This article has been written by Nandini Mukati of SLFJPS, National Forensic Sciences University, Gandhinagar. This article provides detailed information about employee bond agreements, the need for such agreements and their enforceability with relevant case laws. 

It has been published by Rachit Garg.

Introduction

An employee bond agreement is a document that sets out the terms of a labour contract between an employer and an employee. This is meant to protect both the parties and provide standard terms to which they can agree either orally or in writing. The following discussion will briefly outline some of the key points contained within such agreements and how they are useful to employers.

What is an Employee Bond Agreement                

An employment bond is a document that includes all the terms and conditions of employment that have been agreed upon by both the employee and the employer. This type of contract agreement or bond usually specifies the minimum employment period and conditions, such as salary, job profile, and designation.

It is a legally enforceable agreement between an employee and his or her employer that if the employee leaves the company before the agreed-upon term, the employee will have to pay a certain amount to the company. This agreement is usually made when a new employee joins the company.

Need for the Employee Bond Agreement

When it comes to employing personnel, company bond rules are extremely crucial. An employment bond agreement is the fundamental contract between a corporation and an employee that outlines parameters for training and employer expenses in exchange for a specified time of work. An employee bond is a legal agreement that serves as legal proof that the employee accepted the company’s terms and conditions of employment and that if he or she disobeys the company’s policies in the future, appropriate legal action can be taken against the employee or the employee can be warned for not following the company’s policies.

Many sectors have made signing employment bonds a requirement. These agreements may contain the following information:

  • Rights of employees.
  • Employees may be subject to restrictions when they leave a company.
  • Penalties for leaving a firm before the bond period has expired.

In Sham Singh v. the State of Mysore (1972), the State of Mysore agreed to pay for his education expenditures in the United States of America in exchange for a bond. The condition for receiving such money was that he serve the State Government for at least 5 years after completing his studies. Another provision of the bond specified that if the student was not hired within six months of his return from the United States, the State of Mysore would be believed to have waived its right to claim his services. In the event of a bond breach, the Student was required to reimburse the Government for all expenses paid, plus interest. Requesting that employees sign bond contracts has become a well-known strategy for reducing employee churn. However, the law prohibits such contracts from being legally enforced. 

Employees are also aware of the situation. Which leads us to the most important question: “Do employment bonds work?” Companies can withhold critical collateral from employees under the guise of an uncompleted contract. Among them are full and final settlement and a letter of relief. Employees understand the value of a relieving letter, which may compel them to complete the bond time. Only a few will bargain with their new employer; nonetheless, they would like to avoid it if at all possible.

In the case of Superintendence of Company v. Krishan Murgai (1980), it was found that in a contract of restraint of trade, one party places a restriction on the other’s future liberty to carry on his trade, profession, or business in whatever manner and with whomever he chooses. A contract of this sort is initially void. But if it can be demonstrated that it is necessary from both the parties’ and the community’s standpoints, it becomes binding and valid. Such interests are valid since they protect the employer’s interests while causing no undue hardship to the employee, who will be paid a wage or pay for the period in question.

Conditions for a valid Employee Bond Agreement

  • The first condition is that the employee must have spent a significant period of time with the company. An employer cannot force an employee to work for him for a long period of time. The acceptable time period would fluctuate on a case-by-case basis depending on the firm and field of employment. To avoid being arbitrary or inappropriate, the length of the employee bond should be determined by taking into account the employee’s position, growth rate, replacement availability, and other criteria. An employee bond that enforces an excessive duration of mandatory work will be considered forced labour, subject to Article 23  under the Indian Constitution.
  • Second, in the event of a contract breach and termination, the compensation paid by the employee must be reasonable that it compensates the employer adequately, and not excessively, for the costs incurred as a result of the breach. In M/s Sicpa India Limited v. Shri Manas Pratim Deb (2011) and Satyam Computer Services Limited v. Ladella Ravichander (2011), the Delhi High Court and the Andhra Pradesh High Court, respectively, held that the employer’s compensation was excessive when compared to the costs of the recruitment process, training the employee, and hiring a replacement.

Is Employee Bond enforceable

Debate on the enforceability of an Employee Bond Agreement

The fundamental argument against the enforcement of employment bonds is that it violates the right to free trade. Employees who are dissatisfied with the clause say that it infringes on their freedom to practice a lawful profession, trade, or business under Article 19(1)(g) of the Constitution and Section 27 of the Indian Contract Act. This argument, however, falls flat because it conflates an employment connection with a non-compete agreement. The main difference between the two is that the former merely requires the employee to pay a monetary penalty if his or her contract is terminated prematurely, while the latter requires the employee to refrain from working for any other similar firm that competes with the employer. An employee bond cannot be viewed as a breach of either Article 19(1)(g) of the Constitution or Section 27 of the Indian Contract Act, as the employee’s ability to follow his or her trade or profession after cessation of employment is not impeded.

Legal perspective

The Employee bond agreement is a wonderful example of the Indian Contract Act of 1872. The employee cancelling the contract before the contract’s agreed-upon time period expires would be a breach of employment bonds.

The Calcutta High Court considered the scope of Section 74 of the Indian Contract Act in the context of a trainee in Subir Ghosh v. Indian Iron and Steel Company(1976). A condition in the contract required the trainee to serve the company for a given period of time and to pay a defined sum of money in the case of a breach. The High Court ruled that because the agreement provided for the payment of liquidated damages, it was unnecessary to allege or establish damages, and therefore, the management could sue to recover the liquidated damages.

The contractual condition in the employment agreement in Toshniwal Brothers (Pvt.) Ltd. v. E.swarprasad and Others (1996) required the employee to pay compensation to the employer if he left his position within three years. When the employee left his employment after fourteen months, he broke the contract. The Madras High Court ruled that the employer did not have evidence that he suffered losses as a result of the employee’s premature employment termination because the contract had an express employment bond clause. The employee was required to pay the compensation stipulated in the employment contract. Employee bonds are thus, prima facie enforceable under law, provided the other requirements of a valid contract are met, such as free consent, competent parties, legitimate object, lawful consideration, and not being specifically declared void.

Availability of remedies in case of  violation of an Employee Bond Agreement

According to Section 74 of the Indian Contract Act 1872, if a contract stipulates that a sum or penalty be paid in the case of a violation, the party complaining of the breach is entitled to obtain that sum or penalty from the defaulting party. The employer would file a complaint about the breach, and the defaulting party, the employee, would be responsible for paying the contract’s agreed compensation. 

If a question relating to the availability of any remedy for violation of employee bond agreement arises, the answer is the Gujarat High Court’s important judgement in the case of Sushilaben Indravadan Gandhi and Another v. New India Assurance Company Limited and Others (2019). In this case, Dr. Alpesh Gandhi, the late husband of the appellant, Mrs. Sushilaben Indravadan Gandhi, had signed a contract with the Rotary Eye Institute on May 4, 1996, quoted “Contract for Services as Honorary Ophthalmic Surgeon at Rotary Eye Institute.” The insured, the Institute, had purchased a “Private Car B” insurance from the New India Assurance Company Limited (the respondent), for which the Institute had paid an additional premium or had an endorsement of IMT-5 (the Insurance Policy). That insurance policy also provided for unnamed passengers other than the insured, who fell under the purview of the Workmen’s Compensation Act of 1923 and were entitled to 100 percent compensation in the event of death. The deceased, who was riding in a mini-bus owned by the Institute, suffered serious injuries and subsequently died as a result of the bus driver’s incompetent and irresponsible driving.

As a result, the Appellant filed a petition with the Motor Accidents Claim Tribunal under Section 166 of the Motor Vehicles Act, 1988, seeking compensation from the respondent, the Institute, and the minibus driver. The Tribunal found that the deceased’s employment arrangement with the institute was a “Contract for Service.” As a result, the deceased was not an employee of the institute. Therefore, the Tribunal ordered the respondent, the institute, and the mini-bus driver to pay Rs. 37,63,100/- in compensation, with interest at the rate of 8% per annum. Dissatisfied with the Tribunal’s decision, the respondent filed an appeal with the Gujarat High Court, which relied on the Insurance policy’s limitation of liability clause, which relieved the respondent of any liability to a third party because of the death occurred while the person was working for the respondent.

Alternatives to violation of an Employee Bond Agreement

Work-life balance

There’s an old theory that says you should get the most hours out of your employees. Employees may opt to work for another company if they have a better work-life balance. As a result, it’s a good idea to design policies that allow people to be effective at work while simultaneously fulfilling their personal obligations.

Structure the salary

Subtract a certain amount from the employee’s annual paycheck. If the sum is significantly higher, the employee may be forced to complete the term.

Compensation

According to the poll, compensation is a major determinant of attrition rates. The employer can pay the personnel at or above industry standards. In terms of expenditures, the increased wage will be far less than the cost of hiring and training new staff.

Growth Path

The number one reason people leave one employer for another is to pursue greater career opportunities. Employers must let employees see their progress more clearly as the modern workforce becomes increasingly impatient. Reducing attrition rates creates a clear and realistic growth path for all employees.

Leadership

There’s an old adage that “people leave managers, not jobs.” TinyPulse did a survey that corroborated this. According to the report, people choose jobs where they have enough freedom to accomplish their job and are constantly happier. Micromanagement, as a result, is a costly endeavour that should be avoided as much as possible.

Sample of an Employee Bond Agreement

This agreement made at _________ [PLACE] on the day of __________, 20___, between [employer’s name], a Company registered/ a corporation incorporated in [country-name] ,having its primal office at _______________________________[address], hereinafter referred to as the Employer and Mr./Ms._____________[EMPLOYEE NAME] , Indian Inhabitant/s / Non Resident Indian/s, currently residing at _____________ [name of city/address] hereinafter referred as Employee. The employee shall be bound to agree and abide by all the terms and conditions specified hereinafter and all other rules that may be framed by the employer periodically during the employment period of the employee. 

Employee’s job title / position : ___________________

Job location : ___________________

Duties and Responsibilities: As a [job role], the employee requires to perform the following duties and responsibilities: (1)— (2)— (3) — (4)— (5) any other duties that may arise periodically, or assigned to the employee, and is related to the employment of the employee Probation The first 3 months of employment shall be considered as the probationary period. Salary Scale (on monthly basis) : 

Basic : 

General Allowance : 

Medical : 

Educational Allowance: 

Vacation : 

During the employment period, an amount of ____ weeks per annum shall be entitled to the Employee as the vacation Working Schedule: Normal working days: , Days off: ,Working Hours:  Performance Reviews Performance reviews shall be conducted at least once a year and the written performance appraisal will be provided to the employee, followed by the review process and the discussion on every aspect of the assessment. 

Disputes: In case of any disputes regarding the employment, that cannot be amicably settled, shall be referred to the [name of the legal authority of the city] 

Termination: Either party may terminate this agreement upon the successful completion of the probationary period by giving a written notice of month to the other party. Any amendments made to the terms and conditions mentioned here, shall not be considered valid unless mutually agreed in writing and signed by both the Employer and the Employee. The employing company and its internal rules and regulations shall be governed if any terms and conditions are not specifically covered under this agreement. 

In witness whereof and acknowledging the acceptance of the foregoing, the Employer and Employee affix their signatures hereto. 

EMPLOYER ________________                                         EMPLOYEE ________________

COMPANY NAME                                                          [Name of employee]______________

TITLE: [TITLE NAME]_____________ 

Dated:  ______________ 

Mistakes to avoid while drafting an Employee Bond Agreement

  1. The term of the bond should not be unduly long.
  2. The payment bond cannot be more than the amount spent on the employee’s training and grooming.
  3. If you must take legal action, ensure you have sufficient proof of training and maintenance expenditures.
  4. Include a confidentiality clause that legally protects the company’s trade secrets if the employee leaves.
  5. Some companies make agreements with their employees that reward them with a lump sum payment if they decide to leave. It’s critical to realise that these agreements aren’t legally enforceable, and employees commonly disregard them.

Conclusion

The employee bond agreement is deemed reasonable because it is required to preserve the employer’s interests. However, the restrictions placed on the employee under the contract must be “fair” and “necessary” in order to preserve the employer’s interests; otherwise, the bond’s validity may be questioned. It considerably aids the firm in reducing losses resulting from frequent staff vacations. By enforcing the employment bond, the employee cannot be forced to work for any company. The only remedy accessible to the employer in the event of an employee breach of contract is to acquire an appropriate compensation sum. 

References


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