Is My Company's Security Deposit Deduction Legal and Can I Get It Back If I Leave Early?

I am working as a "Professional" (e.g., no standard deductions such as PF, PT, ESIC, etc., except a flat deduction of 10% TDS). I have signed a Memorandum of Understanding with the company (which is on a plain white paper signed by both me and the company) that I will serve the company for 3 years with a notice period of 3 months. A certain amount is deducted per month under the head of "Security Deposit." The clause reads as follows:

Security Deposit:

3.1. The Trust has an amount of Rs.XXX/- (Rupees XXXX only) from the Professional’s previous agreement as a security deposit. An additional Security Deposit of Rs. XXX/- (Rupees XXX Only) will be recovered at the rate of Rs. XXX/- (Rupees XXX Only) per month.

3.2. The security deposit will be refunded to the Professional if the Professional does not violate any of the following terms:

3.2.1. Completion of the stipulated MoU period.

3.2.2. Stipulated notice period at the time of resigning, on completion of the MoU period, or even during the extended period after completion of the stipulated MoU period.

My question is, is the "Security Deposit" legal? For example, if I do not complete 3 years but give 3 months' notice, can the company withhold my amount? And if I go to court, will my case stand?

It is very difficult to give an answer from the point of view of labor law because your case should be addressed with reference to the Contract Act and based on what you have accepted. If there is a contract that states an amount will be held as a security deposit and will be released upon successful completion of certain conditions, that is one of the contract's conditions. The payment of consideration is based on all the conditions attached to the contract. This means that if the contract period is fixed to be three years and during that time, you are required to complete certain tasks, failure to do so will result in the security deposit not being paid to you.

On the other hand, if no specific tasks are assigned but only a timeframe (e.g., 3 years) is given, you will receive the security deposit back once you complete the three years. Even if you decide to leave or terminate the contract by giving three months' notice, you will still receive the security deposit because, by working for three months after deciding to terminate the contract, you have fulfilled the agreed-upon terms.

Regards,
Madhu.T.K

Thank you for your advice. A few things to note are that it is not a "Contract" such as construction or completion of some task within the given time frame. It is a "Memorandum of Understanding (MoU)," and the word "contract" appears nowhere in the MoU. I am working as a "Professional" in the capacity of "Chief Operating Officer" and signing all documents of the hospital and being paid a "Professional Fee" against a certain number of working hours per month. I have signed the MoU on 01-06-2014 and wish to give a notice period of 3 months now. As a result, I will not complete one clause of 3 years but am fulfilling the other clause of 3 months' notice.

Regards

It is not a matter of labor laws. Both parties have agreed to fulfill certain tasks and have agreed to the deduction of security, which is refundable subject to the completion of the stipulated MOU period and notice period at the time of resigning. As such, you may lose the security deposit if you resign before the completion of the stipulated time period.

Regards

As specified in my earlier reply, this is not a "Contract" for the fulfillment of certain tasks within a specific timeframe. I agree with your point, which is typically applicable to situations such as software development or a contractor completing construction work within a stipulated time. As mentioned in my original post, it represents an "understanding" between myself as a "Professional" and the company. Rather than being regarded as an "Employee" with standard deductions, I operate here as a Professional and sign all official documents/letters of the company.

I trust that I have clarified my position.

Thank you.

Understanding the Designation "Professional"

The designation "Professional" is often considered a fancy title. However, when you are entrusted with the authority to sign company documents, you fall under the category of a managerial person unless there is a resolution from the board of directors stating otherwise.

There can be different nomenclatures, but the purpose for which you have been engaged is very clear, and that is to perform a specific task. If the remuneration for the task is measured in terms of time spent, then the notice period holds significance. On the other hand, if it is measured solely upon the completion of the entire work, the situation would be different. In such cases, there should not be any notice period clause in the Memorandum of Understanding (MOU).

In any situation, the matter should be addressed following the MOU (which has all the characteristics of a valid contract under the Contract Act, 1927) signed by you. In short, I would like to reiterate that the notice period served should be treated as an assignment completed.

Regards,
Madhu.T.K

Further to what Madhu.T.K mentioned, there is ONE VERY CRITICAL point that you need to keep in mind—irrespective of which Act this MOU falls under. The Clause "3.2.2. Stipulated notice period at the time of resigning, on completion of MoU period or even during extended period after completion of stipulated MoU period" literally gives the absolute right to the Organization to hold you to ransom perpetually [the key words being "or even during extended period....."]. So practically, the Organization can keep extending the MOU period.

Also, Clause 3.1 mentions "The Trust has an amount of Rs.XXX/- (Rupees XXXX only) from the Professional’s previous agreement as a security deposit." What's this about? Since when have you been working here? In total, how much does the Hospital hold your money as a Security Deposit—as of date?

Please give more inputs so that the members can provide more realistic and actionable suggestions.

Regards,
TS

Thank you all for your comments and advice. I have joined this organization on 01-Jun-10 as a "Professional" and was designated as "Chief Operating Officer." The initial engagement was for 3 years, which expired on 31-May-13. The MoU was renewed for a further period of 3 years from 01-Jun-2013. To get a clear view, I am pasting the whole MoU wording below. Obviously, certain words are replaced with XX for reasons best known to you all. Please go through the entire MoU and comment. TIA.

MEMORANDUM OF UNDERSTANDING

The MOU is made on the 1st day of June 2013 between XX, bearing its office at XX, hereinafter called "The XX"

AND

Mr. Deepak Kanade, resident of XX, Cell: [Phone Number Removed For Privacy Reasons], e-mail: [Email Removed For Privacy Reasons], hereinafter called "The Professional."

They have mutually agreed upon the following:

• **Professional Fee:**

1.1. The Professional will render his services as an Executive and Consultant to XX and allied XX and will be paid a consolidated professional fee of Rs. XX/- (Rupees XX Only) for 240 hours per month for his services from XX and allied XX taken together.

1.2. The exact modalities, including tax details, will be handled by the Accounts/Finance department as per the policy of The XX. TDS as applicable will be deducted from professional charges & incentives payable.

• **Tenure of Agreement & Notice Period:**

2.1. The Professional will render his services for a minimum period of 3 years from 1st June 2013 to XX.

2.2. The XX will give one month's notice to The Professional for discontinuation of services. However, the MoU can be terminated prematurely by The XX with or without giving any prior notice, with or without any remuneration, if it is observed that any act or behavior on the part of The Professional is not found to be in harmony with the conduct of The XX or causing disrepute to The XX. The decision of The XX will be final and will be binding on The Professional.

2.3. This MoU will be in force for a period of Three Years initially and will continue to be in force till such time the next MoU is signed OR there is a written notice for discontinuation of service from any one of the parties.

• **Security Deposit:**

3.1. The XX has an amount of Rs. XX/- (Rupees XX Only) from the Professional’s previous agreement as a security deposit. An additional Security Deposit of Rs. XX/- (Rupees XX Only) will be recovered at the rate of Rs. XX/- (Rupees XX Only) per month.

3.2. The security deposit will be refunded to the Professional if the Professional does not violate any of the following terms:

3.2.1. Completion of stipulated MoU period.

3.2.2. Stipulated notice period at the time of resigning, on completion of MoU period, or even during the extended period after completion of the stipulated MoU period.

• **Timing:**

4.1. The Professional shall attend the XX from 08:30 AM till the completion of the work on hand for the day.

4.2. The Professional shall log in a minimum of 8 hours of working per day.

4.3. The Professional shall attend emergency/night calls as and when necessary and/or as per the duty schedule.

• **Working Relationships:**

5.1. The Professional needs to have a good interpersonal and professional relationship with other XX.

• **Responsibilities and Performance Expectations:**

6.1. The Professional will be responsible for all day-to-day XX and other activities/functioning of the XX, projects, and work assigned to him from time to time.

6.2. The Professional will be responsible for assigning the work and getting the assigned work completed from AGM/Managers/In-charges and other staff members.

6.3. The Professional will be responsible for complying with all statutory requirements, registrations, and licenses.

6.4. The Professional shall be responsible for the safety of personnel, equipment, and instruments in the XX and at its projects.

6.5. The Professional will take necessary steps for enhancement of revenue generation and curtailment of expenditure.

6.6. The Professional shall act as a change catalyst and enhance the speed of changes by suggesting/implementing/monitoring/reporting the changes suggested/required/desired towards a better functioning system based on XX.

6.7. The Professional shall formulate and implement various policies in the team within the required time frame.

6.8. The Professional shall take active participation in management and administration.

6.9. The Professional shall show visible team leadership.

6.10. The Professional shall conduct/attend required management meetings as per the directives and timings published from time to time.

6.11. The Professional shall engage in an active learning process to keep himself constantly abreast.

6.12. The Professional shall give thrust on continuous process improvements together with effective & efficient execution with quality and system-oriented scalable work culture in the XX.

6.13. The Professional shall be responsible for storage of data, data management, backup of data, keeping secrecy of information and data related to the hospital.

• **Administrative:**

7.1. The Professional will report to the Board of Trustees.

7.2. The Professional can be posted in any of the periphery centers of XX on temporary duty for management of the hospital. The Professional will have to visit periphery centers of XX as & when directed.

7.3. The Professional shall conduct/attend daily morning meetings conducted at 09:00 AM. It is expected that The Professional will discuss issues related to process/system changes and stabilization. The Professional is also expected to act as a "Change Catalyst/Change Agent."

7.4. The Professional shall not bring disrepute in any way to the XX by discussing the style of management, remuneration aspects, performance, etc., with outside agencies/individuals. The said behavior shall be treated as a "breach of trust" and shall be admonished as found suitable by the management.

7.5. The Professional will be fully dedicated to the XX and its associate XX as and when necessary and directed by the management. The Professional will not provide his services outside in any form (neither private practice nor charity).

7.6. In addition to the monthly professional fee, the Professional shall be paid an annual leave reimbursement of 20 days on a pro-rata basis for the completed financial year. The reimbursement will be paid along with professional charges of May in the succeeding Financial Year.

7.7. The leave reimbursement shall be admissible in total if the attendance during a financial year is 270 days. For annual attendance below 270 days, it shall be paid on a proportionate basis.

7.8. The professional will get a facility for management training at XX for one month.

7.9. The XX hopes that with The Professional's experience, training, involvement, and dedication, The Professional will be able to build a department of international standards for The XX to be proud of.

Mr. XX Mr. Deepak Kanade

Secretary

XX

Date: __________________ Date: __________________

Regards

Refund of Security Deposit and Organizational Practices

I had requested a refund of my Security Deposit in my Notice-cum-Resignation letter, which is signed by all the board members. There have been instances where three senior management professionals (AGM, Purchase Manager, and Manager HR) were terminated for unsatisfactory performance, including misappropriation of funds by the Purchase Manager. They never completed their MoU tenure, but they were refunded their Security Deposit under the pretext that they were terminated by the organization. So, is the organization encouraging such non-performers and money launderers? All of them were with the organization for a year or more.

Understanding the Nature of MOU and Security Deposits

An MOU is a sort of contract. I have seen many cases like this where a certain percentage of the fee is withheld and released upon the expiry of the contract or mutual closing.

Regards,
Pon

Employee-Employer Relationship and Contractual Obligations

From the above, I observe that your engagement is just as an employee. There are a lot of clauses which describe that there exists an employee-employer relationship between you and the company. Leave, working hours, reporting structure, mandatory meetings, and a bar on working for other companies are some of the clauses which establish it. However, since a few of the company employees are reporting to you, any dispute will be redressed as per the provisions of the Contract Act only.

Security Deposit and Termination of MoU

The security deposit is not illegal, especially since you have agreed to it and there has been a considerable deduction in the past. Therefore, you cannot dispute it now. Termination of the MoU is possible by giving one month's notice (is it not one month?) to the company, and with this, the amount held as a security deposit will become, as per 3.2, the amount payable if you complete the project or leave the company after giving the required notice. Moreover, since the MoU is not less than employment, the company is not in a position to hold a security amount for an unreasonable period. Viewed from the perspective of the Contract Act, the restrictive clause compelling a person not to leave until the project is completed is illegal and may make the contract voidable.

Tax Deducted at Source (TDS)

Regarding the TDS part, I also understand that you have professional qualifications to substantiate your engagement; otherwise, the tax would be 1%.

Regards,
Madhu.T.K

Dear Fraternity,

I am back after almost 8 months. The frustration of having to lose almost 2 lac on account of the security deposit and settling down in a new engagement took that much time.

My request to you all:

1. Is the "memorandum of understanding" legal?
2. If not, can I initiate legal action?
3. If affirmative, where do I request it? I have relocated to another city.

TIA.

Regards,

Deepak Kanade
9922995357