Employment Bonds in India: What Does the Law Say?

employment bonds in India

With the IT industry at a boom in India, a hotly debated employment trend has emerged, that of employment bonds. This post aims to explain how does an employment bond work and its legal position in India.

What is an employment bond?

In simple terms, an employment bond is a contract between an employer and employee.

One of the terms of the contract is a clause in respect of  the training that is given to the employee before he joins the company. In consideration of the training that is imparted by the employers, the employees are required to work with the employer for a specific  period of time. If this clause is violated by the employee, he is liable to  pay a stipulated amount of money to the employer. If the employee is in not in the position to make the payment, a guarantor must make the payment on the behalf of such employee.

What is the controversy surrounding employment bonds?

Employment bonds are favoured by the employers because they incur heavy expenses in the process of training employees. This leads to the rightful assumption that they are entitled to some of the benefits that this training would provide. If a trained employee leaves the company within a few  months of being trained, the employer’s’ losses would be two-fold.

Firstly, they lose an employee on whom they have spent time and money. Secondly, another company would benefit from their resources, i.e., a trained former employee.

However, the position taken by employees on this issue seems to be completely justified as well. On the face of it, agreement that restricts his right to carry on  trade or practice is  not only unfair, but is also a violation of his fundamental rights and free will. One important consideration here is that fundamental rights are not unconditionally applicable and they are always subject to some reasonable limitations.

Are employment bonds enforceable by law in India?

An employment bond is a contract, and therefore would be subject to the provisions of  the Indian Contract Act. An employment bond prevents employees from committing certain acts and thus comprises of some negative covenants. The issue here is whether these negative covenants are legally enforceable.

The answer is yes. Under contract law, a contract is invalid if it has been made by subjecting the other party to coercion, fraud, misrepresentation, or undue influence. A  contract will also be invalid if it has been by mistake. However, an agreement that is entered into with free will; and without any of these invalidating criteria, is valid and legally binding.

The law of contract states that any agreement in restraint of trade or practice can be challenged. Accordingly, the terms and conditions of a contract that prevent an employee from joining another organisation would be invalid.

However, the law allows for reasonable terms and conditions to be laid down in a contract. While an employment bond is being drafted, it is important to ensure that the stipulated terms and conditions are reasonable and valid. For instance, the period of time for which the employee is obligated to work with the organisation and the compensation payable in case of its violation cannot be unnecessarily harsh and must be justified.

The Courts have laid down a two-fold principle while approaching this issue:

  • The interests of the employers must be considered, and they must be compensated in case of a breach of contract.
  • The penalty that may be imposed on an employee or his guarantor cannot be exorbitant and unreasonable.

There have been several cases where the court has held that under certain circumstances, an employer is entitled to prevent the employee from joining another organisation. For example, if there is a possibility that the employee may reveal trade secrets of company A to company B, company A is entitled to prevent such employee from joining company B.

How are damages payable by an employee calculated?

In the event of breach of a contract, courts calculate damages by taking into account  the actual loss that is borne by the employer. Actual loss suffered by the employer includes the expenses incurred in employee training and the loss suffered by violation of mandatory serving period stipulated in the employment bond.

Conclusion

In view of the above considerations, it is safe to conclude that contrary to the popular notion, employment bonds are not inherently void or invalid. Their enforceability depends upon the terms stipulated by them which, if not excessive or unreasonable, are perfectly capable of being legally enforced.

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