For a restraint clause in an agreement to be valid under law, it has to be proved that it is necessary for the purpose of freedom of trade. For instance, if the employer is able to prove that the employee is joining the competitor to divulge its trade secrets then the court may issue an injunction order restricting the employment of the employee to protect the interests of the employer.

In order to execute a valid employment bond, the parties have to ensure that the following requisites have been complied:

  • The agreement has to be signed by the parties with free consent
  • The conditions stipulated must be reasonable
  • The conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer.

Further, the employment bond stipulating conditions such as to serve the employer compulsorily for a specific time period or penalty for incurring the expenses is in the nature of the indemnity bond and, therefore, such kind of employment bond has to be executed on a stamp paper of appropriate value in order to be valid and enforceable.

3. Remedies available to employer and employee

In the event of breach of employment bond, the employer might incur a loss and, therefore, may be entitled for compensation.4 However, the compensation awarded should be reasonable to compensate the loss incurred and should not exceed the penalty, if any, stipulated in the contract

The court normally considers the actual expenses incurred by the employer, the period of service by the employee, conditions stipulated in the contract to determine the loss incurred by the employer to arrive at the reasonable compensation amount. For instance, in the case of Sicpa India Limited v Shri Manas Pratim Deb,6 the plaintiff had incurred expenses of INR 67,595 towards imparting training to the defendant for which an employment bond was executed under which the defendant had agreed to serve the plaintiff company for a period of three years or to make a payment of INR 200,000. The employee left the employment within a period of two years. To enforce the agreement the employer went to the court, which awarded a sum of INR 22,532 as compensation for breach of contract by the employee. It is crucial to note that though the bond stipulates a payment of INR 200,000 as compensation for breach of contract, the judge had considered the total expenses incurred by the employer and the employee's period of service while deciding the compensation amount. Since the defendant had already completed two years of service out of the agreed three year period, the judge divided the total expenses of INR 67,595 incurred by the plaintiff into three equal parts for three years period and awarded a sum of INR 22,532 as reasonable compensation for leaving the employment a year before the agreed time period. Similarly, the High Court of Andhra Pradesh in the case of Satyam Computers v Leela Ravichander,7 had also reduced the compensation amount considering the period of service of the employee.

Conclusion

In view of the aforesaid discussions and various court decisions, the employment bond is considered to be reasonable as it is necessary to protect the interests of the employer. However, the restrains stipulated upon the employee in the said contract should be "reasonable" and "necessary" to safeguard the interests of the employer or else the validity of the bond may be questioned. The employees are always free to decide their employment and they cannot be compelled to work for any employer by enforcing the employment bond. In the event of breach of contract by the employee, the only remedy available to the employer is to obtain a reasonable compensation amount. The compensation amount awarded shall be based upon the actual loss incurred by the employer by such breach.

Footnotes

  • Central Inland Water Transport Corporation v Brojonath Ganguly, (1986)IILLJ171SC
  • Niranjan Shankar Golikari v The Century Spinning and Manufacturing Company Ltd, AIR 1967 SC 1098
  • IBS Software Services Group v Leo Thomas, 2009 (4)KLT 797
  • Section 73 of the Contract Act, 1872
  • Section 74 of the Contract Act, 1872
  • MANU/DE/6554/2011
  • MANU/AP/0416/2011