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EMPLOYMENT BOND: ENFORCEABLE or UNENFORCEABLE?
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 defense options before an employee.
What is Employment Bond
The Employment Bond is basically an agreement entered into by the company with the employee which among the other terms contained in it states that in consideration of the training given to the employee and the money spent by the company in giving such training, the employee shall remain in the services of the company for a particular period of time. 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 of the employee. In the case where the company feels that the employee may not be able to pay the amount, the company has 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. In many cases the bond also contains non competition and confidentiality clauses. The legality of the Bond is dependent upon the provision of 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.
As per the Act, a "contract" is an agreement enforceable by law. The agreements which are not enforceable by law are not contracts. An "agreement" means 'a promise or a set of promises' forming ‘consideration' for each other. A promise arises when a proposal is accepted. An agreement occurs when a proposal is accepted. It can be said that an agreement consists of an 'offer' and its subsequent 'acceptance'.
An "offer" is the initial point in the process of creating an agreement. Each agreement begins with one party making an offer to provide a service or to sell something, etc. When a person who desires to create a legal obligation, communicates to the other person his willingness to do or not to do a thing, with an intention of obtaining the consent of the mentioned other person towards such an act or abstinence, the person is considered to be making a proposal or an offer.
An agreement emanates from the acceptance of the offer. "Acceptance" then can be considered to be the second stage of completing a contract. An acceptance is thus the act of manifestation by the offeree of his affirmation to the terms of the offer. It indicates the offeree's willingness to be bound and constrained by the terms of the proposal intimated to him. To be considered as a valid acceptance, it must correspond exactly with the terms of the offer. It must be absolute and unconditional and it must be intimated to the offeror.
An "agreement" is a contract if it is made by the free consent of parties who are competent to contract, with a lawful object and for a lawful consideration, and is not expressly declared to be void. The contract must be definitive and its purpose must be to create a legal relationship. The parties to the contract should have the legal capacity to make the contract. According to the Contract Act, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of a sound mind, and is not disqualified from contracting by any law to which he is subject". Thus, minors; persons of unsound mind and persons disqualified from contracting by any law are incompetent to contract.
Hence a case where the company has spent a lot of effort in training the employee in return for which the employee signs a bond for a period of a year would be seen as a reasonable control. The same however cannot be said in a case where the company without giving any consideration as above requires the employee to sign a bond period.
As stated above the bond may also contain a condition that a certain amount has to be paid in the case where there is infringement of the provisions of the bond. This sum which is fixed under the contract is called “liquidated damages”. However, under the Indian law, the court does 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 due to the employee's early termination of contract. Hence the company which goes to court should prove that it has suffered a loss 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 the company 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 that prevents the employee from taking up employment with a competing company. Generally, the courts will not grant an order 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 for this the company must 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 what plan 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 employee would be called upon 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 that is payable. In case there is a guarantor to the bond, the person can be made a party to the suit.
There are various defenses that may be taken by the employees when a case is instituted against him/her. One of such could be that no training was 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 comprehend 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 irrational restrictions on a person's trade or profession.
As per Section 74 of Contract Act, 1872
Compensation of breach of contract where penalty stipulated for
“When a contract has been broken, if a sum is named in the contract as the amount be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss or proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. “
Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
Explanation: When any person enters into any bail bond, recognizance or other instrument of the same nature or, under the provisions of any law, or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in which the public is interested, he shall be liable, upon violation of the condition of any of such instruments, to pay the whole sum mentioned therein.
Article 19 of Indian Constitution talks of fundamental rights, as per the Article 19 the Constitution the write work is a fundamental right, and under no circumstances does the Fundamental rights under Article 19 can be waived by any person nor can any person can be forced to do something that amounting to the violation of the rights mentioned under Article 19.
As per the Indian Contract Act contracts entered between two parties if found one sided then such contracts would be null and void.
Again as per the Indian Contract Act no contract can be enforced on any person if the contract which is being so enforced causes any harm to the person on whom it is enforced and if performed would violate principles of natural justices.
As per Sec 368 of Indian Penal Code if any person or institute holds back any document or any use any legal document or threatens any legal suits or actions and thus forces a person to perform any act against his wishes or which is illegal or wrong as per the statute of Law of the land.
Sec 368 of Indian Penal Code talks about extortion by the threatening to file a legal suit. The minimum punishment under this act is 2 two years.
The Supreme Court of India has clearly stated that no employee can be forcefully employed against his will, just because he has signed a contract with the employer.
The court also has stated that the employer cannot hold back any personal documents of the employees as they are earned by the employees and the company has no claim on the same.
Any complain on the company would land its Directors and Managing Directors in Jail, as the company is not a living entity but a legal entity and the management are vital organs of the company.
Bonds are applicable only if the company has spend money on the personal grooming and enhancement of the employees and not on training that aids employees perform better.
Checklist for the employee Contract: Does contract/letter of your organization consist of the following details:
v CONTRACT DETAILS
• Full name of the employee and the employer
• Address of the employer
• Place of work and, where the employee is required to work at various places
• Title of the job or the nature of the work or its brief description
• Date of employment commencement
v PAY & BENEFITS
• Details regarding wages or salaries
• Rate of overtime work (provided the employee is eligible for it)
• Any other cash benefits that the employee is entitled to
• Any payment in kind that employee is entitled to and the value of the payment (for e.g. accommodation)
• Any deductions to be made from the employee's salary (for e.g. Pension / Medical Aid)
• Method of payment and method of calculating salary
• Additional benefits, and any other conditions under which they apply, for e.g. achievement of targets
• Pension scheme whether one exists
• Approvals for any deductions from pay, for e.g. pension scheme other than those required by law
v NATURE OF THE CONTRACT
• Type of the contract: permanent, temporary or fixed term
• Duration of a temporary contract or termination date for a fixed term contract
• Period of notice required to terminate employment, or if the employment is for a specified period, the date when employment is to be terminated
v HOURS OF WORK, SCHEDULES, AND OVERTIME
• Number of hours worked in a workweek and a workday.
• Procedure for scheduling.
• Alternative work schedule/flex time.
• Definition of overtime and pay or compensatory time off
• Advance notice of overtime and right to refuse overtime
• Staffing and workload standards
• Meal and rest period
• Timekeeping and attendance requirements
• Annual leave entitlement
• Role of seniority in scheduling vacations.
• Conditions relating to taking leave, e.g. present company holidays or notice requirements
• Details of any other paid leave entitlements
• Sick leave arrangements and conditions of any benefits
v DISCIPLINARY PROCEDURES
• Details of disciplinary procedure
• Conditions under which the employer can terminate the contract for e.g. gross misconduct
v GRIEVANCE PROCEDURE
• Definition of a grievance.
• Stewards' right to use work time for grievance investigations.
• Employees' right to union representation.
• Explanations of each step in the grievance procedure and the time limits at each step.
v HEALTH & SAFETY
• Employer and employee responsibilities
v PROTECTION OF BUSINESS INFORMATION
• Details of the confidentiality requirements
• Use and misuse of electronic communications and the Internet
v ABOUT THE PROBATION PERIOD
• Purpose and duration of the probationary period
• Benefits that will come into effect when the probationary period is completed.
v PERFORMANCE EVALUATION
• Criteria and frequency for the evaluations.
v RETIREMENT POLICY
v ANY OTHER CONDITIONS
• any collective or third party agreement which affects the employee's terms and conditions
v UNIFORMS AND TOOLS
• Allowance for or provision of the uniforms and/or tools for affected employees.
• Acceptance clause whereby employees sign that they accept contract of employment and conditions therein
Thus if the bond is a valid contract then the company might be successful in enforcing it.
However, any act on the part of company which includes such examples as retaining the original educational certificates or creating any type of impediments for the respective employee to join a job (i.e. a mode of earning) or manhandling the concerned person etc. shall adversely mar the cause of the company.
Also, the amount of compensation a company can claim must be commensurate with the loss caused, and not more.
Any conditions which violate the fundamental rights as defined in the constitution of the country are not tenable in the eyes of law, which shall again mar the validity of bond.
There are conditions which both parties need to fulfill while executing the contract. Contrary to that bond in question cannot be said to exist as a legal contract.
1. Business and Corporate Laws by C.L. Bansal
3. http://www.manpowerindia.net/checklist employee contract.html
4. http://www.4ursake.com/mp/manpower/checklist employee contract.htm
7. http://www.citehr.com/132733 validity bond service aggrement companys letter head per indian stampact.html
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