HR Newsletter: Enforceability of Employment Bonds – April 2021

Training a new employee is commonly known concept in the industry. Depending on the organization’s requirements, the employer intends to coach the new employee, in order to suit the services offered by the organization and achieve better performance of services. However, as a general industry practice, it is often observed that the employees change their jobs depending on the opportunities available in the market. Given that the employer invests its time and incurs cost on training the employee, if the employee leaves the services of the employer, the employer may suffer monetary loss including loss of opportunity. To restrict the employees from leaving their services and in order to save on the time and money invested on the employees, the employee is often required to execute an employment bond. Employment bond is generally a contract between the employer and the employee, with the aim of restricting the employee from the leaving the employer’s services for a defined minimum period. In this arrangement of employment bond, the employee is required to reimburse the cost incurred by the employer for the employee’s training, if the employee quits before the bond period is concluded. These provisions relating to monetary repayment ensures that the employer will not face a loss if the employee quits before his bond is concluded.

Are such Employment Bonds enforceable?

Employment bonds or service bonds are looked upon as ‘Agreements in Restraint of Trade’ and thus have a very limited enforceability. Service Bonds in most cases only act as a deterrent.

Contractual position: As per section 74 of the Indian Contract Act, 1872 (the “Contract Act”), if any contract is terminated by either party breaching the provisions of such contract, the party breaching the terms of the contract is liable to compensate the other party as per the terms of the contract. Bonds in an employee-employer relationship: The employees cannot be bound to serve the company for any specific duration, although in certain exceptional circumstances the company may legally recover the amount of training expenses from the employees, provided that such expenses are quantifiable and backed by sufficient evidentiary proofs. In Toshniwal Brothers (P) Ltd. vs Eswarprasad, E. And Others, an employee agreed to an employment bond of 3 years, however, left the services of the employer within 14 months of his employment.

The High Court held that legal injury, could be safely presumed to have resulted in a case where the employer or the management concerned was shown to have either incurred any expenditure or involved itself into financial commitments to either give any special training either within the country or abroad or in having conferred any special benefit or favour to the detriment of the claimant in favour of the violator involving monetary commitments, though an actual damage after the alleged violation or breach of the contract was shown to have separately resulted or not. In light of the above judgement, it can be inferred that the employer could restrict the employee with an employment bond only if the expenses incurred by the employer are quantifiable in the form of training or travelling. Further, the damages claimed under any employment bond should be reasonable and should relate to the potential damages faced by the employer.

Employee Absconds Without Serving Notice Period

The Maharashtra Industrial Employment (Standing Order) Rules, 1959 (“S.O. Rules”) requires an employee as well as the employer to provide written notice to the other party in order to terminate the permanent employment. However, it is often seen that the employees leave their employment without any notice or salary in lieu thereof. In this case, an employer is entitled to terminate its employee without issuance of the any notice or salary in lieu thereof. Such circumstances are contemplated under the Order 24 of the S.O. Rules. If an employee is absconding for a period more than 10 days, such act can be looked upon as “misconduct” and the employer may terminate such an absconding employee without any notice. As per Order 23 (7) of the S.O. Rules, if a permanent employee leaves the service without giving notice, no deductions on that account can be made from his wages.

Wages defined under the S.O. Rules mean all remuneration payable to a workman in respect of his employment or of work done in such employment, and includes—

(i) such allowances (including dearness allowance) as the workman is for the time being entitled to;

(ii) the value of any house accommodation, or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of food-grains or other articles;

(iii) any travelling concession; Private and Confidential

(iv) any commission payable on the promotion of sales or business or both; but does not include,

(a) any bonus;

(b) any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the workman under any law for the time being in force;

(c) any gratuity payable on the termination of his service.

Please note that prior to the termination, a proper procedure which has been laid down under the S. O. Rules for a disciplinary inquiry of the employees absconding is important to be followed. In view of the above, the employer may terminate the employment of the employee without any notice or salary in lieu thereof if such employee is on unauthorized leave consequently for 10 or more days. However, before terminating the employee for the above misconduct, the employer must follow the disciplinary procedure as detailed in the S.O. Rules. Further, the employer may recover the unpaid notice period from such absconded employee by initiating separate legal proceeding.