The corporate world is at battle to outperform in global markets. It is undergoing phenomenal economic and industrial shifts, which has resulted in increased market rivalry. To keep up with the market competition, companies invest heavily in training their employees in order to improve the nature and efficiency of the company’s goods and services. However, some employees quit their jobs after the training session, after honing their skills and developing their knowledge of the business in exchange for a higher salary and incentives. The rising rate of attrition exposes employers not only to financial losses, but also to delays in completing ongoing ventures, which has a direct effect on their credibility and reputation in the market. Therefore, in order to safeguard their interest, employers have started to obtain an employment bond from their employees who are found suitable for training or skill development.
WHAT IS AN EMPLOYMENT BOND?
Employment bonds are agreements between the employer and employee wherein the terms & conditions of the employment, an additional clause is incorporated which requires the employee to serve the employer compulsorily for a specific time period else refund the amount specified as bond value.
The issue which arises is whether such a method (Employment Bond) is acceptable, legal and enforceable under the Indian Law. This article discusses the need, enforceability of employment bond and the rights and remedies available to the employers and employees under the agreement in light of various court decisions under the Indian Contract Act, 1872.
NEED FOR EMPLOYMENT BONDS
The sole aim of such bonds/contracts is to ensure that employers’ resources and time are not expended in training with no results or benefits derived as a result of early resignation. The employer tries to recoup training costs, according to the reasoning behind the employment bond. This bond serves as a deterrent to prematurely terminating the employment contract.
ENFORCEABILITY OF EMPLOYMENT BONDS
Employment Agreements with negative covenant is valid and legally enforceable under Indian Laws if the parties agree with their free consent. 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 which must be proved with evidence in the Court of law. Further, the courts have been reluctant to restrain the employee from joining a competitor/other employer. It is also to be noted that, an employment bond will not be enforceable if it is either one sided, unconscionable or unreasonable.
Section 74 of the Indian Contract Act, 1872 says “When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.” Thereby, keeping this section in light, an 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 expired.
CHALLENGING THE ENFORCEABILITY OF EMPLOYMENT BONDS
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.
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. Whenever an agreement is challenged on the ground of it being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests.
In order to execute a valid employment bond, the parties have to ensure that the following requisites have been complied: (i) the agreement has to be signed by the parties with free consent; (ii) the conditions stipulated must be reasonable; and (iii) the conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer.
It is to be noted that 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.
REMEDIES AVAILABLE TO EMPLOYER AND EMPLOYEE
A few important points to be kept in mind when a company has an employment bond are:
Ensure that the bond is reasonable and fair
Ensure that the non-compete clause is not unreasonable
The first action that an employer takes after a breach of an employment bond is to send a legal notice requiring the employee to report for duty immediately, failing which the notice should require the employee to pay the amount agreed upon in the bond. After the employee fails to pay the amount, a suit is filed in court of appropriate jurisdiction depending upon the terms and condition of employment for recovery of the due amount. The employers need to ensure that there is training material that can be produced as evidence in the court of law.
In the event of a breach of employment bond, the employer may suffer a loss and thus be entitled to compensation. However, the compensation awarded should be reasonable to compensate for the loss incurred and should not surpass the contract’s penalty, if any. Usually, the court determines the reasonable compensation amount by computing the actual loss incurred by the employer having regard to all circumstances of the case.
It is to be noted that, the specific performance action cannot be sought for breach of contract of personal service or bond6 and, therefore, the employer shall not be entitled to seek for reinstatement of their employees as relief in the event of breach of the employment bond.
LEADING CASE LAWS – RECOVERY OF TRAINING EXPENSES
Nazir Maricar v. Marshalls Sons & Co. (India) Ltd.
The Court in the case held that, agreements recovering training costs are for the benefit of employees because training provided to them increases their acceptability in the job market. There is no restraint also because the employee is free to go away after paying unrecovered portion of expenses of training.
Subir Ghosh Vs. Indian Iron & Steel Co.
In this case, the employee had received special training and the extra cost was incurred by the employers on such special training. Such circumstances the amount stipulated in the contract constitutes liquidated damages being a genuine pre estimate of the damages suffered by the employer and such sum was recoverable without the employer being required to prove any actual loss.
M/S. Sopra India Pvt. Ltd vs Mr. Akhil Singhal
Employment bonds stipulating that in case of failure of an employee to serve the employer for a stipulated period the employee would be liable to make the payment of a stipulated sum as damages cannot be said to be ipso facto unfair and unreasonable. There is no provision in law which declares such clauses to be per se null and void. Section 27 of the Indian Contract Act operates in a different field and does not bar such employment bonds.
In the present case, loss in terms of money could have been determined and therefore the plaintiff in the present case was supposed to establish that whether any actual loss had been caused to him. The result in this case was that the plaintiff has not suffered any loss or any legal injury on account of failure of the defendant to honour the said employment bond and is not entitled to the stipulated amount of Rs. 50,000/-. The grant of notice pay was sufficient and reasonable compensation for the plaintiff.
M/s Sicpa India Limited v. Shri Manas Pratim Deb
In this case, the employee had to enter into two bonds, one which provided that the employee had to work for a period of five years or pay an amount of Rs. 200,000, and another which stated that the expenditure on business trip would be recouped from the services of the employee. The employee resigned from the company towards the end of five years of his/ her bond period. The company instructed the employee to pay certain amounts for medical expenses incurred by the company on behalf of the employee.
The employee refused to pay the amount as it was unreasonable and the matter was taken up to the court where it was held that the five years mentioned in the first bond was almost coming towards the end and Rs. 67,596 was already recouped from the services of the employee for the second bond. Therefore, taking into consideration the period left in the bond, the court awarded reasonable damages to the employer
Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad & Ors
The Madras High Court dealt with a situation where an employee working as sales engineer in breach of his undertaking left his services within 14 months as against the contractually agreed period of three years. The Court held that the employer was entitled to recover the stipulated damages, which is a genuine pre-estimate by the parties of the damages incurred. There is no requirement to prove separately any post-breach damages. The employer is required to establish that the employee was the beneficiary of special favour or concession or training at the cost and expense wholly or on the part of the employer and there had been a breach of the undertaking by the beneficiary of the same. In such cases, the breach would per se constitute the required legal injury resulting for the employer due to breach of the contract.
Employment bond clauses are an employer friendly clause that acts as a deterrent to employees who tend to quit their jobs after seeking the training. 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. As a result, employment bonds are a vital tool in ensuring that employees stay with the job or profession they enter for at least a fair period of time, thus ensuring the employer’s business’s stability and economic performance.
Based on the above findings and various court decisions, employees are always free to choose their employment and cannot be required to work for any employer by imposing the employment bond. The only recourse open to the employer in the case of a breach of contract by the employee is to seek a fair compensation amount. The compensation amount awarded shall be based upon the actual loss incurred by the employer by such breach.
Author: Prashant Jain, Co-Founder & Partner; Abhishek Gupta, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at firstname.lastname@example.org.