Validity of Employment Bonds in India

Even with a fine set of degrees, top qualifications, or exceptional grades, finding a job in this age of fierce competition is difficult. As a result, an employee nowadays takes a job on the majority of the employer's terms and conditions. Understand the concept of the validity of such bonds in India.

Wed Jun 29 2022 | Employment, Criminal and Labour | Comments (0)

Like

This situation is more common to new workers or others with limited experience. Nothing prevents an employer from putting the same requirements in front of a highly experienced employee.

The employment bond is the most common, talked-about, and perplexing case in this. Many businesses these days, especially multinationals, require their workers to sign an employment bond, which usually prohibits an employee from leaving the company and/or joining another before completing a specified period of employment.

The explanation for this is that, under the current economic system, after wasting a significant amount of time, energy, and resources on an employee's training and other expenses, the business loses greatly if the employee moves to a new position using the expertise and training he learned from his previous job.

In this situation, the most pressing question is whether such a procedure for retaining an employee is legal, efficient, reasonable, and enforceable.

Validity of an employment bond in India

The first step in determining if a bond is legitimate is to determine if it is a valid contract under the Indian Contract Act, 1872, i.e., it must be a legally enforceable agreement. If the parties accept with their free consent, that is, without compulsion, coercion, unfair interference, misrepresentation, or error, the employment arrangement with the negative covenant is legitimate and legally enforceable. Since an employment bond must be a legally binding contract, an employer must make an offer, which must be accepted by the employee.

Grounds of legality of an employment bond

Bonds are only valid if the corporation has invested money on the workers' personal hygiene and improvement, not just on preparation to make them work better. It should also not be one-sided or favour the employer to demonstrate that the bond is legal.

For a bond to be recognised constitutionally, the court must always challenge its rationale. For example, if an employer has created software and the employee has knowledge of that software, prohibiting the employee from using that software for another job with a bond is legal and therefore legitimate. However, an employment bond is not recognised as legitimate in unusual situations.

Remedies in case of bond being denunciated

One can go to court if the bond is a legal contract. Any act on the part of the organisation, such as keeping the original educational certificates/creating any kind of impediment for the concerned employee to enter a job (i.e. to earn money), manhandling the concerned individual, etc., tarnishes the company's cause. In addition, the amount of compensation a corporation can seek must be proportional to the damage it has incurred, not more.

If an employer has spent money on preparing an employee for a specific job, he will sue for damages for the financial loss he has suffered. If the work bond is one-sided, unconscionable, or immoral, it would be unenforceable. As a result, it is  important to exercise caution when drafting the employment bond, since the employment bond's terms, such as the required employment duration and penalty amount, must be fair in order for it to be effective under Indian law. Since the word "fair" is not specified in the law, its definition must be decided on a case-by-case basis, based on the issues at hand and the circumstances.

How to Challenge the enforceability of Employment Bond?

Section 27 of the Indian Contract Act may be used to question the validity of employment bonds. Any arrangement in restriction of trade or profession is prohibited under Section 27 of the Indian Contract Act of 1872. Any trade or occupation agreement that violates Section 27 is null and void.

According to the mandate of Section 27, any terms and conditions of an agreement that directly or indirectly compel the employee to serve the employer or prohibits them from joining a competitor or other employer are not valid under Indian law. The employee has the right to resign from the employment even though he has agreed to serve the employer for a certain period of time in the employment bond.

In order for an employment bond to be valid under Indian law, it must be shown that it is required for trade freedom. The court may issue an injunction order prohibiting the employee from joining the competitor if the employer can show that the employee is joining the competitor to reveal the trade secret. If a contract is contested on the grounds that it violates a clause relating to trade restraint, the party defending the contract must prove that restraint is sufficiently required to protect his interests.

The requirements of a valid employment bond agreement are:

  1. The parties must sign the agreement with their free consent.
  2. The terms of the agreement must be fair.
  3. The conditions placed on the employee must be shown to be sufficient to protect the employer's interests.
  4. To be true and enforceable, the work bond must be signed on stamp paper of sufficient value.

Remedies Available to Employer and Employee

An employer can be entitled to compensation if an employment bond is violated. The amount of compensation awarded should be adequate to compensate for the loss and should not exceed the contract's penalty, if any. The court determines the appropriate compensation amount by calculating the employer's actual loss, taking into account all of the case's facts and circumstances. Even if the bond provides for the payment of a penalty in the case of a violation, this does not imply that the employer is entitled to the full sum; the courts may decide the fair amount of compensation to be paid.

Is it legal for employers to request reinstatement of their employees or to receive a restraining order prohibiting them from working for a rival or another employer?

In Chander Shekhar Malhotra vs Nirlon Limited & Others, the Supreme Court held that clear performance action cannot be pursued for breach of contract of personal service or bond, and that an employer cannot be entitled to reinstatement of their employees as relief in the event of a breach of bond. We've seen a pattern where courts are reluctant to issue injunctions against workers prohibiting their jobs with another employer unless it's appropriate to protect the employer's proprietary rights or trade secrets. To assess the damage suffered by the employer, the court considers the real costs incurred by the employer, the employee's length of employment, and the contract's terms to arrive at an appropriate compensation sum.

What does a Company do after Violation of Employment Bond

The first action that businesses take when an employee violates an employment bond is to issue a legal notice requiring the employee to report for duty immediately, failing which the notice should require the employee to pay the bond amount. After the employee fails to pay the amount due, a claim is filed in a court of competent jurisdiction for the recovery of the due amount, based on the terms and conditions of employment.

Conclusion

Since the work bond is required to protect the employer's interests, it is considered reasonable. However, in order to protect the employer's interests, the restraints placed on the employee in the contract must be "just" and "reasonable." Otherwise, the bond's validity could be called into question. The job bond prevents the employee from being forced to work for another company. In the event of an employee breach of contract, the employer's only option is to demand a reasonable compensation amount.

Copyright 2022 – Helpline Law - HLL001

ENQUIRY FORM

You could get in touch with our team to find a suitable lawyer for assistance.
Helplinelaw has been referring lawyers that fit your needs in terms of seniority and experience since 2001

Other Latest Articles