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 organisations, particularly multinational corporations, now require their employees to enter into Employment Bonds or restrictive covenants in their contracts.
An Employment Bond is an agreement that stipulates the agreed-upon terms and conditions. Under this, the employee works for the employing entity for a defined amount of time after joining. If an employee quits the job before completing the required time period, the employee must pay a penalty to the employer.
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Are Employment Bonds Legal?
In order for an employment bond to be valid or legal under Indian law, the ingredients are:
I. The employer has incurred expenses on the employee’s training
II. There has been a breach of the minimum service clause, and
III. The employer may suffer a legal injury on account of such a breach.
In Shree Gopal Paper Mills Ltd vs. Surendra K Ganeshdas Malhotra1, an agreement stating that the employee will have to work with the employer for 20 years was held as oppressive. The same was not enforceable and the Court refrained from stopping the employee to seek employment elsewhere.
In Jet Airways (I) Ltd vs. Jan Peter Ravi Karnik2, it was held that a bond of 7 years was restrictive in nature. The court observed that training given to pilots is a common trade practice, thus there was no reason for such a unilateral clause.
In Subhir Ghosh vs. Indian Iron and Steel Company3, an employment bond was held valid as it was reasonable. The amount payable was in fact the training amount and was not in the nature of a penalty.
It is clear from the aforementioned cases that an employment bond, by itself, is not invalid in India. But if the bond puts an unreasonable restriction on the employee, without any commercial justification, the same would be invalid. The Courts herein opt for a “substance over form” approach, i.e., to actually look into the wording of the bond rather than categorising the same as valid or invalid on the face of it.
For our Hindi-speaking readers looking to understand the nuances of employment bonds in depth, ‘Employment Bond की पूरी जानकारी‘ provides a comprehensive guide. This blog delves into what constitutes an employment bond, its legal standing, and how it affects both employees and employers. Gaining a thorough understanding of these agreements can empower you to navigate your contractual obligations more confidently.
Understanding your employment contract is critical before committing to any bond. ‘Employment Contract: Why and How Should You Read It?‘ guides you through the importance of thoroughly reviewing your employment agreements. This blog highlights what to look for in your contract and how it relates to employment bonds, ensuring you make informed decisions about your career.
What is a Reasonable Bond Tenure?
This varies from case to case and industry to industry. A time frame of 2-3 years may be considered to be reasonable, as long as commensurate training is provided. The tenure is typically limited to not more than 3 years when an estimated amount of 1 to 4 lakhs rupees is spent on a single trainee. The primary goal of an employment bond is to keep a trained employee for as long as possible. This is done to ensure that the employer’s resources and time are not wasted in training with no benefits derived as a result of early resignation by employees. It must be ensured that the duration of the bond is not excessively long. Secondly, the amount of such recovery is not greater than the actual amount spent by the employer on training the employee.
Legal Remedies in case of a Breach
There are basically two remedies that lie in case of a breach of employment bonds:
- Compensation or damages
- Filing a suit for recovery before a civil court of law
But in both of these cases, one must follow legal procedure. Exhausting all alternative remedies is a standard expectation by a court of law, before initiating litigation. It would be premature for an employer to directly jump to the step of filing a civil suit against the employee before a court.
An employer may send a legal notice requesting the employee to report to duty. If the employee fails to do so, the employer may send a legal notice. The compensation in the amount agreed upon in the bond can be claimed through the notice. If an employee fails to pay money, the employer can initiate an action in court to recover the amount due. The amount must be as stated under the terms and conditions of employment.
However, in most cases, the employer does not approach the civil court. This is due to the high costs of litigation and instead attempts to threaten employees by sending legal notices to the employees. Under such threats and apprehensions, many employees pay compensation to their employers.
The employer may suffer a loss as a result of a breach of employment bond. Thus the employer becomes entitled to compensation. However, the compensation to be paid must be reasonable in order to compensate for the loss. It also shall not exceed the contract’s penalty, if any. The court usually calculates the acceptable compensation amount. It assesses the actual loss incurred by the employer while taking into account all of the circumstances of the case.
Suit for Specific Performance
However, a suit for specific performance does not lie for breach of a personal service contract or a bond. Since a contract of service or bond rests on the parties’ personal will and requires personal skills, it is specifically enforceable by either the employer or the employee. It falls under Section 14(c) of the Specific Relief Act, 1963 which provides for contracts that are not specifically enforceable. Therefore, the employer cannot seek reinstatement of their employees as a remedy in case of breach of employment bond.
Section 73 of the Indian Contract Act, 1872 provides the general right to compensation for loss or damage caused by a breach of contract. Section 74, on the other hand, offers compensation for violation of the contract in case of a stipulated penalty. This section talks about liquidated damages. Damages for breach of employment bonds can fall under both sections because employment bonds are basically a type of contract.
Also, the specific performance of such a bond is not enforceable because neither can an employer force an employee to work for his company, nor ask him to fulfill all the terms and conditions of such a bond. One may only claim damages as there lies no punitive punishment.
Are you contemplating the implications of breaking an employment bond? Our blog ‘Employment Bond Details‘ offers a closer look at what employment bonds entail, including the potential consequences and legal remedies available to employees. Knowing these details can help you weigh the pros and cons of exiting an employment bond and what steps to take if you decide to move forward.
Some General Queries
Is it Legal to take a Blank Cheque as security?
The cheque is blank when the authorised signatory to it, signs it before filling out the other essential details. This is when a person writes a cheque in lieu of a future uncertain event, the occurrence of which depends on future occurrences. However, the practice of utilising a blank cheque is increasingly common in the business world.
Nonetheless, one must avoid issuing a blank cheque in general since it runs the danger of misplacing it or using it for illegal purposes. Punishment for a cheque bounce is imprisonment of up to two years or a fine up to double the value of the cheque, or both, according to Section 138 of the Negotiable Instruments Act of 1881.
In the case of M/s Laxmi Dyechem vs. State of Gujarat4, Hon’ble Supreme Court held that if the cheque has been dishonoured on the ground that the signature does not match, even then an offence under Section 138 of the NI Act would be made out if all the other ingredients of the offence are fulfilled.
What to do if you have already given the Cheque?
When it comes to handing over the cheque, the employee may ask to enter into an agreement. The terms of the agreement may state an undertaking on behalf of the employee in return for any breach. So, instead of delivering a cheque, you can sign an agreement with your employer. Thus the employee will face a civil action only instead of a criminal one.
However, if the employer refuses to sign such an agreement or requires an employee to provide a blank or signed and undated cheque, then it is advisable to send an email to the company immediately noting that at the time of hiring, the employer requested for a blank cheque from a specific bank and that the same is not due to a “legally enforceable debt”.
If the employer misuses it on a subsequent date, a suit for offence of extortion may lie against them. In such a breach, the employee can send a copy of such emails to the nearest police station through email. The employee may also lodge an FIR and shall keep it safe themselves.
Even though it is highly unlikely that any police officer takes action. on the basis of such a postal communication. However one may still use it as evidence if the employer actually goes and encashes the cheque and then files a cheque bounce case against the employee under Section 138 of the NI Act. One may directly approach the High Court pleading that he gave the cheque under duress and not as a legally recoverable debt.
Is it legal to take and retain Original Marksheets/ Certificates?
In general, no private company requests to deposit the original documents with them. The standard practice is to validate all original documents and make xerox copies of them to file with the employer at the time of joining The employee may submit it with the company for a reasonably short duration to complete a verification process. In such cases, management acknowledges it in writing to the employees and thereafter, duly returns them after the completion of the verification process.
If an employer has contracted you for a minimum service duration and retains your original documents, you would not be able to apply for another employment until you have completed your acceptable minimum period. Further, it is also blatantly against the law to retain the original documents of an employee without any valid purpose, and simply as leverage to enforce the minimum service requirement in the training bond.
Illegally retaining original certificates by the management is unlawful and dishonest. It amounts to a criminal breach of trust, as was ruled by the Madras High Court in A. John Paul vs. State Representative5. In such a situation, the employee can also proceed with filing a police complaint for offences under the Indian Penal Code.
Furthermore, bonds/contracts/agreements restraining an employee to leave employment before a certain amount of time would also be invalid, being in restraint of trade under Section 27 of the Indian Contract Act.
What if the Cheque bounces?
Cheque bounce, be it for insufficient funds, account closure, cancellation of the cheque, instructions from the drawer, or a signature mismatch, is an offence punishable under Section 138 of the Negotiable Instruments Act.
Initially, the complainant shall prove that the individual issued a cheque that bounced subsequently. The cheque shall be submitted within 3 months from the date written on it. Once the payee receives the information via a return memo from the bank that the cheque is dishonoured, a notice is to be sent to the drawer of the cheque requesting payment of the amount specified in the cheque.
The notice is sent to the drawer within 30 days of the payee receiving information about the non-payment. If the drawer of the cheque does not make the payment within 15 days of receipt, the complainant may file an FIR before the Metropolitan Magistrate or a Judicial Magistrate of the First Class within another 30 days following the expiration of the 15-day period.
The 2018 Amendment to the NI Act proposes that the accused shall pay an interim compensation complainant within 60 days. The quantum of this interim compensation is to be up to 20% of the amount of the cheque. The complainant refunds the interim compensation with interest when he is not able to establish the charges successfully.
What if Employee says that He/ She didn’t receive any notice?
According to Section 114 of the Indian Evidence Act, 1872, the court may assume that something would have happened if it appeared to the court that the common course of business made it likely that it would happen unless there are circumstances in a specific case to show that the common course of business was not followed. When it comes to postal communications, Section 114 allows the Court to assume that the communication would have reached the address of the addressee in the normal run of things.
In the case of K. Bhaskaran vs. Sankaran Vaidhyan Balan6, the Supreme Court observed that because the NI Act does not require that notice be given only by ‘post’, Section 27 of the General Clauses Act, 1897 can be invoked, and in such a situation, service of notice is regarded to be effected on the sender unless he proves that it was truly not served and that he was not responsible.
Process of Bond Recovery
In a civil suit, the court will issue a notice or summons to you, requiring you to appear in court. The court then frames the issues, peruses the documents, and hears the arguments of both sides. In the end, the court decides whether or not an employee must pay compensation. Then you have to pay the amount as ordered by the court with interest and court fees thereon.
Conclusion
Employment bond clauses are a valuable tool in the toolbox of any business. It’s a pro-employer clause that serves as a deterrent to employees who frequently vacate their positions. It considerably aids the firm in reducing losses resulting from high staff turnover. The most important reason behind imposing a lengthy training period is to justify hefty compensation for the breach. Thus, employment bonds are an important instrument to guarantee that employees stay with their job or occupation. This is in turn to maintain business stability and economic efficiency. They are valid but they must be ‘reasonable’ and ‘necessary’ and are not enforceable as a ‘penalty’.
Feeling trapped by an employment bond can be daunting, but understanding your rights and options is the first step towards making an informed decision. For more insights on navigating employment contracts, bonds, and workplace laws, subscribe to our newsletter – ‘The Success Circle‘. Get expert advice and tips straight to your inbox, helping you tackle complex employment issues with confidence. Subscribe now and empower yourself with the knowledge to navigate your career path successfully.
Endnotes
- AIR 1962 Cal 61
- 2000 (4) BomCR 487
- 1976 (2) CLJ 556
- (2012) 13 SCC 375
- Crl. OP No. 9920 of 2012
- (1999) 7 SCC 510
