Are Employee Bonds Legal? Understanding the Supreme Court's Stance and Consequences

Companies generally ask their new recruits to enter into a bond, say for one or two years. What is the final Supreme Court position on such bonds, and what happens if an employee breaks the bond in between and joins another company? Please guide.

Understanding Employment Bonds

A bond is a contract enforceable in law for any breach thereof by the party who promises to fulfill the conditions stipulated therein and prescribes summary damages for such breach. Thus, if an employee breaks the bond and joins another company, the employer will seek to enforce the bond and claim summary damages stipulated in the bond.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

I have just received an article on this topic and am attaching it here. Upon its perusal, it seems that bonds are actually not legal.

Regards,

As of now, no company has taken the bonds from employees. Each and every term and condition is mentioned in the offer letter.

Regards,

Dear Anand, it is too sweeping to say that a bond is illegal when the Contract Act 1872 itself accords legal force to bonds. A bond is enforceable so far as it does not travel beyond the boundaries stipulated by sec. 27 of the Indian Contract Act. That is the essence of the article.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Validity of Employment Bonds

The service bond will not be constitutionally valid, as repeatedly clarified by the Supreme Court and the High Courts. Freedom of changing employment to improve service conditions is a vital and important right of an employee, which cannot be restricted or curtailed.

Regards,
J. Basak
HR Professional

At that time, all companies are surely ready for a bond because employees are more than three or six months into their job before changing. Companies start implementing these types of rules and regulations for employees, and I think this is best for the company.

Some big and small companies still use the bond system for new employees; it has not been eliminated.

Understanding Employee Bonds and Legal Implications

When human trust and trustworthiness are put to the test, employee bonds become the order of the day. HR professionals should be aware of how to use this bond as a tool effectively.

A bond is effective before the employee resigns from the organization/company. Any contract with a futuristic clause, other than the disclosure of trade secrets, would not be admissible by Indian courts. The onus of the burden of proof is again left on the initiator of proceedings (the employer).

To understand its technicality, read the following:

The negative covenants operative during the term of the contract are not affected by Section 27 of the Indian Contract Act because they are designed to fulfill the contract and not restrict them. On the other hand, when a restriction applies after the contract is terminated, the restriction on freedom of trade, business, or profession takes the form of a restraint of trade, business, or profession. This distinction, which is of a fundamental nature, must be borne in mind; otherwise, the perspective will be lost.

With warm regards,

V. Govindarajan
Manager-Continuous Improvement
Raysoft Technologies