Is It Legal for Companies to Impose a Bond When Offering Permanent Roles? Seeking Clarity on Employment Contracts

I had an offer from X company. After joining, i.e., on the day of joining, they gave me some documents (employment contract) to sign.

Although HR clearly explained every condition and point of the contract, there was one point stating that I had to stay with the firm for the next 2 years, i.e., I could not resign before completing 2 years. If I did so, I would have to pay Rs. 1 lac.

I refused to accept this condition and did not sign the contract papers. In response, they revoked my job offer, and I am currently jobless.

I even argued with them that they should have informed me about such conditions before offering me the job. I could have made a decision then and there without wasting time for both of us. They had no response to my argument.

I request professionals to clarify my concern regarding the conditions employers impose on the candidates they hire.

Is it legal to hire on a contract when employment documents state the role is permanent?

Dear Swati,

What we call an "Appointment Letter" is an employment contract. An employment contract is between an "employer" and an "employee." However, before entering into the contract, both parties should have discussed the terms and conditions of employment. Both parties entered into the contract with assumptions, which were discovered at a much later stage.

Now both parties have suffered losses because of these assumptions. Since the employer could not employ a selected candidate, they will have to continue to work without the employee, which could affect that department's work. On the contrary, the employee's loss is far more severe. She will have to deal with disruptions in monthly cash flow, potentially throwing her financial planning into disarray.

However, there is no legal solution to this problem. The lesson for you and others from this incident is to clearly clarify the future terms of employment.

As a candidate, I recommend you start searching for a new job vigorously. May you be destined to get a better job.

Thanks,
Dinesh Divekar

Dear Swati,

Greetings for the day. As far as your matter is concerned, I have reviewed the type of bond. Bonded labor, in any condition, is totally abolished by law, but the 'Surety Bond' is still in use by various Public Sector Undertakings under the Government of India and Private Sector Enterprises. For instance, candidates selected for the post of Management Trainee under Coal India Limited have to sign a surety bond which states:

1) They will have to serve the corporation for a minimum period of prescribed months, for which a bond amount is to be signed with the selected candidates.

2) An amount will be deducted from the selected candidate’s salary for 60 months, which will be refunded with interest upon completion of 60 months.

3) In case the candidate’s performance is found unsatisfactory by the corporation, the service of the candidate during the probation period will be terminated in accordance with the terms and conditions of the offer of appointment and receipt of a satisfactory police report.

Please go through the type and definition of the bonds and seek legal advice before signing the same.

Thanks & Regards,

Sumit Kumar Saxena

True, they should have informed you about the condition when recruiting you. However, legally, you have limited rights because you did not sign anything before that point. Oral agreements (offer and acceptance), though valid in law, are difficult to prove in a court of law.

I did not gather from your post where exactly they put you on contract. In general, being put on contract means it's a fixed-term employment, employed through a contractor, or the work is not full-time, and you are not on the payroll of the company (paid professional fees). So, I think you need to check your wording and your understanding of the terms, or you may end up with the wrong advice.

That being said, employment bonds are recognized in India only in cases where the employer is providing certain specialized training, imparting skills by way of formal training, and not otherwise. Furthermore, courts have also held that the value of the bond cannot exceed the cost of training. In most cases, in-house training and on-the-job training are not counted for this purpose. Therefore, even if you had signed the agreement, unless they were giving you specific training, the bond would be non-enforceable.

There is no such condition as mentioned by you. It was a full-time employment for the post of Senior HR Manager. The offer letter includes this statement. They have also mentioned, while convincing me, that they will write the same thing in the appointment letter as well. The only condition as per that agreement was that I cannot resign before the completion of 2 years irrespective of any reason. If I do so, I had to pay the amount mentioned in the contract. They also mentioned that if I fail to pay the amount, they will follow the legal path.

Now, being in HR, if I myself am not satisfied with this condition, how will I convince other employees joining after me to agree to this point, in fact, the one which is completely illegal.

Dear Swati, Saswata and I have already clarified the details regarding the surety bond. However, in the current scenario, in various organizations, you need to carefully review the terms and conditions of the notice period. If the conditions are not met, you may be required to pay the amount specified by the company in their standing order, which holds legal validity. Therefore, I recommend seeking legal advice from a legal expert to fully understand the implications.

Sumit Kumar Saxena

Dear Sumit, you have made an interesting point. Do you know of any cases where standing orders mention that the employee has to pay if they do not work for a certain number of years? Based on my understanding, standing orders have to be approved by the Labour Commissioner before they are certified, and no labour officer will accept these terms in the standing order. I am specifically asking because you have raised an important point. It could be used to bypass the terms of the Supreme Court judgment on employment bonds.

Going through the post and the responses, my observations are as follows:

1) The poster's contention that a permanent job for which applications were invited was later converted into a contractual job after selection is not correct.

2) Employment Bond

An employment bond requiring a new appointee to serve the organization for a minimum period after induction or to pay a specific sum of damages in case of failure cannot be considered per se illegal. It depends on the nature of the job, the duration of time, and the amount of money invested by the employer to train the new appointee.

3) Fairness and Transparency in Communication

Fairness and transparency require the prospective employer to mention such a condition in the job advertisement or at least in the offer letter after selection. The facts described by the poster show that such a condition was revealed to her for the first time only after her joining. Thus, the recruitment and appointment process lacks not only professional standards but also ethical considerations, given the nature of the job position advertised and offered.

4) Job Position: Senior HR Manager

Since the job is that of a Senior HR Manager, no one can reasonably think that it would require any long duration of on-the-job training after appointment or that two years would be a reasonable notice period for resignation.

5) Comparative Losses and Compensation

Juxtaposing the comparative losses incurred by both parties due to this unhappy situation created by the employer, the poster seems to be at a greater loss because she has lost her previous job and the present one due to the communication failure of the organization. The employer is bound to compensate the poster for her present unemployment and the mental agony virtually created by the employer. The poster can institute a civil suit against the organization if she desires and claim damages, though it can be a long-drawn battle. She can consult an experienced civil lawyer well-versed in service matters. After all, professional ethics are more important in matters of employment.

Clarification on employment contract conditions

As already clarified by respected elders, this is not a contract appointment. A condition that requires the candidate to pay Rs. 1 lakh if they leave before a period of two years cannot be considered an unconscionable term of employment, as such a condition is neither prohibited by law nor against public policy. Similar clauses exist in other organizations too, probably with a view to make the new employee commit to a long career ahead.

The employment contract was offered to you, and you could either accept or reject it, so it cannot be viewed as opposed to the provisions of the Contract Act 1872. The post of Sr Manager/HR is a key position in any organization, and hence imposing such conditions is very critical for the long-term prospects of the organization. However, they could have made this condition clear beforehand, at least to a Senior HR professional.

I will have to disagree with you. Any condition that forces an employee to work for a specific minimum period of time within a particular organization is illegal, unless the company has invested money in training the individual through a formal course (and not just on-the-job training).

This law has been confirmed by the Supreme Court of India, meaning it cannot be overridden by including it in the appointment letter or in any contract. In any case, the contract would be deemed invalid and null from the beginning if it requires the employee to stay for a set period or compensate for leaving early.

If a company desires an employee to work for a longer duration, they must ensure that the work environment is appealing and that the compensation is sufficient to retain the employee within the organization.

I have understood the conditions required for the employer to enforce any contract on employees. However, my case was not under any of these conditions. It was a private firm, and there was no off-the-job training as well. The only reason for them to enforce the contract was the instability of employees. On top of that, they don't even disclose such conditions before releasing offers. Hence, such contracts are always illegal.

Swati, I think we are all talking about the same thing from different points of view.

The 'bond' or 'condition' for paying the penalty for leaving before the completion of 2 years is illegal in your case. Therefore, since it is illegal, you need not bother with it. You could continue working, and if you wanted to leave, you could do it because they have no way to enforce the agreement.

On the other hand, your decision not to join because you cannot force this condition on new employees is probably a valid moral decision. Whether the moral decision at the cost of a job makes sense depends on each individual. If I were in your place, I would probably join and look for another job and then leave once I got it, rather than be unemployed. But then again, it depends on whether you desperately needed the money from the job. Not everyone can afford to refuse like you.

Regards,

Saswata Banerjee