By Shruti Khole, Advocate at Lex Credence May 14, 2024

Introduction:

An employment bond is a legal agreement between an employer and an employee which confirms that the employee shall work for an agreed period upon joining the business. Wherein, the employee pledges to pay a certain amount to the employer if he/she decides to leave the organization before that agreed period. To protect the interest and goodwill of the company, the employment bonds were needed to be introduced. However, the employment bond not only protects the interests of the employer but also those of the employees.

An employment bond requires the employee, to stay with the company for a set period. If you leave before that time is up, you may have to pay the company a certain amount of money. This is often called “liquidated damages.”

Several factors determine the legality of an employment bond in India:

  1. Reasonableness: The bond’s terms, including duration, compensation, and obligations, must be reasonable and fair to both parties.
  2. Scope of employment: The restrictions imposed by the bond should be directly related to protecting the employer’s legitimate interests, such as safeguarding confidential information or preventing employees from joining competitors.
  3. Consent: Both parties must enter into the bond voluntarily and with a full understanding of its terms and implications.
  4. Consideration: There should be a valid consideration exchanged between the parties, such as employment benefits or specialized training, to support the validity of the bond.
  5. Public Policy: The terms of the bond must not violate public policy or any statutory provisions, such as those related to minimum wages or employment rights.
  6. Consequences of Breach: The consequences of breaching the bond, such as financial penalties or legal actions, should be proportionate to the harm suffered by the employer.
  7. Jurisdiction: The bond should be governed by applicable laws and regulations, and any disputes arising from it should be resolved through legal means within the appropriate jurisdiction.

The legality of employment bonds is a bit complex. Employment bonds are recognized under the Indian Contract Act, 1872. However, their enforceability depends on reasonableness which is assessed based on factors such as duration, compensation, and circumstances of the agreement. On the other side, if the terms of the bond are found to be unreasonable or unfair, they may be deemed unenforceable. Therefore, it ultimately depends on the specific terms and circumstances of the employment bond in question.

S. 27 of the Indian Contract Act:

Section 27 of the Indian Contract Act prohibits any agreement in restraint of  trade. As per this section, if any agreement, directly or indirectly restricts someone from a fair trade and lawful profession, then it is void. 

The validity of Employment bonds can be challenged based on Section 27 of the Indian Contract Act. The court can always question the reasonability of the bond for it to be accepted legally. The terms and conditions which are mentioned in the employment bonds can restrain the employees from joining any other employment which can directly restrain the livelihood of the employees by compelling them to provide compulsory service. Courts generally view that, regardless of any prior agreements between the employee and the employer, the employees’ rights to livelihood must prevail over the employers’ interests. Somewhere there must be a line between contracts which restrict the trade and whose reasonableness the courts may consider, and those contracts which merely regulate the ordinary commercial relations between the parties.

* In Pepsi Foods Ltd. v. Bharat Coca-Cola Holdings Pvt. Ltd.1  the Hon’ble Delhi High Court held that a negative covenant that restrained employees from undertaking employment for 12 months after they left the plaintiff’s service amounted to a violation of Section 27 of the Indian Contracts Act. It held that such contracts are unenforceable, void and against public policy and that what the law prohibits cannot be permitted by an injunction.

Considering the aforesaid, it would be better that the employment bond is created keeping in mind the interests of both the employer and the employee to prevent its validity from scrutiny. The employment bond is certainly necessary for a Company to protect their interests from the employees who frequently quit their jobs. However, the restraints stipulated upon the employee in the contract should be reasonable and not excessive or else the validity of the contract can come into question. Any Company/employer cannot compel any employee to work for them by enforcing an employment bond.

Requirements of a valid employment bond

  1. The agreement must be voluntarily signed by the parties;
  2. The agreement’s conditions stipulated must be reasonable;
  3. The period of the employment bond must be reasonable;
  4. It must be demonstrated that the restrictions imposed on the worker are adequate to safeguard the employer’s interests;
  5. It should contain a confidentiality clause to ensure that the company’s trade secrets are protected and
  6. It needs to be signed on stamp paper with enough value for it to be valid and enforceable.

Recently, before the Hon’ble Telangana High Court, a plea was made questioning the legal validity of the “Employment Bond” in the private sector.2 The issue of the legality of the employment bond in the private sector is still at a nascent stage. The sole purpose of such contracts is to ensure that the resources and time of employers are not rendered meaningless in training with no benefits derived whatsoever due to early resignation.

 In Ledella Ravichander v. Satyam Computer Services Ltd.3 the defendant was an employee who left the services abruptly. As per the terms of employment bond he was charged to pay Rupees two lakhs in addition to stipend charges and additional expenses meted out by the employer. However, the Hon’ble Andhra Pradesh High Court held that such action by the employee did not cause any damage or loss to the employer and it would be unreasonable to demand such an amount from the employee after considering the period of work and the fact that no actual loss was caused to the company it was found that recovery of damages was unreasonable and it was fixed by the Hon’ble court as reasonable damages as Rupees One lakhs payable by Defendants.

The employee for breaching the bond must be proportionate to the demonstrable investment the employer made in the employee’s development, such as training costs as well as the right to resign with proper notice cannot be overridden by an employment bond, and the bond cannot compel continued employment against the employee’s will. In the long run, the effectiveness of employment bonds depends on how they are implemented. If used strategically and with reasonableness, they might provide some advantages in specific industries like the IT, healthcare and pharmaceutical sectors which have been plagued with high attrition rates. 

Given the potential complexities surrounding employment bonds, employees should seek legal counsel if they are unsure about the terms of a specific bond. A lawyer can provide informed guidance on the bond’s legality and the employee’s rights and obligations. While enforceable under certain conditions, the validity hinges on reasonableness and respect for employee rights. Consulting a lawyer is prudent to navigate the specifics of any employment bond.

Conclusion

Employment bonds are a double-edged sword when it comes to their impact in the long run. For employers, they can provide a degree of stability and recoupment of their investment in training new hires. However, this benefit can be offset by several drawbacks. For employees, bonds can offer a guaranteed job for a set period, especially for those entering a new field. However, they can also limit career growth and the ability to take advantage of better opportunities. Bonds can limit the talent pool by discouraging highly skilled individuals who value mobility. Additionally, a disgruntled employee locked into a bond might be less productive than someone who is genuinely invested in the company. However, a more flexible approach that fosters a positive work environment and invests in employee development might prove more sustainable for both employers and employees in the dynamic modern workplace.

The article represents the personal views of the author.

  1. MANU/DE/0740/1999
  2. Bar and Bench, Plea before Telangana High Court to declare employment bond signed with private company as illegal, April 2024, Available at: https://www.barandbench.com/news/plea-before-telangana-high-court-declare-employment-bond-signed-private-company-illegal (Last visited on May 14, 2024)
  3.  MANU/AP/0416/2011
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