To win in the marketplace, you must first win in the workplace. Nowadays, an employee accepts a job based on the terms and conditions of the employer. Many organizations, particularly MNCs, now require their employees to enter into employment bonds or restrictive negative covenants. An employment bond is an agreement between an employer and an employee. The employee will work for the organization on certain terms and conditions. If an employee leaves their job before the required time period, he must pay a penalty to the employer.
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Are such employment bonds valid?
To execute a valid employment bond, the parties must first and foremost read it properly. Also make sure the following requirements are met:
- Both the parties sign the agreement with consent
- The conditions prescribed must be reasonable
- To safeguard the employer’s interests with fair conditions
An employment bond is not the same as a non-compete clause. The major difference between the two is that the former only puts a monetary punishment on the employee. While the latter sets a condition that the employee cannot work in any other similar firm like that of the employer. The entire problem between the employment bond and Section 27 and Article 19(1)(g) is due to the non-compete provision. An employment bond is valid when it asks for compensation from an employee for all costs suffered by the company. It is void under both Section 27 and Article 19(1)(g) when non-compete clauses restrict an employee from practicing a lawful profession, trade, or business.
Section 74 of the Indian Contract Act of 1872 empowers the employer to receive compensation in the form of a penalty from the employee if he leaves any company before the time period specified in the bond.
What is the solution?
In case of breach of employment bonds, there are two remedies:
- Compensation for damages
- Suit for recovery before the court of law
But one has to follow a procedure for both the options. The employer cannot directly file a suit against the employee before the court. The first step an employer must take is to send a legal notice to the employee to come to duty. Next, employer can ask employee for penalty for the bond. If the employee fails to pay the penalty, employer can file a suit in court. However, the compensation paid must be reasonable in order to compensate for the loss. It must not exceed the contract’s penalty, if any. The court usually calculates the compensation by assessing the actual loss faced by the employer considering circumstances of each case.
Section 14(c) of the Specific Relief Act, 1963
It is important to note that in this case there shall be no specific performance. A contract of service or bond is based on the parties’ personal will and requires personal skills. Either employer or employee cannot enforce it. Section 14(c) of the Specific Relief Act, 1963, does not enforce such contracts for specific performance. Therefore, an employer cannot look for reinstatement of their employees as a remedy in case of breach of employment bond.
Section 73 of the Indian Contract Act, 1872, provides general right to damages for loss caused by breach of contract. Section 74 offers compensation for violation of contract. This section talks about liquidated damages. Damages for breach of an employment bond can fall under both sections because employment bonds are basically a type of contract. Specific performance of such a bond is not enforceable because an employer cannot force an employee to work for his company. Also, employer cannot ask him to fulfil all the terms and conditions of such a bond. Employer can claim only damages and no punishment.
Judicial views on such bonds
Judicial judgments and common law doctrines have played an important role in developing a jurisprudence that balances the opposite issues and rights inherent in restrictive covenants and the scheme of Section 27.
Section 27 does not clarify what types of restrictions are permitted under the ICA scheme but it does give an exception provision as follows:
“Saving of agreement not to carry on business of which goodwill is sold. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business.”
Case Studies
In Niranjan Shankar Golikari Vs. Century Spinning Mills, the Supreme Court held that –
“Negative covenants are operative during the period of employment when the employee is bound to serve his employer exclusively, are not to be regarded as restraint of trade and therefore do not fall under S. 27 of the Contract Act. A negative covenant that the employee would not engage himself in trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided.”
The interpretation of restrictive covenants came up before the Supreme Court in Niranjan Shankar Golikari Vs. Century Spinning Mills. Mr. Golikari worked at Century Spinning for five years as a shift supervisor. Clause 9 of his contract required him to “keep secret and avoid exposure of any and all information, instruments, papers, etc., of the company that may come to his knowledge during the course of his employment as well as thereafter.” As per Clause 17, Mr. Golikari had to devote himself to his job at Century Spinning only. He could not accept employment from elsewhere. The contract also stated that Mr. Golikari cannot leave the company before the expiry of his five-year term. Otherwise, he would have to compensate Century Spinning for his six-month salary and the company’s training costs.
Mr. Golikari left Century Spinning after one year to work for Rajasthan Rayon Company in Kota. At the end of his leave, he informed Century Spinning about leaving and already joined a new company. So, it filed a suit to prevent him from working for any company till the period of his employment expires. It also claimed damages under Clause 17 of his contract, Mr. Golikari’s six-month pay, and accompanying training costs. Century Spinning also sought a permanent injunction against Mr. Golikari from disclosing any private information to other companies.
The issues before the Court
The issue before the Supreme Court was the legal status of non-compete covenants under Section 27 of the Indian Contract Act, 1872. The Court held that restraints that are only in effect while an employee is contractually committed to serve his employer are never considered to be in restraint of trade at common law or under Section 27 of the Indian Contract Act, 1872. As a result, a condition putting a partial control, banning the employee from performing services in the same industry as the employer for the life of the agreement would not violate Section 27.
Analysis
In terms of post-termination employment restraints, it has been stated that in order to prevent an employee from joining as a competitor, the employer must show that there has been actual theft of private and sole information, and that losing trade secrets, or the exposure of trade secrets to the competitor, has caused or is likely to cause damage/loss to the employer. Even in this situation, the court may only stop the employee from giving any private information to the competition, but not from joining the opposing organization. The Court made a difference between a restriction in an employment contract that is valid during the employment time and one that is valid after the employment period has ended.
Superintendence of Company Vs. Krishnan Mugai
In Superintendence of Company Vs. Krishan Mugai, the question of legality of employment bonds came up before the Supreme Court. The employer, engaged in the manufacture of specialized inks, hired the defendant as a sales executive. They claim to have sent the employee abroad for training for two separate purposes. Hence, two employment bonds were signed. The serving time period was five years. Otherwise, pay a fee of Rs 2 lakh if he quits the services sooner, according to the employment bonds. Before the expiry of the five-year period of the second bond, the employee gave his resignation letter. The employer thus enforced the two bonds and demanded that the employee pay Rs 4 lakh as penalty for the breach of each bond, as well as claim a sum of Rs 17,290 for the 57-day notice period and Rs 117 for repayment of excess medical expenditures.
The issues before the Court
i) whether such a method (Employment Bond) is acceptable, legal and enforceable under the Indian Law, and
ii) whether the appellant is qualified to a decree of compensation along with interest.
It’s important to note that while the bond specifies a payment of Rs 2 lakh as compensation for breach of contract, the judge determined the compensation amount after taking into account the employer’s entire expenses and the employee’s time of service. Because the defendant had already served two years of the agreed-upon three years, the judge divided the plaintiff’s entire expenses of Rs 67,595 into 3 equal parts over three years and awarded Rs 22,532 as valid compensation for quitting the job a year early.
Analysis
The Court upheld the validity of employment bonds but reduced the excessive damages payable to a ‘reasonable’ amount. If the bond is a genuine contract, one may file a court action. However, any move on the part of the firm, such as preserving the original educational certificates, creating any kind of problem for the concerned employee to join a work (i.e. to earn), manhandling the concerned person, etc., harm the company’s cause. Furthermore, the amount of compensation a firm can seek must be equal to the loss suffered, and not greater. In the event that an employer has suffered monetary expenses for training the employee for a specific job, he may seek damages for the monetary loss.
Conclusion
Employment bond’s purpose is to protect the interests of employers. These interests have to be ‘valid’, ‘reasonable’ and ‘necessary.’ In case of any violation, the employer gets compensation. Coming to restrictive covenants clauses, it has now become a routine to include such clauses into employment bonds. However, just the mention of such clauses in employment bonds does not make them enforceable. These are enforceable if their restrictions are reasonable. They should strike a balance between the rights of the employer and employee.
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