Employment contracts in a vast majority of businesses today have increasingly
being incorporating a particular clause in the contract known as an employment
bond. An employment bond is an agreement between the employer and the employee
which provides that the employee shall work for an agreed upon minimum period of
time upon joining the business. If the employee quits his/her job before he/she
completes this minimum time period, then such an employee will have to pay a
particular amount as compensation to the employer. The rationale behind this
agreement is that the employer seeks to recover the costs he/she faces in
training the employee, recruiting a replacement, losses faced until a
replacement is hired, etc. by imposing the employment bond liability, the
employee will have to think twice before quitting his/her job as the bond serves
as a deterrent to prematurely terminating the contract of employment. Employment
bond clauses are increasingly being incorporated into employment contracts in a
wide array of industries. This paper analysis the legal validity of
incorporating and enforcing such employment bonds under the Indian Contract Act,
1872.
Enforceability of Employment Bonds
Section 74 of the Contract Act[1]provides that in the event of a breach of a
contract in which there was a stipulation that a sum or penalty is to be paid
incase of such breach, then the party complaining of the breach is entitled to
receive from the defaulting party such sum or penalty. The employment bond
agreement is a perfect embodiment of this provision of the Contract Act. The
breach in case of employment bonds would be the termination of the contract by
the employee before the agreed upon time period in the contract expires. The
party complaining of this breach would be the employer and the defaulting party
which would be the employee, would have to pay the stipulated compensation
stated in the contract. In Toshnial Brothers (Pvt.) Ltd. v. E. E swarprasad and
Or.[2], the contractual clause in the employment agreement stated that the
employee had to pay a compensation to the employer if he leaves his job within a
period of three years. The employee breached the contract when he quit his job
after fourteen months. The Madras High Court held that due to the existence of
an explicit employment bond clause in the contract, the employer did not have to
prove that he suffered damages due to the premature termination of employment by
the employee. The employee was ordered to pay the compensation as prescribed in
the agreed upon employment contract. In light of this, employment bonds are
prima facie enforceable under law, provided the other prerequisites of a valid
contract such as free consent, competent parties, lawful object, lawful
consideration and not being expressly declared void[3]; are adhered to.
Reasonability of the conditions imposed.
In addition to the essentials of a contract being followed, an employment bond
agreement should be reasonable with respect to two aspects in order for it to be
enforceable.
The first requisite is that the time period for which the employee has to remain
with the employer should be reasonable. The employer cannot force the employee
to work for him for years on end. A reasonable time period would defer on a case
to case basis depending on the industry and sector of the employment. Taking
into consideration the position, growth rate, replacement availability, etc. of
the employee, the time period of the employment bond should be determined so as
to not make it arbitrary and unreasonable. An employment bond that imposes an
excessive time period of mandatory employment will amount to forced labour and
invoke the safeguards under Article 23 of the Constitution[4].
Secondly, the compensation payable by the employee on the breach and termination
of his contract will have to be reasonable to the extent that it adequately and
not overly compensates the employer for the cost he/she suffers due to the
breach. In the cases of M/s Sicpa India Limited v. Shri Manas Pratim Deb[5]and
in Satyam Computer Services Limited v. Ladella Ravichander[6], the Delhi High
Court and the Andhra Pradesh High Court respectively, held that the compensation
imposed by the employer was too high when compared to the cost faced in the
recruitment procedure, training the employee, hiring a replacement, etc. In both
these cases the Courts upheld the validity of employment bonds but reduced the
excessive compensation payable as per the contractual agreements to a
‘reasonable’ amount.
Employment bond – a restraint to trade or not?
The primary ground for challenge of the enforcement of employment bonds is that
it infringes the right to free trade. Disgruntled employees claim that the
clause violates their right to exercise lawful profession, trade and business
under Article 19(1)(g) of the Constitution[7]and Section 27 of the Contract
Act[8]. However this contention is unavailing as it confuses an employment bond
with a non-compete clause. The key difference between the two is that the former
only imposes a monetary liability on the employee on pre-mature termination of
his/her contract, whereas the latter imposes a condition that the employee
refrain from working in any other similar firm competing with that of the
employer. Since an employment bond does not restrict the freedom of the employee
in pursuing his/her trade or profession after the termination of employment, it
cannot be said to be an infringement on either Article 19(1)(g) of the
Constitution or Section 27 of the Contract Act.
Conclusion
Employment bond clauses are a very useful tool in an employer’s arsenal. It is
an employer-friendly clause that acts as a deterrent to employees who tend to
constantly quit their jobs. It significantly helps the employer cut down losses
caused by frequent vacation of the jobs by the employees. One of the primary
reasons that firms these days impart extensive training periods for new
employees is to justify a reasonably large compensation to be paid by the
employee if he/she terminates the work contract prematurely. Therefore
employment bonds are a valuable tool in ensuring that employees continue with
the job or occupation they join, atleast for a reasonable period of time,
thereby ensuring the stability and economic efficiency of the employer’s
business.
End-Notes
[1]The Indian Contract Act 1872, sec. 74
[2]Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad and Or.,1997 LLR 500
[3]The Indian Contract Act 1872, sec. 10
[4]The Constitution of India 1950, art. 23
[5]M/s Sicpa India Limited v. Shri Manas Pratim Deb, MANU/DE/6554/2011.
[6]Satyam Computer Services Limited v. Ladella Ravichander , MANU/AP/0416/2011
[7]The Constitution of India 1950, art. 19(1)(g)
[8]The Indian Contract Act 1872, sec. 27
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