The Legality of Employment bond Contract

Article posted by: office@indialawoffices.com

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The war to excel in the corporate world has increased manifold in the recent past. To survive in the global markets, business houses are incurring huge expenditure in imparting training to their employees for enhancing the nature and quality of goods and services of the company.

According to market analysts, 54% of employees in India are always on the lookout for better opportunities and employees under the age of 24 are much likely to quit in the first six months of their joining. This has become an unending struggle for HR managers and recruiters. To resolve this issue, employers have got just one solution i.e. Employment Bond Contracts.

WHAT IS AN EMPLOYMENT BOND?


Employment bond are employment agreements with negative covenant. It is an agreement between the employee and the employer which confirms that the employee shall work for an agreed period of time upon joining the business. Wherein, the employee pledges to pay a certain amount to the employer if he/she decides to leave the organization before that agreed period of time.
 
There have been cases when the employee leaves the company after honing the skills and improving the knowledge of the business for better salary and incentives. In such cases, the employer not just faces financial losses but also gets delayed in completing the ongoing projects. Such situations affect the goodwill and reputation of the company in the market.

To prevent such circumstances and safeguard their interests, the company signs a bond with the employee and if he/she leaves, then they’re liable to pay that agreed amount to recover the damages and costs caused to the company in training and recruiting them. In some particular cases where the Employee is not 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

ENFORCEABILITY OF EMPLOYMENT BOND


  • An employment bond is a contract and is subject to the provisions of the Indian Contract Act 1872. It would be invalid if it has been made by subjecting the other party (here, employee) to duress, fraud, falsification, or undue influence. However, the contract holds legal value and validity only if the agreement that is entered into is done with free will and is without any of the invalidating criteria.
  • The Section 74 of the Contract Act provides that in the events of the infringement of a contract in which there was a proviso that a sum or penalty is to be paid in case of such breach, then the party complaining of the infringement is entitled to receive from the defaulting party such sum or penalty.
  • The infringement in case of employment bonds would be called as the ‘termination of the contract’ by the employee if it is breached before the agreed time period. The party complaining of this infringement would be the employer while the defaulting party would be the employee, which would have to pay the predetermined compensation settled in the contract.
  • The court has also witnessed that sometimes due to the presence of an explicit employment bond clause in the contract, the complainant i.e. the employer did not have to prove that he has suffered any damages or losses due to the untimely termination of the contract by the defaulter i.e. the employee. Thus, the employee was ordered to pay the compensation as agreed upon in the employment contract. This implicates the employment bonds as prima facie enforceable under law, provided the other prerequisites of a valid contract are adhered to.

IS EMPLOYMENT BOND A RESTRAINT TO TRADE OR NOT?


The inquiry that emerges here is whether such employment contracts binds/restricts the employee from the right to free trade or not. The law of contract states that any agreement in restraint of trade or practice can be challenged. Accordingly, if the terms and conditions of a contract prevent an employee from joining another organization, then the contract would be called invalid.

Using this some employees have stated that the clauses in the contract violate their right to exercise lawful profession, trade and business under Article 19(1) (g) of the Constitution and Section 27 of the Contract Act.
Though such statements become invalid as they confuse an employment bond with the non-compete clause. The prime distinction between the two is that the employment bond obtrudes the employee to a monetary liability for premature termination of his/her contract while the non-compete clause obtrudes a condition that refrains the employee from working in any other similar firm competing with that of the employer.

Since an employment bond does not limit the liberty of the employee in pursuing his/her trade or lawful profession after the termination of employment, it cannot be said to be a contravention on either Article 19(1) (g) of the Constitution or Section 27 of the Contract Act. Thus, employment bond does not restraints an employee from practicing free trade.

REASONABILITY OF THE CONDITIONS IMPOSED


The time period for which the employee is obligated to work with the employer should be reasonable. The employer has no right to force the employee to work for him for n number of years. The reasonable time period might defer on the basis of industry and sector of employment depending on the replacement availability and position of the employee. If any employer imposes unreasonable and excessive time period limits on the employee, he/she has the right to call in the provision of forced labor and appeal to the safeguards under Article 23 of the Constitution.

The employment bond is created by the employers to safeguard their interests and curb the losses but the compensation payable in case of the infringement and termination of the contract cannot be unnecessarily harsh and must be justified.  If the compensation imposed by the employer is found to be exorbitant compared to the cost faced in the recruitment procedure, training and hiring a replacement, then the Courts have the right to reduce the excessive compensation payable as per the contractual agreements to a ‘reasonable’ amount.

FINAL WORD


In the view of aforesaid, the employment bond is certainly necessary for a Company to protect their interests from the employees who frequently quit their jobs. However, the restraints stipulated upon the employee in the contract should be reasonable and not excessive or else validity of the contract can come into question. No employer can compel any employee to work for them by enforcing employment bond. If there is infringement, the only remedy available to the employer is to obtain a reasonable compensation amount. It would be better that the employment bond is created keeping in mind the interests of both the employer and the employee to prevent its validity from scrutiny.

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