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EMPLOYMENT BONDS: LEGAL OR NOT LEGAL IN INDIA?
Team SoOLEGAL 19 Jun 2023

EMPLOYMENT BONDS: LEGAL OR NOT LEGAL IN INDIA?

The level of competitiveness in the business sector has risen dramatically. The business houses are spending resources on educating their personnel in order to improve the quality of the company's goods and services. However, we have seen a lot of situations where people leave their employers after sharpening their talents and expanding their understanding of the business. Due of the rising attrition rate, companies are now required to get an employment bond from employees who are deemed fit for training and skill development. Employment bonds are contracts between an employee and an employer that outline the terms and conditions of employment.

The employment bond has a condition that demands the employee to serve the employer for a defined period of time or else refund the bond value.

PREREQUISITES FOR A VALID EMPLOYMENT BOND

The parties must sign the agreement with their voluntary consent.

The terms and conditions must be reasonable.

The conditions put on the employee must be proven to be required to protect the employer's interests.

EMPLOYMENT BOND LEGALITY

The most pressing question that arises is whether such a practice for retaining an employee is legal, acceptable, and enforceable:

Ø  Bonds are only eligible if the corporation has spent resources on the personal grooming & development of the personnel, not only training that helps employees perform well. Furthermore, to demonstrate that the bond is legitimate, it should not be one-sided or only benefit the employer. The court always examines the bond's reasonableness in order for it to be approved legally.

Ø  An employment bond is not accepted as valid under unreasonable conditions. If the employment bond is one-sided, unjust, or irrational, it will not be enforceable.

As a result, it is critical to exercise caution when creating the employment bond since the requirements listed in the employment bond, including the obligatory employment time and penalty amount, must be reasonable in order for it to be legitimate under Indian law.

THE LEGALITY OF AN EMPLOYMENT BOND IN INDIA

The Indian Contract Act, 1872 requires that a contract be enforceable by law in order for it to qualify as a legitimate contract, which is the first consideration to make when attempting to determine whether the bond is valid. If the parties agree voluntarily, i.e., without coercion, undue influence, deception, or mistake—an employment agreement with a negative covenant is lawful and legally enforceable. Since an employment bond must be a legitimate contract, both the employer's offer and the employee's acceptance of that offer are required.

Ø  Section 27 of the Indian Contract Act allows for a challenge to the validity of employment bonds. This section of the Indian Contract Act prohibits any arrangement that interferes with fair trade or the legal profession. According to this section, any agreement that limits someone from engaging in a fair trade or lawful profession, whether directly or indirectly, is null and void.

Ø  Article 19(1)(g)[3] of the Indian Constitution also grants the freedom to practise a lawful profession, trade, or business. To be lawful in India, an employment bond must not contradict the aforementioned provisions. There should be free trade and fair practices in legally permitted professions.

REMEDIES AVAILABLE FOR EMPLOYEE & EMPLOYER

 If an employment bond is broken, the employer may be entitled to compensation. The compensation given should be reasonable in order to compensate for the loss and not go beyond the penalty, if any, provided in the agreement between the parties. The court determines the reasonable compensation amount by calculating the real loss suffered by the employer while taking into account all of the particulars and circumstances of the case. Even if the bond requires the payment of a penalty amount in the case of a violation, this does not imply that the employer is entitled to the full amount; the courts must establish the fair amount of compensation to be paid.

WHETHER BUSINESSES HAVE THE RIGHT TO SEEK REINSTATEMENT OF THEIR EMPLOYEES OR OBTAIN A RESTRAINING ORDER PROHIBITING THEM FROM WORKING FOR A COMPETITOR OR ANOTHER FIRM?

 The Supreme Court ruled that particular performance action could not be sought for breach of contract of personal service or bond, and so employers would not be entitled to reinstatement of their employees as relief in the event of bond breach. Courts are reluctant to issue injunctions against employees restricting their employment with another employer unless it is required to protect the company's property interests or trade secrets.

COMPANY'S COURSE OF ACTION FOLLOWING A BREACH OF EMPLOYMENT BOND

The first action that corporations take following a breach of an employment bond is to send a legal notice requiring the employee to report for duty promptly, failing which the notice should require the employee to pay the sum stipulated in bond. After the employee fails to pay the amount, a suit is launched in a court of proper jurisdiction for recovery of the due amount, based on the terms and conditions of employment.

In Toshnial Brothers (Pvt) Ltd v E Eswarprasad & Ors, the Madras High Court decided that the existence of a legal injury arising as a result of breach is a prerequisite for claiming liquidated damages under section 74 of the Indian Contract Act, 1872. In a nutshell, the employer must demonstrate a legal injury as a result of a breach of the obligation to service for a minimum duration.

In Superintendence of Company v. Krishan Mugai, the court stated that if an agreement restricts a party's ability to carry on a trade in the future, such an agreement is prima facie void. A contract of this type is initially void, but becomes binding and valid if it can be demonstrated that it is necessary from the standpoint of the parties as well as the community. Such interests are valid since they protect the employer's interests while causing no undue hardship to the employee, who will receive a pay or compensation for the period in question.

CONCLUSION

It is obvious that the restrictions that apply throughout the period for which the employee has agreed to serve would not normally amount to a trade constraint. This comes with the caveat that the covenants aren't one-sided, do not impose arbitrary fetters, and are not burdensome. However, limits in effect after termination would be regarded unlawful and in violation of Section 27 of the Indian Contracts Act of 1872. Furthermore, in calculating liquidation damages to be paid in the event of a breach of an employment bond, the court would use the standards outlined above and would be unlikely to allow specific performance of the contract. Furthermore, the bonds would be lawful with respect to trainees if the employer can demonstrate that it has incurred a legal injury as a result of the trainee's breach of the bond.

Thus, it is advised that before engaging into such agreements, both employers and employees should seek legal counsel to ensure that their rights and obligations are effectively safeguarded. 

We have tried to address the possible queries related to legality of Employment Bond in India, still if there are any further questions, please contact us at +9810929455 or via email at info@soolegal.com.

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