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The Legality of Employment Bond Contracts

Employment contracts in a vast majority of businesses today have increasingly being incorporating a particular clause in the contract known as an employment bond. An employment bond is an agreement between the employer and the employee which provides that the employee shall work for an agreed upon minimum period of time upon joining the business. If the employee quits his/her job before he/she completes this minimum time period, then such an employee will have to pay a particular amount as compensation to the employer. The rationale behind this agreement is that the employer seeks to recover the costs he/she faces in training the employee, recruiting a replacement, losses faced until a replacement is hired, etc. by imposing the employment bond liability, the employee will have to think twice before quitting his/her job as the bond serves as a deterrent to prematurely terminating the contract of employment. Employment bond clauses are increasingly being incorporated into employment contracts in a wide array of industries. This paper analysis the legal validity of incorporating and enforcing such employment bonds under the Indian Contract Act, 1872.

Enforceability of Employment Bonds
Section 74 of the Contract Act[1]provides that in the event of a breach of a contract in which there was a stipulation that a sum or penalty is to be paid incase of such breach, then the party complaining of the breach is entitled to receive from the defaulting party such sum or penalty. The employment bond agreement is a perfect embodiment of this provision of the Contract Act. The breach in case of employment bonds would be the termination of the contract by the employee before the agreed upon time period in the contract expires. The party complaining of this breach would be the employer and the defaulting party which would be the employee, would have to pay the stipulated compensation stated in the contract. In Toshnial Brothers (Pvt.) Ltd. v. E. E swarprasad and Or.[2], the contractual clause in the employment agreement stated that the employee had to pay a compensation to the employer if he leaves his job within a period of three years. The employee breached the contract when he quit his job after fourteen months. The Madras High Court held that due to the existence of an explicit employment bond clause in the contract, the employer did not have to prove that he suffered damages due to the premature termination of employment by the employee. The employee was ordered to pay the compensation as prescribed in the agreed upon employment contract. In light of this, employment bonds are prima facie enforceable under law, provided the other prerequisites of a valid contract such as free consent, competent parties, lawful object, lawful consideration and not being expressly declared void[3]; are adhered to.

Reasonability of the conditions imposed.
In addition to the essentials of a contract being followed, an employment bond agreement should be reasonable with respect to two aspects in order for it to be enforceable.
The first requisite is that the time period for which the employee has to remain with the employer should be reasonable. The employer cannot force the employee to work for him for years on end. A reasonable time period would defer on a case to case basis depending on the industry and sector of the employment. Taking into consideration the position, growth rate, replacement availability, etc. of the employee, the time period of the employment bond should be determined so as to not make it arbitrary and unreasonable. An employment bond that imposes an excessive time period of mandatory employment will amount to forced labour and invoke the safeguards under Article 23 of the Constitution[4].

Secondly, the compensation payable by the employee on the breach and termination of his contract will have to be reasonable to the extent that it adequately and not overly compensates the employer for the cost he/she suffers due to the breach. In the cases of M/s Sicpa India Limited v. Shri Manas Pratim Deb[5]and in Satyam Computer Services Limited v. Ladella Ravichander[6], the Delhi High Court and the Andhra Pradesh High Court respectively, held that the compensation imposed by the employer was too high when compared to the cost faced in the recruitment procedure, training the employee, hiring a replacement, etc. In both these cases the Courts upheld the validity of employment bonds but reduced the excessive compensation payable as per the contractual agreements to a ‘reasonable’ amount.

Employment bond – a restraint to trade or not?
The primary ground for challenge of the enforcement of employment bonds is that it infringes the right to free trade. Disgruntled employees claim that the clause violates their right to exercise lawful profession, trade and business under Article 19(1)(g) of the Constitution[7]and Section 27 of the Contract Act[8]. However this contention is unavailing as it confuses an employment bond with a non-compete clause. The key difference between the two is that the former only imposes a monetary liability on the employee on pre-mature termination of his/her contract, whereas the latter imposes a condition that the employee refrain from working in any other similar firm competing with that of the employer. Since an employment bond does not restrict the freedom of the employee in pursuing his/her trade or profession after the termination of employment, it cannot be said to be an infringement on either Article 19(1)(g) of the Constitution or Section 27 of the Contract Act.

Employment bond clauses are a very useful tool in an employer’s arsenal. It is an employer-friendly clause that acts as a deterrent to employees who tend to constantly quit their jobs. It significantly helps the employer cut down losses caused by frequent vacation of the jobs by the employees. One of the primary reasons that firms these days impart extensive training periods for new employees is to justify a reasonably large compensation to be paid by the employee if he/she terminates the work contract prematurely. Therefore employment bonds are a valuable tool in ensuring that employees continue with the job or occupation they join, atleast for a reasonable period of time, thereby ensuring the stability and economic efficiency of the employer’s business.


[1]The Indian Contract Act 1872, sec. 74
[2]Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad and Or.,1997 LLR 500
[3]The Indian Contract Act 1872, sec. 10
[4]The Constitution of India 1950, art. 23
[5]M/s Sicpa India Limited v. Shri Manas Pratim Deb, MANU/DE/6554/2011.
[6]Satyam Computer Services Limited v. Ladella Ravichander , MANU/AP/0416/2011
[7]The Constitution of India 1950, art. 19(1)(g)
[8]The Indian Contract Act 1872, sec. 27

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