Exorbitant bond amount and non-fulfillment of service agreement by the employer
4 years ago
I am an engineer & my employer (a PSU) had granted 2-years of unpaid leave to me to pursue higher education in 2017. Till 2016, the related bond amount in my firm was 3 months' basic salary plus DA. But my firm increased it to 8 months' basic salary plus DA in 2017, the year I signed the bond. In 2019, I joined back the firm. However, I have been doing exactly same job I was doing before MBA. I have tried to contact the topmost mgmt. in my firm innumerable times through mail and by visiting their offices. My request to them was to provide a similar job profile to me, which any new MBA joinees gets. And as per their rules, the intention behind bond is to utilize the knowledge imparted in higher education, which is not happening in my case. My query - whether they can take such a huge amount from me as bond when 1. I was on unpaid leave and my firm didn't sponsor my education 2. Does law fix any financial limit on such bonds or firms can charge as they wish 3. How can I get relieving letter from them for completing the joining formalities in any other MNC, how should I go about it ? Thanks
Ayantika Mondal @ Prime Legal
Responded 4 years ago
A.Hi,
Hope you are doing good and safe.
This is very unethical and unjustified.
As education was not sponsored by the organization, you are not liable for service. However, we need to look into the kind of bond you have entered.
You are liable to give notice period as per the employment agreement or pay remuneration in lieu thereof. The notice period is governed by the S&E act of every state and different from each other.
Request to issue a legal notice, failing which your lawyer may ask you to file a formal complaint before jurisdictional labor inspector to mediate the issue.
Hope you are doing good and safe.
This is very unethical and unjustified.
As education was not sponsored by the organization, you are not liable for service. However, we need to look into the kind of bond you have entered.
You are liable to give notice period as per the employment agreement or pay remuneration in lieu thereof. The notice period is governed by the S&E act of every state and different from each other.
Request to issue a legal notice, failing which your lawyer may ask you to file a formal complaint before jurisdictional labor inspector to mediate the issue.
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A.Dear Sir,
My answers are as follows:
Please give me Rank 5 and Review my Resume and Follow Me.
1. I was on unpaid leave and my firm didn't sponsor my education
Ans: When it has not sponsored then the firm has no power to claim any enhancement in bond amount.
2. Does law fix any financial limit on such bonds or firms can charge as they wish
Ans: Several High Court settled the law on this issue saying it is limited to the amount on your training only.
3. How can I get relieving letter from them for completing the joining formalities in any other MNC, how should I go about it ?
Ans: Resignation is your right the SC Court says in the following judgment.
==============================================
Enforceability Of Employment Bond
http://www.mondaq.com/india/x/237806/employee+rights+labour+relations/Enforceability+of+Employment+Bond
1 Central Inland Water Transport Corporation v Brojonath Ganguly, (1986)IILLJ171SC
2 Niranjan Shankar Golikari v The Century Spinning and Manufacturing Company Ltd, AIR 1967 SC 1098
3 IBS Software Services Group v Leo Thomas, 2009 (4)KLT 797
4 Section 73 of the Contract Act, 1872
5 Section 74 of the Contract Act, 1872
6 Nandganj Sihori Sugar Company Ltd v Badrinath Dixit, & Ors, AIR1991 SC 1525
7 Gujarat Bottling Co Ltd v Coca Cola Company, AIR 1995 SC 2372
8 MANU/DE/6554/2011
9 MANU/AP/0416/2011
Introduction
The present era is experiencing phenomenal changes in the economy and industrial processes, which has resulted in greater business competition. To cope up with competition, the employers incur huge expenditure in imparting training to their employees for improving the quality of goods and services of the company. However, sometimes the employees leave their employment after honing the skills & improving the knowledge of the industry for better salary and incentives. The increasing rate of attrition subjects the employers not only to financial losses but also delays in completing the ongoing projects thereby directly impacting their goodwill & reputation in the market. Therefore, in order to safeguard their interest, employers have of late started to obtain an employment bond from their employees who are found suitable for training or skill development. Such employment bonds are agreements between the employer and employee wherein among other terms & conditions of the employment, an additional clause is incorporated which requires the employee to serve the employer compulsorily for a specific time period else refund the amount specified as bond value.
The question that arises here is whether such a method to retain employees is effective, acceptable and enforceable under the law. This article discusses the enforceability of employment bond and the rights available to the employers and employees under the agreement in light of various court decisions.
1. Employment bond: need and enforceability?
Generally before selecting employees for providing training or skill enhancement program, employers take necessary safeguard of conducting interviews, take assurances that employee will stick to complete the projects for which he is being trained and shall also train the other co-employees so that an effective and efficient work environment is created. However, employees still tend to leave for greener pastures and, therefore, it is increasingly becoming necessary for the employers to enter into an employment bond to safeguard their interests. If employee leaves the employment without serving the company for agreed time period, the employer is expected to suffer due to the undue delay in completing the work undertaken, which can ultimately affect its reputation/creditability in the market. To prevent such situations, the employer can compensate the loss incurred if a valid employment bond has been executed. Such bonds also deter the employees from committing any breach of the agreed terms and conditions.
Now, the most pertinent question that arises here is whether the employment agreement with negative covenant is enforceable under Indian laws? The simple answer is yes. Such employment agreements with the negative covenant is valid and legally enforceable if the parties agree with their free consent i.e. without force, coercion, undue influence, misrepresentation and mistake. The courts in India have held in its various judgments that in the event of breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of money was spent on providing training or incurred other expenses for the employee. Further, the courts have been reluctant to restrain the employee from joining a competitor/other employer. The employment bond will not be enforceable if it is either one sided, unconscionable or unreasonable. Therefore, it is pertinent to be cautious while drafting the employment bond because it is mandatory that the conditions mentioned in the employment bond, including the compulsory employment period and amount of penalty are reasonable in order to be valid under the Indian law. The term "reasonable" is not defined under the legislation and, therefore, the meaning has to be determined on a case by case basis depending upon the issues involved and circumstances of the case. In general, the conditions stipulated in the contract should justify that it is necessary to safeguard the interest of the employer and to compensate the loss in the event of breach of contract. Further, the penalty or compulsory employment period stipulated in the contract should not be exorbitant to be considered as valid and to be regarded as reasonable.
2. Challenging the enforceability of employment bond
The validity/enforceability of the employment bond can be challenged on the ground that it restrains the lawful exercise of trade profession or trade or business. As per section 27 of the Contract Act, 1872, any agreement in restraint of trade or profession is void. Therefore, any terms and conditions of the agreement which directly or indirectly either compels the employee to serve the employer or restrict them from joining competitor or other employer is not valid under the law. The employee, by signing a contract of employment, does not sign a bond of slavery and, therefore, the employee always has the right to resign the employment even if he has agreed to serve the employer for specific time period.1 However, the restraints or negative covenants in the agreement or contract may be valid if they are reasonable. For a restraint clause in an agreement to be valid under law, it has to be proved that it is necessary for the purpose of freedom of trade. For instance, if the employer is able to prove that the employee is joining the competitor to divulge its trade secrets then the court may issue an injunction order restricting the employment of the employee to protect the interests of the employer. Whenever an agreement is challenged on the ground of it being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests.2
In order to execute a valid employment bond, the parties have to ensure that the following requisites have been complied: (i) the agreement has to be signed by the parties with free consent; (ii) the conditions stipulated must be reasonable; and (iii) the conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer. Further, the employment bond stipulating conditions such as to serve the employer compulsorily for a specific time period or penalty for incurring the expenses is in the nature of the indemnity bond and, therefore, such kind of employment bond has to be executed on a stamp paper of appropriate value in order to be valid and enforceable.3
3. Remedies available to employer and employee
In the event of breach of employment bond, the employer might incur a loss and, therefore, may be entitled for compensation.4 However, the compensation awarded should be reasonable to compensate the loss incurred and should not exceed the penalty, if any, stipulated in the contract.5 Usually, the court determines the reasonable compensation amount by computing the actual loss incurred by the employer having regard to all circumstances of the case. Even if the bond stipulates payment of any penalty amount in the event of breach, it does not mean that the employer shall be entitled to receive the stipulated amount in full as compensation on the occurrence of such default; rather the employer shall be entitled only for reasonable compensation as determined by the court. While exploring alternate remedies available to the employer in the event of default by the employee, it would be interesting and worthwhile to discuss whether the employers are entitled to seek for reinstatement of their employee or obtain restraining order against the employee from joining any competitor/alternate employer because many such similar reliefs have been sought by the employers in various suits. The apex court, while dealing with similar query, has held that the specific performance action cannot be sought for breach of contract of personal service or bond6 and, therefore, the employer shall not be entitled to seek for reinstatement of their employees as relief in the event of breach of bond. In another matter, the apex court has held that it is not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee to idleness or to serve the employer7 and, therefore, the courts are also reluctant to grant injunction against the employees restricting their employment with other employer unless it is necessary for the protection proprietary interests or trade secrets of the employer.
As mentioned, the conditions stipulated in the employment bond should be reasonable in order to be valid and, therefore, even if unreasonable condition/clauses are stipulated in the contract such as imposing exorbitant duration of compulsory employment period or huge penalty upon the employee, the court shall award compensation only if it determines that the employer has incurred loss by such breach of contract. The court normally considers the actual expenses incurred by the employer, the period of service by the employee, conditions stipulated in the contract to determine the loss incurred by the employer to arrive at the reasonable compensation amount. For instance, in the case of Sicpa India Limited v Shri Manas Pratim Deb,8 the plaintiff had incurred expenses of INR 67,595 towards imparting training to the defendant for which an employment bond was executed under which the defendant had agreed to serve the plaintiff company for a period of three years or to make a payment of INR 200,000. The employee left the employment within a period of two years. To enforce the agreement the employer went to the court, which awarded a sum of INR 22,532 as compensation for breach of contract by the employee. It is crucial to note that though the bond stipulates a payment of INR 200,000 as compensation for breach of contract, the judge had considered the total expenses incurred by the employer and the employee's period of service while deciding the compensation amount. Since the defendant had already completed two years of service out of the agreed three year period, the judge divided the total expenses of INR 67,595 incurred by the plaintiff into three equal parts for three years period and awarded a sum of INR 22,532 as reasonable compensation for leaving the employment a year before the agreed time period. Similarly, the High Court of Andhra Pradesh in the case of Satyam Computers v Leela Ravichander,9had also reduced the compensation amount considering the period of service of the employee.
In view of the aforesaid discussions and various court decisions, the employment bond is considered to be reasonable as it is necessary to protect the interests of the employer. However, the restrains stipulated upon the employee in the said contract should be "reasonable" and "necessary" to safeguard the interests of the employer or else the validity of the bond may be questioned. The employees are always free to decide their employment and they cannot be compelled to work for any employer by enforcing the employment bond. The court can; however, issue order restricting the employment of the employee only if the said action is deemed necessary to safeguard the trade secrets/proprietary interest of the employer. In the event of breach of contract by the employee, the only remedy available to the employer is to obtain a reasonable compensation amount. The compensation amount awarded shall be based upon the actual loss incurred by the employer by such breach.
======================================================
To resign is a right of the employee: SC
Can’t be compelled to serve, says court in case of Air India employee
To resign is a right of an employee and he cannot be forced to continue, the Supreme Court has said in a recent order.
An employee cannot be compelled to serve in case he is not willing “until and unless there is some stipulation in the rules or in the terms of appointment or disciplinary proceedings is pending or contemplated which is sought to be avoided by resigning from the services.”
A Bench of Justices Arun Mishra and Vineet Saran made the observations while allowing the appeal of a former Air India engineer, who was refused his dues by the Central government carrier.
My answers are as follows:
Please give me Rank 5 and Review my Resume and Follow Me.
1. I was on unpaid leave and my firm didn't sponsor my education
Ans: When it has not sponsored then the firm has no power to claim any enhancement in bond amount.
2. Does law fix any financial limit on such bonds or firms can charge as they wish
Ans: Several High Court settled the law on this issue saying it is limited to the amount on your training only.
3. How can I get relieving letter from them for completing the joining formalities in any other MNC, how should I go about it ?
Ans: Resignation is your right the SC Court says in the following judgment.
==============================================
Enforceability Of Employment Bond
http://www.mondaq.com/india/x/237806/employee+rights+labour+relations/Enforceability+of+Employment+Bond
1 Central Inland Water Transport Corporation v Brojonath Ganguly, (1986)IILLJ171SC
2 Niranjan Shankar Golikari v The Century Spinning and Manufacturing Company Ltd, AIR 1967 SC 1098
3 IBS Software Services Group v Leo Thomas, 2009 (4)KLT 797
4 Section 73 of the Contract Act, 1872
5 Section 74 of the Contract Act, 1872
6 Nandganj Sihori Sugar Company Ltd v Badrinath Dixit, & Ors, AIR1991 SC 1525
7 Gujarat Bottling Co Ltd v Coca Cola Company, AIR 1995 SC 2372
8 MANU/DE/6554/2011
9 MANU/AP/0416/2011
Introduction
The present era is experiencing phenomenal changes in the economy and industrial processes, which has resulted in greater business competition. To cope up with competition, the employers incur huge expenditure in imparting training to their employees for improving the quality of goods and services of the company. However, sometimes the employees leave their employment after honing the skills & improving the knowledge of the industry for better salary and incentives. The increasing rate of attrition subjects the employers not only to financial losses but also delays in completing the ongoing projects thereby directly impacting their goodwill & reputation in the market. Therefore, in order to safeguard their interest, employers have of late started to obtain an employment bond from their employees who are found suitable for training or skill development. Such employment bonds are agreements between the employer and employee wherein among other terms & conditions of the employment, an additional clause is incorporated which requires the employee to serve the employer compulsorily for a specific time period else refund the amount specified as bond value.
The question that arises here is whether such a method to retain employees is effective, acceptable and enforceable under the law. This article discusses the enforceability of employment bond and the rights available to the employers and employees under the agreement in light of various court decisions.
1. Employment bond: need and enforceability?
Generally before selecting employees for providing training or skill enhancement program, employers take necessary safeguard of conducting interviews, take assurances that employee will stick to complete the projects for which he is being trained and shall also train the other co-employees so that an effective and efficient work environment is created. However, employees still tend to leave for greener pastures and, therefore, it is increasingly becoming necessary for the employers to enter into an employment bond to safeguard their interests. If employee leaves the employment without serving the company for agreed time period, the employer is expected to suffer due to the undue delay in completing the work undertaken, which can ultimately affect its reputation/creditability in the market. To prevent such situations, the employer can compensate the loss incurred if a valid employment bond has been executed. Such bonds also deter the employees from committing any breach of the agreed terms and conditions.
Now, the most pertinent question that arises here is whether the employment agreement with negative covenant is enforceable under Indian laws? The simple answer is yes. Such employment agreements with the negative covenant is valid and legally enforceable if the parties agree with their free consent i.e. without force, coercion, undue influence, misrepresentation and mistake. The courts in India have held in its various judgments that in the event of breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of money was spent on providing training or incurred other expenses for the employee. Further, the courts have been reluctant to restrain the employee from joining a competitor/other employer. The employment bond will not be enforceable if it is either one sided, unconscionable or unreasonable. Therefore, it is pertinent to be cautious while drafting the employment bond because it is mandatory that the conditions mentioned in the employment bond, including the compulsory employment period and amount of penalty are reasonable in order to be valid under the Indian law. The term "reasonable" is not defined under the legislation and, therefore, the meaning has to be determined on a case by case basis depending upon the issues involved and circumstances of the case. In general, the conditions stipulated in the contract should justify that it is necessary to safeguard the interest of the employer and to compensate the loss in the event of breach of contract. Further, the penalty or compulsory employment period stipulated in the contract should not be exorbitant to be considered as valid and to be regarded as reasonable.
2. Challenging the enforceability of employment bond
The validity/enforceability of the employment bond can be challenged on the ground that it restrains the lawful exercise of trade profession or trade or business. As per section 27 of the Contract Act, 1872, any agreement in restraint of trade or profession is void. Therefore, any terms and conditions of the agreement which directly or indirectly either compels the employee to serve the employer or restrict them from joining competitor or other employer is not valid under the law. The employee, by signing a contract of employment, does not sign a bond of slavery and, therefore, the employee always has the right to resign the employment even if he has agreed to serve the employer for specific time period.1 However, the restraints or negative covenants in the agreement or contract may be valid if they are reasonable. For a restraint clause in an agreement to be valid under law, it has to be proved that it is necessary for the purpose of freedom of trade. For instance, if the employer is able to prove that the employee is joining the competitor to divulge its trade secrets then the court may issue an injunction order restricting the employment of the employee to protect the interests of the employer. Whenever an agreement is challenged on the ground of it being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests.2
In order to execute a valid employment bond, the parties have to ensure that the following requisites have been complied: (i) the agreement has to be signed by the parties with free consent; (ii) the conditions stipulated must be reasonable; and (iii) the conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer. Further, the employment bond stipulating conditions such as to serve the employer compulsorily for a specific time period or penalty for incurring the expenses is in the nature of the indemnity bond and, therefore, such kind of employment bond has to be executed on a stamp paper of appropriate value in order to be valid and enforceable.3
3. Remedies available to employer and employee
In the event of breach of employment bond, the employer might incur a loss and, therefore, may be entitled for compensation.4 However, the compensation awarded should be reasonable to compensate the loss incurred and should not exceed the penalty, if any, stipulated in the contract.5 Usually, the court determines the reasonable compensation amount by computing the actual loss incurred by the employer having regard to all circumstances of the case. Even if the bond stipulates payment of any penalty amount in the event of breach, it does not mean that the employer shall be entitled to receive the stipulated amount in full as compensation on the occurrence of such default; rather the employer shall be entitled only for reasonable compensation as determined by the court. While exploring alternate remedies available to the employer in the event of default by the employee, it would be interesting and worthwhile to discuss whether the employers are entitled to seek for reinstatement of their employee or obtain restraining order against the employee from joining any competitor/alternate employer because many such similar reliefs have been sought by the employers in various suits. The apex court, while dealing with similar query, has held that the specific performance action cannot be sought for breach of contract of personal service or bond6 and, therefore, the employer shall not be entitled to seek for reinstatement of their employees as relief in the event of breach of bond. In another matter, the apex court has held that it is not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee to idleness or to serve the employer7 and, therefore, the courts are also reluctant to grant injunction against the employees restricting their employment with other employer unless it is necessary for the protection proprietary interests or trade secrets of the employer.
As mentioned, the conditions stipulated in the employment bond should be reasonable in order to be valid and, therefore, even if unreasonable condition/clauses are stipulated in the contract such as imposing exorbitant duration of compulsory employment period or huge penalty upon the employee, the court shall award compensation only if it determines that the employer has incurred loss by such breach of contract. The court normally considers the actual expenses incurred by the employer, the period of service by the employee, conditions stipulated in the contract to determine the loss incurred by the employer to arrive at the reasonable compensation amount. For instance, in the case of Sicpa India Limited v Shri Manas Pratim Deb,8 the plaintiff had incurred expenses of INR 67,595 towards imparting training to the defendant for which an employment bond was executed under which the defendant had agreed to serve the plaintiff company for a period of three years or to make a payment of INR 200,000. The employee left the employment within a period of two years. To enforce the agreement the employer went to the court, which awarded a sum of INR 22,532 as compensation for breach of contract by the employee. It is crucial to note that though the bond stipulates a payment of INR 200,000 as compensation for breach of contract, the judge had considered the total expenses incurred by the employer and the employee's period of service while deciding the compensation amount. Since the defendant had already completed two years of service out of the agreed three year period, the judge divided the total expenses of INR 67,595 incurred by the plaintiff into three equal parts for three years period and awarded a sum of INR 22,532 as reasonable compensation for leaving the employment a year before the agreed time period. Similarly, the High Court of Andhra Pradesh in the case of Satyam Computers v Leela Ravichander,9had also reduced the compensation amount considering the period of service of the employee.
In view of the aforesaid discussions and various court decisions, the employment bond is considered to be reasonable as it is necessary to protect the interests of the employer. However, the restrains stipulated upon the employee in the said contract should be "reasonable" and "necessary" to safeguard the interests of the employer or else the validity of the bond may be questioned. The employees are always free to decide their employment and they cannot be compelled to work for any employer by enforcing the employment bond. The court can; however, issue order restricting the employment of the employee only if the said action is deemed necessary to safeguard the trade secrets/proprietary interest of the employer. In the event of breach of contract by the employee, the only remedy available to the employer is to obtain a reasonable compensation amount. The compensation amount awarded shall be based upon the actual loss incurred by the employer by such breach.
======================================================
To resign is a right of the employee: SC
Can’t be compelled to serve, says court in case of Air India employee
To resign is a right of an employee and he cannot be forced to continue, the Supreme Court has said in a recent order.
An employee cannot be compelled to serve in case he is not willing “until and unless there is some stipulation in the rules or in the terms of appointment or disciplinary proceedings is pending or contemplated which is sought to be avoided by resigning from the services.”
A Bench of Justices Arun Mishra and Vineet Saran made the observations while allowing the appeal of a former Air India engineer, who was refused his dues by the Central government carrier.
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