A Note on Legality of Employment Bond [Series-I] By CS Deepesh Maheshwari


What are Employment Bonds?

Employment Bonds are Contracts / Undertakings given by the employee wherein employee agrees to serve the employer compulsorily for a certain minimum fixed period of time failing which the employee ‘Promises’ to furnish/pay the amount as specified in the bond. Such a promise not to leave the employment for a specified period is usually a ‘Negative Covenant’. The purpose is to deter the employee from leaving employment before the specified time period. However, the question arises whether these bonds are legally valid.

Is Employment Bond Legal?

As per Section 27 of the Indian Contract Act, 1872 which speaks for:

“Agreements in Restraint of Trade” is considered as Void or void-ab-Initio.

It states that Every Agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void and against the law.

Explanation in terms of Employment:

So, if employment contracts stipulate clause like the signing of employment bond, then it can be challenged by the employee on the ground that they restrict the ‘Fundamental Right’ of the employee to profess his or her trade or profession. Furthermore, the validity of such bonds would also depend on whether the bond is, in fact, a valid contract under the Indian Contract Act, 1872 or not.

What is a Valid Contract as per ICA (Indian Contract Act, 1872)?

A Contract is valid only if it has been made with ‘Free Consent’ of the parties, i.e. without Force, Coercion, Undue Influence, Fraud, Misrepresentation, and Mistake, which means if employee signs the contract and gives his or her Free Consent then the contract is valid in the eyes of law.

Also as far as validity of the contracts with respect to the ‘Negative Covenant’ is concerned, these contracts or employment bonds have been held to be more legally valid if the organization has invested resources on personnel training or skill enhancement of the employee, and thus the Employer becomes entitled to claim for the money he or she invested on employee and which in turns result in ‘Breach of Contract’ by the employee.

What Remedy is available to an employer in case of Breach of Contract?

According to Section 74 of ICA 1872 which speaks for the ‘Compensation for loss or damages’ in case of Breach of Contract by the party. Thus, in case of any Breach of Contract made by the employee, will hold him or her liable to make the loss good despite specifically such clause not being part of the employee contract.

However, having such clause for Compensation for loss or liquidated damages payable to the employer specifically mentioned in the employment bond may become payable by the employee in case of Breach of Contract, but only on actual basis i.e. actual loss incurred by the employer on employee and cannot be wholesome the total amount mentioned in the Bond.

As held in the case of M/s. Sicpa India Limited v Shri Manas Pratim Deb, the Company had incurred expenses of INR 67,595/- towards imparting training to the defendant for which an employment bond was executed under which the employee had agreed to serve the Company for a period of 3 years or to make a payment of INR 2,00,000/-.

The employee left 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.

This Calculation by the Judge was done on the basis of total expenses on account of employee made by the employer divided by number of years the employee was liable to work, multiplied by number of years the employee didn’t work, so in this case the employee didn’t work for 1 year out of 3 promised years and that’s why the actual loss to Company was only INR 22,532/- and thus Company cannot claim the amount mentioned in the bond i.e.  INR 2,00,000/-.

Similarly, in the case of M/s. Satyam Computers v. Leela Ravichander, the Hon’ble High Court of Andhra Pradesh said that the employee who had abruptly left the Company and as per terms of employment bond, was to pay liquidated damages of INR 2, 00,000 along with stipend charges and additional expenses incurred by the Company for the employee. However, the Andhra Pradesh High Court held that such action by the employee did not cause any damage or loss to the Company and it would be unreasonable to acquire such amount from the employee. Whereas an amount of INR 1,00,000 was fixed by the court as reasonable damages taking into consideration the period of work and the fact that no actual loss was caused to the Company.

Conclusion:

Therefore, from the above discussion, it is evident that the employment bond is valid only if it is made and agreed as per the Indian Contract Act, 1872.

And also, the Bond may stipulate Negative Covenants or restriction such as:
  • Restricting the employee for a certain number of years,
  • Considering such specified sum payable by the employee in case of breach of contract or loss suffered to the employer on employee account.
  • Restriction on Non-Disclosure of Information or Confidentiality of Information and etc valid and justifiable in the eyes of law or in terms of natural justice.
Further, in employment contracts, the burden is on the employer to prove that the employment bond is necessary to protect his / her interest.

To read Series-II, Click here https://blogs.compliancecalendar.in/a-note-on-legality-of-employment-bond-series-ii-by-cs-deepesh-maheshwari-989

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