What is an employment bond?
An employment bond is an agreement entered between an employer and employee containing certain negative covenants for restricting the employer from leaving the employment without serving a prescribed minimum duration. These restrictive covenants can be included in various forms in the employment bond, for example, providing for a penalty clause in case of breach of the minimum tenure condition, restricting from working in the same field for a few years, or keeping hold of documents like degree, etc.
Validity of employment bonds in India
As per Section 27 of the Indian Contract Act, an agreement in the restraint of trade is void. Employment bonds which might seem like a restraint on employees’ power of engaging in trade by imposing negative covenants on them, however, are not violative of said Section 27 and enforceable if it meets certain conditions as was held by the Supreme Court.[1] Therefore, the validity of the employment bonds depends upon the fulfilment of specific conditions and the type of negative covenant included in the bond, which has been discussed as follows:
1. Validity of Employment Bonds Stipulating Penalty Clause
Generally, an employment bond which provides for penalty for the breach of minimum tenure is considered valid and damages are awarded to the employer under Section 74 of the Indian Contract Act[2]. Here, damages are awarded as compensation to the employer; therefore, the employer has to show the incurrence of some loss by breach of the employment bond and that the penalty is proportionate to the loss.[3] The loss can be due to the money spent by the employer on the employee for training or some kind of favour or concession or in lieu of salary of the notice period.[4]
Therefore, in bonds with penalty clauses, if the prescribed minimum time period is reasonable, the employer has incurred some loss and the penalty imposed is proportionate to the loss, an employment bond is a valid and enforceable agreement.
2. Validity of the Employment Bonds stipulating only Lock-in Period
The employment bond which does not provide for penalty and only provides the employee for serving the minimum duration i.e., lock-in period, is considered invalid and is not enforceable as being violative of Section 14 of the Specific Relief Act which bars a contract of specific performance providing for personal performance from being enforceable. Therefore, all employment bonds which have negative covenants to the extent of forcing the employee to serve the minimum duration, like, holding on to the employee’s degree until the expiry of the prescribed minimum period, are invalid and cannot be enforced.
3. Validity of the Employment Bonds stipulating post-termination covenants
The employment bonds contain covenants to operate post-termination like non-solicitation clauses(which bar an employee from soliciting the clients or business of the employer), non-compete clauses (which bar an employee from working in the same area of employment for a certain duration), and confidentiality clauses(which bar an employee from leaking the trade secrets of the previous employer) are considered valid only if the bar is for a reasonable time and is not wide. Otherwise, where such a clause is extremely unconscionable or excessively harsh or unreasonable, or one-sided, the agreement is held void and unenforceable. [5]
Conclusion
Considering the legal provisions and judicial pronouncements in India, it can be concluded that the validity of the employment bond depends upon the nature and content of restrictive content. Usually, the Court awards compensation to the employer if an employee leaves the company before serving the notice period, however, where covenants are too harsh or unreasonable, the Court has set them aside to recognize the employee’s right to practice any profession or trade as guaranteed under Article 19(1)(g) of the Constitution.
Endnotes:
- Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company Limited, AIR 1967 SC 1098.
- M/s Sicpa India Limited v. Shri Manas Pratim, 2011 SCC Del 4805.
- Ledalla Ravichandar and Another v. M/s Satyam Computer Services Limited, 2011 AIR CC 2827.
- Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad and Others, (1996 Mad HC).
- Superintendence Company of India v. Sh. Krishan Murgai, AIR 1980 SC 1717.