VALIDITY OF EMPLOYMENT BONDS IN INDIA

Author Name: ANJALI SHARMA, University Name: University of Jammu

ABSTRACT

To secure their interest, many multinational companies, and organizations despite the sector they work in prefer to appoint their employees based on employment bonds. The concept of employment bonds which earlier was hardly used by the companies, has now over the years gained prominence in India to retain their employees in whom they have invested a considerable amount of time and money to increase their work efficiency, as with uncertain changes in the economic conditions it becomes difficult to retain them. The courts have also decided several cases that have construed the significance of employment bonds under different circumstances. This paper highlights and focuses on the validity of employment bonds in India, their enforceability, and legality.

INTRODUCTION

Before we delve into the validity of employment bonds, let us first understand the concept of employment bonds. In simple terms, an employment bond is an agreement between an employee and an employer that outlines the rules governing such an employee’s service within the organization. This bond specifies the expense the employer has incurred on hiring and training the employee, it also prescribes the period for which the employee must stay with the organization with whom he signed the bond. Employers generally execute these bonds as they often include clauses related to confidentiality and non-compete agreements and to safeguard their interests which is the primary object of these bonds which helps the employer to seek legal reimbursement from the employee, if he tries to leave before completing the stipulated term mentioned in the bond.

VALIDITY AND ENFORCEABILITY OF EMPLOYMENT BONDS

The question of whether these employment bonds are valid in India is a legally complex matter. Whereas, the question related to their enforceability depends upon the adherence to the legal criteria and reasonable terms which can be challenged under certain conditions in a court of law. Employment bonds being a negative covenant of a contract, just like any contract, also come within the purview of The Indian Contract Act, of 1872. Several judgments provide the scope of these bonds to be rational which varies from case to case.
Employment bonds though generally valid in India, the enforceability of these bonds can still be challenged, the agreement entered by the parties must be violative of section 27 of the Indian Contract Act, which prohibits such agreements that prevent a person from exercising any lawful trade, business, or profession, and if any such agreements either directly or indirectly compel him to do so, they are not valid under Indian law. The burden of proof here lies on the party, that is in favor of the contract, to prove that the restraint put to protect their interest is reasonably necessary. For an employment bond agreement to be valid under Indian law, it must be proven that

i. It is essential for freedom of trade
ii. It must be signed with the free consent of the parties (without coercion, fraud, undue influence, mistake, or misrepresentation)
iii. Reasonable conditions are stipulated in the bond and the conditions that are imposed on the employee are essential to protect the interest of the employer
iv. It should be executed on a stamp paper of appropriate value which is valid and enforceable.

Whereas, the legal criteria of the employment bonds include:

• Bonds with reasonable duration, which the courts are likely to uphold and typically which do not exceed beyond 2 years.
• The inclusion of a compensation clause is an essential part of the employment bond as it outlines the monetary penalty for breach of the bond by the employee.
• The extent of the investment by the employer in the employee is also a significant factor in determining the enforceability of the bond.
• Bonds that impose unreasonable restrictions on an employee’s career growth may be considered against public policy and consequently may not be enforceable.
• No such bonds shall be enforceable that are made against the will of the employee i.e., which indicates forced labor if the same is unconscionable, it may not be valid.

These bonds must adhere to the relevant labor regulations or laws, which govern employment contracts in India.

The validity of the employment bond can also be challenged under Article 19(1)(g) of the Constitution of India, this Fundamental right enables one to lawfully trade with freedom. The Delhi High Court, in this case, emphasized fairness and reasonableness and concluded that the bonds that are extravagant and unconscionable are invalid. Further, the court held that as the employee has completed the stipulated bond period the penalty clause could not be invoked in this case. This case underscores the balanced and reasonable bond terms. Now let us further understand the enforceability of the employment bonds, the question of whether these bonds are enforceable only on employees must have arisen in our mind at some point while going through this concept. To answer it more accurately let’s comprehend it with the help of the judgments given by various High Courts and the Supreme Court of India. In a case, the Delhi High Court held that if in a circumstance the employer tries to safeguard his [1]interest from his competitors and the employee’s right to seek employment is in question, which comes under his right to livelihood, the latter shall prevail over the interest of the employer.2 Further in another case that was heard by the Calcutta High Court, the Court upheld that Section 27 of the Indian Contract Act intends to protect employees’ rights and the contracts restricting employees’ service cannot be enforced specifically. This case reinforces a balance between the employer’s interest and employees’ rights.3
Whereas the Supreme Court, while referring to the case of Brahmaputra Tea Co. Ltd. Vs. Scarth4 decided by the Calcutta High Court held that there is nothing to prevent a court from granting a limited jurisdiction to the extent that is necessary to protect the employer’s interests where the negative stipulation is not void.

CONCLUSION

The employment bond is considered a crucial document based on the information and cases referred to in this article and its primary object is to safeguard the interest of the employer’s organization. However, it should be noted that such bonds must fulfill the legal stipulations given by the law and should contain reasonable conditions to be held the same as a valid contract. Whereas, in case of breach of bond, the employer has two remedies, firstly, he can claim compensation for damages and secondly, he can file a suit for recovery before the court of law. It should be kept in mind that such compensation payable must be just and reasonable.6 Additionally, the Delhi High Court has also addressed the issue related to post-service restrictive covenants concerning Article 19(1)(g) and Section 57 of the Special Relief Act (1963), Section 27 of the Indian Contract Act, where the court while deciding this case adopted the test of reasonableness, where the decision of this court was overturned, on appeal, by the division bench and stated that the negative covenant that goes beyond the stipulated period of the employee’s service was violative of Section 27 of the Indian Contract Act.