Employment Bond: Enforceable Or Unenforceable in Indian Law?

The present writeup concerns one of the major employment issues in the contemporary world i.e. employment bonds. Signing of an employee bond is almost a norm nowadays in the present industry. The employment bonds levy certain restrictions on the employees be it not to join a particular company after leaving the job or the paying of monetary penalty for leaving the job before the stipulated period of time. The present attrition rate in the industry particularly IT means that the money garnered through this method (employment bond) is very huge. Also the terms of the bond are a major issue with people in taking up of a particular job or not. Thus we look at the various measures which make the bond enforceable or otherwise not.

What is an Employment Bond

The Employment Bond is basically an agreement which the company and the employee enter into which among the other terms contained therein states that in consideration of the training given to the Employee and the money spent by the company in imparting such training, the Employee will remain in the services of the company for a particular period. In case the Employee breaches the provisions of the Agreement, the Employee will be liable to pay a certain sum of money, be it the expense incurred by the company in training of the Employee. In the particular case where the company feels that the Employee may not be able to pay the amount, the company has a Guarantor who guarantees that they would take responsibility to ensure that the Employee adheres to the terms of the Bond. In case of breach, the Guarantor will be jointly liable to pay the Bond amount to the company. The Bond may also contain confidentiality and non competition clauses. The legality of the Bond shall depend upon whether there was consideration in the form of training or otherwise.

Our issue of contention is that whether such bonds are leagally enforceable or not. The contractual clauses are taken up in the Contracts Act, 1872. The Contract Act states that such a contract might be legal even if it levies certain conditions and restrictions if the mentioned restrictions are valid and reasonable. Whether

As per the Act, a “contract” is an agreement enforceable by law. The agreements not enforceable by law are not contracts. An “agreement” means ‘a promise or a set of promises’ forming consideration for each other. And a promise arises when a proposal is accepted. By implication, an agreement is an accepted proposal. In other words, an agreement consists of an ‘offer’ and its ‘acceptance’.

An “offer” is the starting point in the process of making an agreement. Every agreement begins with one party making an offer to sell something or to provide a service, etc. When one person who desires to create a legal obligation, communicates to another his willingness to do or not to do a thing, with a view to obtaining the consent of that other person towards such an act or abstinence, the person is said to be making a proposal or offer.

An agreement emerges from the acceptance of the offer. “Acceptance” is thus, the second stage of completing a contract. An acceptance is the act of manifestation by the offeree of his assent to the terms of the offer. It signifies the offeree’s willingness to be bound by the terms of the proposal communicated to him. To be valid an acceptance must correspond exactly with the terms of the offer, it must be unconditional and absolute and it must be communicated to the offeror.

An “agreement” is a contract if ‘it is made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and is not expressly declared to be void’. The contract must be definite and its purpose should be to create a legal relationship. The parties to a contract must have the legal capacity to make it. According to the Contract Act, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of a sound mind, and is not disqualified from contracting by any law to which he is subject”. Thus, minors; persons of unsound mind and Persons disqualified from contracting by any law are incompetent to contract.

Hence a case where the company has spent a lot of time and money in training the Employee in return for which the Employee signs a bond for a period of 1 year would be seen as a reasonable restriction. The same however cannot be said in a case where the company without giving any consideration requires the Employee to sign a bond period.

As stated above the Bond may also contain a stipulation that a certain amount has to be paid in the case where there is a breach of the provisions of the Bond. This sum which is fixed under the contract is called “liquidated damages”. However, under the Indian law, the courts will not automatically grant the liquidated damages merely because it is stipulated in the contract. The court will grant compensation only if the company has actually suffered a loss as a result of the Employee’s early termination of contract. Hence the company which goes to court should prove that it has suffered a loss to the extent of its claim in order to get that amount, though it has been fixed under the contract. This could be easier in cases where the company has records to show that it has incurred expenses for providing training to the Employee and that the Employee has left in the middle of a project etc. However, the company cannot get an amount higher than that fixed under the contract.

Another issue at this stage is whether the company can seek any remedy, which seeks to prevent the Employee from taking up employment with a competing company. Generally, the courts will not grant an injunction that will force the Employee to either work for a particular employer or remain idle. However, a company to protect its trade secrets or confidential information may obtain an order from the courts to prevent its ex Employee from divulging such information to his/her new employer. Again, the company will have to prove that its ex Employee had access to such information and that there is a possibility of such information being leaked.

This brings us to the topic of what course of action a company must follow when an Employee breaches the condition of the Employment Bond. The first thing the company must do is issue a legal notice calling upon the Employee to report for duty immediately, failing which the notice should call upon the Employee to pay the sum agreed to in the Bond. A demand notice for the bond amount should be issued to the Guarantor also. Should the Employee fail to pay the amount a suit may be filed in the Court of appropriate jurisdiction to recover the amount due. Remember that in case there is a Guarantor to the bond, the person can be made a party to the suit.

There are various defences that may be taken by the Employees when a case is instituted against him/her. Some of the more common ones are that there was no training imparted to the Employee and therefore the company is not entitled to the bond amount. The Employee might also state that she/he was forced to sign the Agreement without being able to understand the contents of the Bond. The Employee may also state that the Bond is in violation of the provisions of the Contract Act as it imposes unreasonable restrictions on a person’s trade or profession.

As per Section 74 of Contract Act, 1872

Compensation of breach of contract where penalty stipulated for

When a contract has been broken, if a sum is named in the contract as the amount 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 or 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.

Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

Explanation: When any person enters into any bail bond, recognizance or other instrument of the same nature or, under the provisions of any law, or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

Article 19 of Indian Constitution talks of fundamental rights, as per the Article 19 the Constitution the write work is a fundamental right, and under no circumstance does the Fundamental rights under Article 19 be waived by any person nor can any person be forced to do something that amounting to the violation of the rights mentioned under Article 19.

As per the Indian Contract Act contracts entered between two parties if is one sided then such contract would be null and void. Most of the Bonds are one sided.

Again as per the Indian Contract Act no contract can be enforced on any person if the contract which is being so enforced causes any harm to the person on whom its is enforced and if performed would violate principles of natural justices.

As per Sec 368 of Indian Penal Code if any person or institute holds back any document or any use any legal document or threatens any legal suits or actions and thus forces a person to perform any act against his wishes or which is illegal or wrong as per the statute of Law of the land.

Sec 368 of Indian Penal Code talks about extortion by the threatening to file a legal suit. The minimum punishment under this act is 2 two years.

The Supreme Court of India has clearly stated that no employee can be forcefully employed against his will, just because he has signed a contract with the employer.

The court also has stated that the employer cannot hold back any personal document of the employees as they are earned by the employees and the company has no claim on the same.

Any complain on the company would land the Directors and Managing Directors of the company in Jail, as the company is not a actual living entity but legal entity and the management are hands and heads of the company.

Bonds are applicable only if the company has spend money on the personal grooving and enhancement of the employees, but not just a training that helps employees perform better.

The effectiveness of these defences varies from case to case. If the Employee can prove that there was no consideration for the Bond in the form of training etc. then in such cases s/he will not be required to pay the Bond Amount.

Therefore a checklist when a company has an Employment Bond is:

1. Ensure that the Bond period is reasonable
2. Ensure that the Non competition clause is not unreasonable
3. Ensure that the Bond Amount is reasonable and reflects the expenditure of the company on the Employee
4. Ensure that there is training material that can be produced to prove in Court that the Employee was given training.
5. Ensure that there is a confidentiality clause to ensure that the company’s trade secrets are protected.

As per the Indian Statute bonded labor system was long abolished and no bond can force any person to work against the employees wishes

Employers are required to give employees written particulars of employment. These particulars should include all the legal requirements or consist of a letter of appointment with minimal information plus reference to additional material that defines the conditions of employment.

Many employment contracts contain only vague references to the “policies and procedures to which the employee will be bound”. The employer should provide the employee with all of the company policies and other documents that relate to the contract or are referred to in the contract.

Checklist for Employee Contract: Does the contract/letter of your organization consist of the following details:

CONTRACT DETAILS

• Full name of employer and employee
• Address of employer
• Place of work of employee, and, where the employee is required or permitted to work at various places, an indication of this
• Title of job or nature of the work or a brief job description
• Date of commencement of employment

PAY & BENEFITS

• Wages/ salary details
• Rate of overtime work (if eligible for overtime pay)
• Any other cash benefits that the employee is entitled to
• Any payment in kind that the employee is entitled to and the value of that payment (e.g. accommodation)
• Any deductions to be made from the employee’s remuneration (e.g. Pension / Medical Aid)
• Method of payment and method of calculating wages
• Additional benefits, and any conditions under which they apply, e.g. achievement of targets
• Pension scheme whether one exists, and if so conditions
• Approvals for any deductions from pay, e.g. pension scheme other than those required by law

NATURE OF CONTRACT

• Type of contract: permanent, temporary, fixed term
• Duration of a temporary contract or termination date for a fixed term contract
• Period of notice required to terminate employment, or if employment is for a specified period, the date when employment is to terminate

HOURS OF WORK, SCHEDULES, AND OVERTIME

• Number of hours in workweek and workday.
• Procedure for scheduling.
• Alternative work schedules/flex time.
• Definition of overtime & pay or compensatory time off
• Advance notice of overtime & right to refuse overtime
• Staffing and workload standards.
• Meal and rest periods.
• Timekeeping and attendance requirements

LEAVES

• Annual leave entitlement
• Role of seniority in scheduling vacations.
• Conditions relating to taking leave, e.g. present company holidays or notice requirements
• Details of any other paid leave entitlements
• Sick leave arrangements and conditions of any benefits

DISCIPLINARY PROCEDURES

• Details of the disciplinary procedure
• Conditions under which the employer can terminate the contract e.g. gross misconduct

GRIEVANCE PROCEDURE

• Definition of a grievance.
• Stewards’ right to use work time for grievance investigations.
• Employees’ right to union representation.
• Explanations of each step in grievance procedure and time limits at each step.

HEALTH & SAFETY

• Employer and employee responsibilities

PROTECTION OF BUSINESS INFORMATION

• Details of confidentiality requirements
• Use and misuse of electronic communications and Internet

ABOUT PROBATION PERIOD

• Purpose & duration of the probationary period
• Benefits that will come into effect when the probationary period is completed

PERFORMANCE EVALUATION

• Criteria & frequency for evaluations.

RETIREMENT POLICY  ANY OTHER CONDITION, like,

• Any collective or 3rd party agreement which affects the employee’s terms and conditions

UNIFORMS AND TOOLS

• Allowance for or provision of uniforms and/or tools for affected employees.

ACCEPTANCE

• Acceptance clause whereby employees sign that they accept the contract of employment and conditions therein

In a nutshell , if the bond is a valid contract, company may go to court.

However, any act on the part of company e.g. retaining the original educational certificates/ creating any kind of impediments for the concerned employee to join a job(i.e. to earn)/ manhandling with the concerned person etc. will adversely mar the cause of company.

Also, the amount of compensation a company can claim must be commensurate with the loss caused, and not more. I don’t feel that asking for last year’s salary is one of them.

Any conditions which violate the fundamental rights as defined in constitution / are not tenable in the eyes of law, will again mar the validity of bond.

There are conditions which both parties need to fulfill while executing the contract. Contrary to that bond in question cannot be said to exist as a legal contract.