Employee bonds - getting your act right

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All of us are aware of the high attrition rate prevalent in knowledge industries particularly, Information Technology (IT). Wherein a company recruits fresh graduates and provides them intensive training for executing a particular project. After a few weeks or months, however, many of its recruits resign. The company had to recruit some more employees and repeat the training program in order to complete the project, incurring a lot of expense. This scenario is something everyone in the IT industry is familiar with. Employee bond is a practice used by various companies to safeguard the interest it has in its employees, after expending time and training? In this article we cover what is an employee bond, to what extent it is enforceable, remedies companies can seek and defence options before an employee.


First let me define an employee bond. The Employment Bond is basically an Agreement entered into by the Company with the Employee which among the other terms contained therein states that in consideration of the training given to the Employee and the money spent by the Company in imparting such training, the Employee will remain in the services of the Company for a particular period. In case of the Employee breaching the provisions of the Agreement, the Employee would be liable to pay certain sum of money, being the expense incurred by the Company in training the Employee. In the case where the Company feels that the Employee may not be able to pay the amount, then they have a Guarantor who guarantees that they would take responsibility to ensure that the Employee adheres to the terms of the Bond and in case of breach, the Guarantor will be jointly liable to pay the Bond amount to the Company. The Bond may also contain confidentiality and non-competition clauses. Remember, the legality of the Bond depends on whether there was consideration in the form of training or otherwise.


The Question that now arises is whether such a Bond is enforceable or not. The contractual clauses in employment agreements are governed by the Contracts Act, 1872. Under this, a contract is valid even if it imposes restrictions on a person’s trade or profession, as long as such restrictions are reasonable. Whether a particular condition is reasonable would depend upon the facts and conditions of each case.


Hence a case where the Company has spent a lot of time and money in training the Employee in return for which the Employee signs a bond for a period of 1 year would be seen as a reasonable restriction. The same however cannot be said in a case where the Company without giving any consideration requires the Employee to sign a bond period.


As stated above the Bond may also contain a stipulation that a certain amount has to be paid in the case where there is a breach of the provisions of the Bond. This sum which is fixed under the contract is called “liquidated damages”. However, under the Indian law, the courts will not automatically grant the liquidated damages merely because it is stipulated in the contract. The court will grant compensation only if the Company has actually suffered a loss as a result of the Employee’s early termination of contract. Hence the Company which goes to court should prove that it has suffered a loss to the extent of its claim in order to get that amount, though it has been fixed under the contract. This could be easier in cases where the Company has records to show that it has incurred expenses for providing training to the Employee and that the Employee has left in the middle of a project etc. However, the Company cannot get an amount higher than that fixed under the contract.


Another issue at this stage is whether the Company can seek any remedy, which seeks to prevent the Employee from taking up employment with a competing company. Generally, the courts will not grant an injunction that will force the Employee to either work for a particular employer or remain idle. However, a Company to protect its trade secrets or confidential information may obtain an order from the courts to prevent its ex-Employee from divulging such information to his/her new employer. Again, the Company will have to prove that its ex-Employee had access to such information and that there is a possibility of such information being leaked.


This brings us to the topic of what course of action a Company must follow when an Employee breaches the condition of the Employment Bond. The first thing the Company must do is issue a legal notice calling upon the Employee to report for duty immediately, failing which the notice should call upon the Employee to pay the sum agreed to in the Bond. A demand notice for the bond amount should be issued to the Guarantor also. Should the Employee fail to pay the amount a suit may be filed in the Court of appropriate jurisdiction to recover the amount due. Remember that in case there is a Guarantor to the bond, the person can be made a party to the suit.


There are various defences that may be taken by the Employees when a case is instituted against him/her. Some of the more common ones are that there was no training imparted to the Employee and therefore the Company is not entitled to the bond amount. The Employee might also state that she/he was forced to sign the Agreement without being able to understand the contents of the Bond. The Employee may also state that the Bond is in violation of the provisions of the Contract Act as it imposes unreasonable restrictions on a person’s trade or profession.


The effectiveness of these defences varies from case to case. If the Employee can prove that there was no consideration for the Bond in the form of training etc. then in such cases s/he will not be required to pay the Bond Amount.


Therefore a checklist when a Company has an Employment Bond is


1. Ensure that the Bond period is reasonable


2. Ensure that the Non-competition clause is not unreasonable


3. Ensure that the Bond Amount is reasonable and reflects the expenditure of the Company on the Employee


4. Ensure that there is training material that can be produced to prove in Court that the Employee was given training.


5. Ensure that there is a confidentiality clause to ensure that the Company’s trade secrets are protected.


The article is contributed by www.indialawinfo.com, a Bangalore-based legal portal. Comments and queries can be mailed to legal@businessgyan.com




Issue BG4 July01


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