How to Handle Resignation and Bond Breach During Probation in a Small Company?

Hi, I am an HR professional in a small organization with only five people, so we are not issuing any payslips for the employees and are only issuing appointment letters. An employee in my organization joined on 1st June 2012. She is still in the probationary period of six months, and she has applied for resignation on 12th October 2012. The Managing Director accepted the resignation and asked her to complete all the work immediately. Now she is serving her notice period for only 18 days.

Terms & Conditions as per the Appointment Letter

1. Bond for one year and probation for six months.

2. If they leave the service during the bond period, they have to pay two months' salary in lieu of the signed bond.

3. Notice period of 30 days.

The resignation has been accepted, and now she is asking for a relieving letter and payslips immediately. She had drawn Rs. 9,300/- in her previous company and received an appraisal to Rs. 12,000/-. She has never submitted her appraisal letter from her previous company. Now her current salary is Rs. 15,000. We have to collect the two-month salary for breaking the bond.

Please clarify what to do in this situation.

From the case cited above, I presume there are a lot of flaws in your company's policies. The clauses mentioned are not specific and precise. Additionally, your query is not clear. What is it that you would like guidance on?

Beginning from the end, you mentioned "She has drawn Rs.9300/- in her previous company and got an appraisal to Rs.12000/-. She has never submitted her appraisal letter from her previous company still. Now her drawn salary is Rs.15K...". What does her salary in the previous organization have to do with her resignation now? You should have verified her salary documents from her first salary to the appraised salary when she left her previous organization at the time you offered her a position in your organization. On what grounds did you offer her Rs.15,000? Please clarify.

Secondly, you said "As per the appointment letter, these are the terms & conditions for the employee:

1. Bond for one year and probation for six months.

2. If they leave the service during the bond period, they have to pay two months' salary in lieu of the signed bond.

3. Notice period for 30 days."

Are you aware of whether bonds are really feasible? Keeping that aside, if you've made a mutual agreement, then why is it not mentioned clearly whether the one-year period starts from the date of confirmation or from the date of joining, inclusive of the 6-month probation? This clarity will help the company, the employees, and yourself.

If the employee in this case is ready to pay the penalty amount, what is the issue? You have not mentioned that the employee is not agreeing to pay the amount. And is the notice period of 30 days applicable to both probationary and confirmed employees? Please clarify.

If issuing a relieving letter is your concern, then you should issue one as your MD has accepted an 18-day notice in lieu of 30 days. Alternatively, instead of issuing a relieving letter, you can mention her DOJ and LWD in the F'n'F statement and inform her that your company does not have the practice of issuing relieving letters to probationary employees.

You must issue her pay slips.

Still, I suggest that if you mention your point of concern with more clarity, it would help others to advise.

Regards,
Hiral

The damages sought must be certain to the bona fide situation. As per your situation, an employer claiming practical distress as a result of losing the business would need to have clear evidence of this distress. The non-breaching party also has a duty to mitigate any loss by attempting to minimize any damage.

One certain thing is that when your management prudently accepted the employee's resignation, she should have been sanguinely given her 30-day notice period as she was in her probationary period. Since she served for 18 days, she would be liable for breaching a contract with the employer. It does not necessarily require her to complete a year; hence the management agreed.

You may send out a letter to her stating the pros and cons of breaching the contract and the notice in lieu, along with the clause mentioned in the offer to her. You may ask her to complete serving the period of resignation and relieve her services with the resignation letter and F&F.

Regards

According to the situation you have described in this case, I understand that your main concern is that the employee broke the bond, and now you wish to claim the two months' salary that the employee was liable to pay for breaking the bond.

Legality of Employment Bonds in India

First of all, I would like to inform you that bonds are illegal according to the Indian Penal Code. The Supreme Court of India has stated that no employee can be compelled to work against their will.

Legal Implications of Enforcing Bonds

Attempting to extract money from the employee could land the company in legal trouble. Section 368 of the Indian Penal Code addresses extortion by threatening legal action. The minimum punishment under this provision is two years.

According to labor laws, any one-sided contract is not valid in court and is considered null and void.

Handling the Notice Period

Regarding the notice period, you can request the employee to complete it but cannot force them. Since she has formally resigned, her resignation has been accepted, and she is fulfilling her responsibilities before leaving. The notice period typically serves this purpose.

I hope your query has been addressed.

Regards,
Nisha

Please understand that the bond term cannot be arbitrarily decided by the management on their own. It is only sustainable when you provide any training for which you actually spent a significant amount of money to raise the skill level of the employee. If you try to force the bond otherwise, not only shall it be illegal, but it may also open a Pandora's Box upon you on the contrary. Since you have already accepted her resignation as evident in your query, it is imperative upon you to issue her the relieving letter if she gives a proper handover within the agreed time between the management and the employee. Just because an employee has signed a bond does not mean it becomes a valid and legal bond.

Actually, you have no right to claim two months of salary from an employee for breaking a bond. Legal Implications of Employment Bonds

Remember, the Supreme Court recently stated that illegal bonds are covered under the Bonded Labour Act, and the violating employer is liable to be prosecuted. Also, such illegal bonds amount to a violation of the IPC.

Notice Period and Legal Provisions

The notice period is only applicable as per the provisions of the Shop and Establishment Act and the Approved Standing Orders provisions.

Regards,
Rajeesh

Dear Nisha,

Please let me clarify two things here:

1. Do not confuse yourself between the Bonded Labour System, which is illegal in India, and the valid contract bond executed in lieu of any training provided to the employee by the employer.

2. The purpose of this contract bond is to recover the cost of such training that the employer incurred on the employee's training, as it is an investment from the employer to generate revenue, to which they are validly and legally entitled.

I am mentioning this link, and please read the experience of Rekha Bhanu on page 6 of the thread and decide for yourself. A bond is not illegal per se. You can break the bond, but you will have to pay the amount the employer spent on your training. It is a two-way system and not a one-sided agreement. Nobody is forcing you to work for a management, and if someone does, that is illegal. If the bond is legal, there is no need to worry about the consequences you mentioned.

https://www.citehr.com/423676-legali...anisation.html

Regards

In addition to all the great responses you have received, I would like to add a few points. By now, I'm sure you must have realized that you have to do away with the Bond clause in your appointment letter. You may like to take up the following tasks on an immediate basis:

a. Rethink your appointment letter and all the clauses. While doing so, ask yourself if these are ethical, practical, or one-sided—only favoring the management or employee too.

b. Begin with payslips immediately.

c. Make a checklist of essential documents to keep in all personnel files for future reference.

d. Lastly, sit with your MD to understand exactly what culture you wish to have in your organization and, going forward, look at framing policies that will encourage this.

Regards, Richard

Yes, I agree with Mr. Kamal Kant Tyagi. To elaborate further, there are various types of contracts/agreements that an employee may sign at will.

- Insurance contracts for the benefit of the employee: Small businesses usually offer two basic choices for insurance. It's usually acceptable for the employer if the new employee takes some time to decide on insurance contracts.

- Confidentiality agreement: This contract ensures that the employee does not disclose vital business information to a competitor.

- Probationary-period contract: These are typically provided to new employees to allow both the employer and employee to assess if the working relationship is successful within the initial few months. This arrangement helps to keep the employee under a performance system to ensure flexibility and job satisfaction. Having this agreement in writing helps prevent confusion later on and also communicates to the employee the importance of performing well in their role.

Some small-business owners opt for behavioral contracts. If an employee receives a certain number of write-ups for violating business policies, procedures, or rules, their employment may be terminated.

I have noticed many queries regarding contracts of bonded labor and employee contracts. It is important to differentiate and closely observe the perspectives to avoid any confusion among CiteHR members.

Thank you, Mr. Kamal, for the link. I read it thoroughly and learned a lot from it. I agree with the clause related to the bond against the training, which is very much valid. However, going by the terms mentioned in the thread by Ms. Manju, there has been no mention of training. It simply states:

Based on this, in my opinion, there has been no training involved, which was the basis of my response. Although I am definitely not a legal expert, so I may be wrong.

Thank you again for the valuable input. This has definitely increased my knowledge regarding the case.

Best regards,
Nisha

Dear Nisha,

On other things, we both are on the same page, but I just commented on the portion wherein you stated that the bond system is per se illegal in India. All I wanted was to correct you on that point only. Otherwise, please go through my first post in the thread; you will find my answers are in your line itself. The only difference is that I didn’t assume the absence or presence of any training given to the employee. Let the querier weigh the situation.

Regards

Probation Period and Termination Conditions

As per the issue described above, the probation period includes that any party, either employee or employer, can terminate the agreement with or without notice. In your case, she was given a notice period as well. One thing to note is that bonds can act as deterrents to employees during the probation period, and we cannot take any action on this.

Legality of Service Bonds and Employee Rights

Even if a service bond is executed to recover training costs from an employee, in case of a breach of contract, the employer cannot recover anything more than the actual reasonable expenses incurred to provide the said training. Moreover, the remarks sometimes made by some experts that the bond is legal are not fully correct. Generally, such a bond is illegal as it is against Section 27 of the Contract Act and violates Article 19 of our Constitution. This Article guarantees freedom to all citizens to pursue any occupation, trade, or business, or to practice any profession. However, it is valid if executed for any reasonable restraint, e.g., to recover training costs or to protect intellectual property rights. Any bond to restrict employment is absolutely void and illegal as it is bad in law. The Andhra Pradesh High Court in Bakelite Hylam v/s S.J. Hasan (1985 I LLJ 438) held that it is public policy to oppose all restraints upon the liberty of individual action that are injurious to the interests of the State.

Moreover, the employee may challenge the contract on the ground that it was one-sided and not entered into voluntarily. The Supreme Court of India in Niranjan Shankar Golikari v/s The Century Spinning and Manufacturing Company Ltd. (1967 I LLJ 740) observed that restraints or negative covenants in the appointment or contract may be valid if they are reasonable.

Thank you to all the members for their guidance and views from various aspects of the resignation process of an employee leaving a job in a natural process. I agree with you. I have two to three points to express my views, based on the query of Manju:

1. As a small company, it is difficult to have fully formed HR policies and adopted procedures of the HR process. In the absence of the same, you can relieve her with the consent of the MD, as he has agreed based on her resignation. Relieving a person is based on job responsibilities, the role played in the organization, the time taken to get a replacement, and KT. The time taken to do all the above processes is normally considered as the notice period. It is not intended to recover money from the outgoing employee in the name of notice pay, but only to find a replacement, either internally or externally. It is at the discretion of the company to relieve a person.

2. Please introduce a practice of creating PAY SLIP in Excel and giving it to employees. Nowadays, the payments have to be made directly to the employees' banks, which has become mandatory above a certain salary limit, including the check no. as well.

3. When your MD has accepted her resignation, he has understood about the bond and notice period, then took the decision to relieve by giving a date as the last working day. He is the ultimate authority. There is no hard and fast rule that all employees executed a bond, and at the time of relieving should definitely pay and get out; it is against the law. The service bond works as support to business and should be executed judiciously.

By this, you might have gained a good amount of knowledge on the subject and benefited for the future, helping other readers too. Please understand my suggestion, if it works out good.

Lakshmi, thanks for your valuable points. However, her last date is now on 31st Oct 2012. She has not yet submitted the appraisal letter, and I am following up with her via email, but there has been no response from her side. My boss informed me not to give her payslips and a relieving letter on the last date until she submits her letter. She was making changes in the attendance record, and my boss noticed that there were lots of leaves and permissions taken during this notice period.

I have prepared a payslip, not in an Excel format. Please let me know if any changes are needed because there are no deductions.

Salary Certificate

This is to certify that Ms. **************, designated as "Web Designer," has been paid the following salary amount:

Earnings
- Basic Salary: Rs. 9000.00
- HRA: Rs. 4500.00
- Conveyance Allowance: Rs. 800.00
- Uniform Allowance: Rs. 0.00
- Medical Allowance: Rs. 0.00
- Other Allowance: Rs. 700.00
- Total Earnings: Rs. 15000.00
- Net Salary: Rs. 15000.00

Yours sincerely,
************
Managing Director

Thanks for all your valuable feedback. Finally, I have discussed with my MD and changed our appointment letter; there is no bond, and I have prepared payslips. Can you please give your suggestions on this?

Payslip Certification

This is to certify that Ms. *********, designated as "Web Designer," has been paid a consolidated salary for the period of June 2012.

Earnings

- Basic Salary: Rs. 9000.00
- HRA: Rs. 4500.00
- Conveyance Allowance: Rs. 800.00
- Uniform Allowance: Rs. 0.00
- Medical Allowances: Rs. 0.00
- Other Allowance: Rs. 700.00
- Total Earnings: Rs. 15000.00
- Net Salary: Rs. 15000.00

Yours sincerely,
************
Managing Director