Nowadays, a lot of companies, especially multinational, demand that its employees sign employment bonds, which typically forbid workers from leaving one company and/or joining another before completing a set amount of time on the job. This circumstance occurs more frequently to new hires or other people with little experience. However, nothing prohibits an employer from imposing the same standard on a highly skilled worker. The reason for this is that, in the current economic climate, if an employee transfers to a new position using the skills and training he/she acquired from his prior employment, the business will suffer significantly after having wasted a great deal of time, effort, and resources on their training and other costs.
Whether employment bonds are valid in India?
The primary step in figuring out whether a bond is lawful is to see if it qualifies as a contract under the Indian Contract Act of 1871, meaning thereby it must be legally enforceable agreement. The employment agreement with the negative covenant is valid and legally enforceable if the parties agree to it freely, that is, without pressure, compulsion, unfair interference, misrepresentation, or error. Notably, an offer must be made by the employer and accepted by the employee in order for the employment bond to be a valid contract.
What are the legal justifications?
Bonds are only valid if the company has spent money on the employees’ personal care and advancement, not merely on getting them ready for work. To show that the bond is lawful, it should also not be biased or in the employer’s favour. The court must always question a bond’s reasonableness in order for it to be recognized constitutionally. To elaborate, if an employer has developed software and the employee has knowledge of that software, it is legitimate and lawful to forbid the employee from using that software for a different employment. In uncommon circumstances, an employment bond is not, however; accepted as valid.
Whether enforceability of employment bond can be challenged?
It is possible to contest the legality of employment bonds under Section 27 of the Indian Contract Act. According to which, no agreement may restrict trade or profession. Any agreement relating to a trade or occupation that contravenes Section 27 is void. Any clauses in an agreement that directly or indirectly require an employee to work for the employer or forbid them from joining a rival company or another employer are not valid under India law. It is marked here that even though employee is committed to working for the company for a specified amount of time in the employment bond, the employee has the ability to resign from his/her position.
It must be proven that an employment bond is necessary for trade freedom to make it legalized under the Indian law. If the employer can prove that the employee is joining the competitor in order to divulge the trade secret, the court may impose an injunction order forbidding the employee from joining the competitor. A party defending a contract that is being challenged on the grounds that it breaches a trade restraint clause must demonstrate that the restraint is necessary to preserve his/interests.
What are the requirements of a valid employment bond?
- The agreement must be voluntarily signed by the parties.
- The agreement’s conditions must be reasonable.
- It must be demonstrated that the restrictions imposed on the worker are adequate to safeguard the employer’s interests.
- It needs to be signed on stamp paper with enough value for it to be valid and enforceable.
What remedies are available to the employer?
A breach of an employment bond may result into filing a suit for compensation by the employer. The amount of compensation granted must be sufficient to cover the loss and must not be greater than the contract’s penalty, if any. By estimating the employer’s actual loss and accounting for all relevant facts and circumstances, the court establishes the proper compensation amount. Even if the bond calls for the payment of a fine in the event of a violation, this does not automatically mean that the employer will receive the full amount; rather, the courts may determine that what reasonable amount of compensation is to be given.
It is deemed reasonable that the employment bond is needed because it safeguards the employer’s interests. However, the restrictions imposed on the employee by the contract must be ‘fair’ and ‘reasonable’ in order to protect the employer’s interests. The legitimacy of the bond might be questioned if this were not the case. The employment contract shields the worker from being coerced to work for another business. Employers are only permitted to seek a fair compensation sum in the case that an employee violates the terms of the contract.
Associate at Aggarwals & Associates, S.A.S. Nagar, Mohali