Security Deposit and Employment Agreement Concerns
My company asks all employees to enter into an agreement upon joining. They request a two-month salary as a security deposit. This deposit is to be refunded once the employee leaves the company after fulfilling the terms and conditions of the agreement, such as the notice period, etc.
Is this legally valid? They deduct one month's salary in the first three months in three installments, and another salary is taken by cheque, which is not deposited. However, they don't provide any acknowledgment that they have received the cheque. Even after leaving the company, they do not refund this deposit for a long time. Additionally, they do not issue a relieving letter or an experience letter. Salary slips are also not provided.
Furthermore, they have the practice of stopping and deducting the salary at their will.
What are the options in such a scenario? I am hopeful of receiving expert help here as I am currently stuck.
From India, Ahmedabad
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My company asks all employees to enter into an agreement upon joining. They request a two-month salary as a security deposit. This deposit is to be refunded once the employee leaves the company after fulfilling the terms and conditions of the agreement, such as the notice period, etc.
Is this legally valid? They deduct one month's salary in the first three months in three installments, and another salary is taken by cheque, which is not deposited. However, they don't provide any acknowledgment that they have received the cheque. Even after leaving the company, they do not refund this deposit for a long time. Additionally, they do not issue a relieving letter or an experience letter. Salary slips are also not provided.
Furthermore, they have the practice of stopping and deducting the salary at their will.
What are the options in such a scenario? I am hopeful of receiving expert help here as I am currently stuck.
From India, Ahmedabad
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In India we do have employment by contract. however with what you have mentioned above is illegal and does pose a risk. regards,
From India, Chandigarh
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28From India, Chandigarh
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I am aware of the problem which you have mentioned. This practice is prevalent in a few companies in Ahmedabad and Vadodara. From what I have gathered, the employer keeps some money as a deposit so that employees do not run away without serving notice. Though this concept minimizes the business impact for the employer, it is illegal.
Steps to Address the Issue
1. Collect any kind of documentation/evidence regarding this, e.g., salary slips in which the deducted amount is mentioned, a photocopy of the cheque given to the employer.
2. This is a bit risky, so do it only if you have very trustworthy colleagues. Gather your colleagues who are facing a similar problem and are ready to file a complaint along with you. Then approach a labor officer. Request the labor officer to keep your and your colleagues' names confidential.
3. Do not openly talk about going to the labor officer. If your employer finds out that you complained against him, then he may target you (though that is also not legally correct, employers do find workarounds).
4. Most importantly, the issue here is the wrong policy/practice followed by your employer. Focus on getting that corrected; do not make this a personal issue against your employer.
Hope this helps.
Best Regards,
Ritesh Shah
From India, Pune
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Steps to Address the Issue
1. Collect any kind of documentation/evidence regarding this, e.g., salary slips in which the deducted amount is mentioned, a photocopy of the cheque given to the employer.
2. This is a bit risky, so do it only if you have very trustworthy colleagues. Gather your colleagues who are facing a similar problem and are ready to file a complaint along with you. Then approach a labor officer. Request the labor officer to keep your and your colleagues' names confidential.
3. Do not openly talk about going to the labor officer. If your employer finds out that you complained against him, then he may target you (though that is also not legally correct, employers do find workarounds).
4. Most importantly, the issue here is the wrong policy/practice followed by your employer. Focus on getting that corrected; do not make this a personal issue against your employer.
Hope this helps.
Best Regards,
Ritesh Shah
From India, Pune
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Hello Ritesh, thanks for the help. My thinking was along the same lines. The issue here is that all employees are asked to make a deposit. I am not sure how many of them will come forward to file a complaint, but I am going to try.
Thanks a ton,
Sunir
From India, Ahmedabad
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Thanks a ton,
Sunir
From India, Ahmedabad
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There is one thing here: that the company will collect non interest bearing deposit is mentioned in the contract agreement itself...in such a case, its still illegal or legal? Sunir
From India, Ahmedabad
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From India, Ahmedabad
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Section 383 in The Indian Penal Code
383. Extortion. Whoever intentionally puts any person in fear of any injury to that person, or to any other, and thereby dishonestly induces the person so put in fear to deliver to any person any property or valuable security, or anything signed or sealed which may be converted into a valuable security, commits "extortion."
Illustrations:
(a) A threatens to publish a defamatory libel concerning Z unless Z gives him money. He thus induces Z to give him money. A has committed extortion.
(b) A threatens Z that he will keep Z's child in wrongful confinement unless Z will sign and deliver to A a promissory note binding Z to pay certain monies to A. Z signs and delivers the note. A has committed extortion.
(c) A threatens to send club-men to plough up Z's field unless Z will sign and deliver to B a bond binding Z under a penalty to deliver certain produce to B, and thereby induces Z to sign and deliver the bond. A has committed extortion.
(d) A, by putting Z in fear of grievous hurt, dishonestly induces Z to sign or affix his seal to a blank paper and deliver it to A. Z signs and delivers the paper to A. Here, as the paper so signed may be converted into a valuable security, A has committed extortion. https://indiankanoon.org/doc/262864/
Central Government Act
Section 15 in The Indian Contract Act, 1872
15. 'Coercion' defined. 'Coercion' is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. Explanation: It is immaterial whether the Indian Penal Code (45 of 1860) is or is not in force in the place where the coercion is employed.
Illustrations:
A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code (45 of 1860). A afterwards sues B for breach of contract at Calcutta. A has employed coercion, although his act is not an offence by the law of England, and although section 506 of the Indian Penal Code (45 of 1860) was not in force at the time when or place where the act was done. https://indiankanoon.org/doc/894399/
Where a person, fraudulently or dishonestly induces a person to deliver any property
As it is clear by now, mere dishonest intention or deceit will not be sufficient for cheating. Meeting of these two in order to induce the other person to deliver their property and making them do something which they would not have done otherwise, is cheating. Therefore, to constitute fraud at the time of delivery of the property by assuring the seller of the property that he will pay afterward but deceived him by leaving the town amounts to cheating.
Breach of promise and cheating
How many times must a boy have heard this from his girlfriend, "You're a cheater!" But does breaking up social promises amount to cheating? By social promises, we mean social engagement, like going for a movie or a dinner date. The answer is no. As said earlier, there must be a dishonest intention to deceive the other for some gain. A mere breaking of social promises won't amount to cheating. So next time before canceling your dinner date, do not fear criminal punishment of cheating.
The person being cheated must suffer damage or harm in body, mind, reputation, or property
The damage must be a consequential result of cheating and must not be too remote. The loss suffered because of cheating must not be vague. Where a person is selling steel coated in gold and it can be reasonably figured out that the article sold is not gold, will this amount to cheating? Does reasonableness from the side of the buyer is not required? The answer is, this too will amount to cheating. It could be, say, the person might be buying gold for the first time. There was a deceiving act done from the seller's end to gain wrongfully and he succeeded too. This will amount to cheating.
Cheating is a criminal act or mere civil wrong
The question is worth mooting. A civil wrong is a matter pertaining only between two parties, e.g., breach of contract, non-repayment of a loan, etc. Civil wrongs are matters which do not harm society in any way. An act which has the tendency to harm society at large is called a criminal wrong. Cheating is both a civil as well as a criminal wrong in the same way as defamation is. When a criminal proceeding is set into motion, several disabilities arise, for example, institutions might not accept your admission or difficulty in applying for a passport. Therefore, the court sees to it that cheating is not used as a tool to harass the offender. The court applies its brain in every case of cheating. If the court thinks that the effect of cheating is more civil in nature, it sets civil procedure into motion. Although, in a few cases such as chit fund cases where a large stake of people is involved, cheating is often dealt with criminally. https://blog.ipleaders.in/cheating-fraud/
Introduction
The present era is experiencing phenomenal changes in the economy and industrial processes, which has resulted in greater business competition. To cope with competition, employers incur huge expenditure in imparting training to their employees for improving the quality of goods and services of the company. However, sometimes the employees leave their employment after honing the skills and improving their knowledge of the industry for better salary and incentives. The increasing rate of attrition subjects the employers not only to financial losses but also delays in completing the ongoing projects, thereby directly impacting their goodwill and reputation in the market. Therefore, in order to safeguard their interest, employers have of late started to obtain an employment bond from their employees who are found suitable for training or skill development. Such employment bonds are agreements between the employer and employee wherein among other terms and conditions of the employment, an additional clause is incorporated which requires the employee to serve the employer compulsorily for a specific time period or else refund the amount specified as bond value.
The question that arises here is whether such a method to retain employees is effective, acceptable, and enforceable under the law. This article discusses the enforceability of employment bonds and the rights available to the employers and employees under the agreement in light of various court decisions.
1. Employment bond: need and enforceability?
Generally, before selecting employees for providing training or skill enhancement programs, employers take necessary safeguards of conducting interviews and take assurances that the employee will stick to complete the projects for which he is being trained and shall also train the other co-employees so that an effective and efficient work environment is created. However, employees still tend to leave for greener pastures and, therefore, it is increasingly becoming necessary for employers to enter into an employment bond to safeguard their interests. If an employee leaves the employment without serving the company for the agreed time period, the employer is expected to suffer due to the undue delay in completing the work undertaken, which can ultimately affect its reputation/credibility in the market. To prevent such situations, the employer can compensate for the loss incurred if a valid employment bond has been executed. Such bonds also deter the employees from committing any breach of the agreed terms and conditions.
Now, the most pertinent question that arises here is whether the employment agreement with a negative covenant is enforceable under Indian laws? The simple answer is yes. Such employment agreements with the negative covenant are valid and legally enforceable if the parties agree with their free consent, i.e., without force, coercion, undue influence, misrepresentation, and mistake. The courts in India have held in various judgments that in the event of breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of money was spent on providing training or incurred other expenses for the employee. Further, the courts have been reluctant to restrain the employee from joining a competitor/other employer. The employment bond will not be enforceable if it is either one-sided, unconscionable, or unreasonable. Therefore, it is pertinent to be cautious while drafting the employment bond because it is mandatory that the conditions mentioned in the employment bond, including the compulsory employment period and amount of penalty, are reasonable in order to be valid under Indian law. The term "reasonable" is not defined under the legislation and, therefore, the meaning has to be determined on a case-by-case basis depending upon the issues involved and circumstances of the case. In general, the conditions stipulated in the contract should justify that it is necessary to safeguard the interest of the employer and to compensate for the loss in the event of breach of contract. Further, the penalty or compulsory employment period stipulated in the contract should not be exorbitant to be considered as valid and to be regarded as reasonable.
2. Challenging the enforceability of employment bond
The validity/enforceability of the employment bond can be challenged on the ground that it restrains the lawful exercise of trade, profession, or business. As per section 27 of the Contract Act, 1872, any agreement in restraint of trade or profession is void. Therefore, any terms and conditions of the agreement which directly or indirectly either compels the employee to serve the employer or restricts them from joining a competitor or other employer is not valid under the law. The employee, by signing a contract of employment, does not sign a bond of slavery and, therefore, the employee always has the right to resign from the employment even if he has agreed to serve the employer for a specific time period. However, the restraints or negative covenants in the agreement or contract may be valid if they are reasonable. For a restraint clause in an agreement to be valid under law, it has to be proved that it is necessary for the purpose of freedom of trade. For instance, if the employer is able to prove that the employee is joining the competitor to divulge its trade secrets, then the court may issue an injunction order restricting the employment of the employee to protect the interests of the employer. Whenever an agreement is challenged on the ground of it being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests.
In order to execute a valid employment bond, the parties have to ensure that the following requisites have been complied with: (i) the agreement has to be signed by the parties with free consent; (ii) the conditions stipulated must be reasonable; and (iii) the conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer. Further, the employment bond stipulating conditions such as to serve the employer compulsorily for a specific time period or penalty for incurring the expenses is in the nature of the indemnity bond and, therefore, such kind of employment bond has to be executed on a stamp paper of appropriate value in order to be valid and enforceable.
3. Remedies available to employer and employee
In the event of breach of employment bond, the employer might incur a loss and, therefore, may be entitled to compensation. However, the compensation awarded should be reasonable to compensate for the loss incurred and should not exceed the penalty, if any, stipulated in the contract. Usually, the court determines the reasonable compensation amount by computing the actual loss incurred by the employer having regard to all circumstances of the case. Even if the bond stipulates payment of any penalty amount in the event of breach, it does not mean that the employer shall be entitled to receive the stipulated amount in full as compensation on the occurrence of such default; rather the employer shall be entitled only to reasonable compensation as determined by the court. While exploring alternate remedies available to the employer in the event of default by the employee, it would be interesting and worthwhile to discuss whether the employers are entitled to seek reinstatement of their employee or obtain a restraining order against the employee from joining any competitor/alternate employer because many such similar reliefs have been sought by the employers in various suits. The apex court, while dealing with a similar query, has held that the specific performance action cannot be sought for breach of contract of personal service or bond and, therefore, the employer shall not be entitled to seek reinstatement of their employees as relief in the event of breach of bond. In another matter, the apex court has held that it is not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee to idleness or to serve the employer and, therefore, the courts are also reluctant to grant an injunction against the employees restricting their employment with other employers unless it is necessary for the protection of proprietary interests or trade secrets of the employer.
As mentioned, the conditions stipulated in the employment bond should be reasonable in order to be valid and, therefore, even if unreasonable conditions/clauses are stipulated in the contract such as imposing an exorbitant duration of compulsory employment period or huge penalty upon the employee, the court shall award compensation only if it determines that the employer has incurred loss by such breach of contract. The court normally considers the actual expenses incurred by the employer, the period of service by the employee, conditions stipulated in the contract to determine the loss incurred by the employer to arrive at the reasonable compensation amount. For instance, in the case of Sicpa India Limited v Shri Manas Pratim Deb, the plaintiff had incurred expenses of INR 67,595 towards imparting training to the defendant for which an employment bond was executed under which the defendant had agreed to serve the plaintiff company for a period of three years or to make a payment of INR 200,000. The employee left the employment within a period of two years. To enforce the agreement, the employer went to the court, which awarded a sum of INR 22,532 as compensation for breach of contract by the employee. It is crucial to note that though the bond stipulates a payment of INR 200,000 as compensation for breach of contract, the judge had considered the total expenses incurred by the employer and the employee's period of service while deciding the compensation amount. Since the defendant had already completed two years of service out of the agreed three-year period, the judge divided the total expenses of INR 67,595 incurred by the plaintiff into three equal parts for three years period and awarded a sum of INR 22,532 as reasonable compensation for leaving the employment a year before the agreed time period. Similarly, the High Court of Andhra Pradesh in the case of Satyam Computers v Leela Ravichander had also reduced the compensation amount considering the period of service of the employee.
Conclusion
In view of the aforesaid discussions and various court decisions, the employment bond is considered to be reasonable as it is necessary to protect the interests of the employer. However, the restraints stipulated upon the employee in the said contract should be "reasonable" and "necessary" to safeguard the interests of the employer or else the validity of the bond may be questioned. The employees are always free to decide their employment and they cannot be compelled to work for any employer by enforcing the employment bond. The court can, however, issue an order restricting the employment of the employee only if the said action is deemed necessary to safeguard the trade secrets/proprietary interest of the employer. In the event of breach of contract by the employee, the only remedy available to the employer is to obtain a reasonable compensation amount. The compensation amount awarded shall be based upon the actual loss incurred by the employer by such breach. Enforceability Of Employment Bond - Employment and HR - India
After going through some of the extensive legal provisions, it is clear that criminal procedure can be initiated if the employer even asks for a security deposit at any stage, simply because except for the Central Government, no one is permitted to collect taxes (money) by whatever name called or of whatever nature and if one does so regardless of its status under the Companies Act, is liable for violation of law.
From India, Anand
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383. Extortion. Whoever intentionally puts any person in fear of any injury to that person, or to any other, and thereby dishonestly induces the person so put in fear to deliver to any person any property or valuable security, or anything signed or sealed which may be converted into a valuable security, commits "extortion."
Illustrations:
(a) A threatens to publish a defamatory libel concerning Z unless Z gives him money. He thus induces Z to give him money. A has committed extortion.
(b) A threatens Z that he will keep Z's child in wrongful confinement unless Z will sign and deliver to A a promissory note binding Z to pay certain monies to A. Z signs and delivers the note. A has committed extortion.
(c) A threatens to send club-men to plough up Z's field unless Z will sign and deliver to B a bond binding Z under a penalty to deliver certain produce to B, and thereby induces Z to sign and deliver the bond. A has committed extortion.
(d) A, by putting Z in fear of grievous hurt, dishonestly induces Z to sign or affix his seal to a blank paper and deliver it to A. Z signs and delivers the paper to A. Here, as the paper so signed may be converted into a valuable security, A has committed extortion. https://indiankanoon.org/doc/262864/
Central Government Act
Section 15 in The Indian Contract Act, 1872
15. 'Coercion' defined. 'Coercion' is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. Explanation: It is immaterial whether the Indian Penal Code (45 of 1860) is or is not in force in the place where the coercion is employed.
Illustrations:
A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code (45 of 1860). A afterwards sues B for breach of contract at Calcutta. A has employed coercion, although his act is not an offence by the law of England, and although section 506 of the Indian Penal Code (45 of 1860) was not in force at the time when or place where the act was done. https://indiankanoon.org/doc/894399/
Where a person, fraudulently or dishonestly induces a person to deliver any property
As it is clear by now, mere dishonest intention or deceit will not be sufficient for cheating. Meeting of these two in order to induce the other person to deliver their property and making them do something which they would not have done otherwise, is cheating. Therefore, to constitute fraud at the time of delivery of the property by assuring the seller of the property that he will pay afterward but deceived him by leaving the town amounts to cheating.
Breach of promise and cheating
How many times must a boy have heard this from his girlfriend, "You're a cheater!" But does breaking up social promises amount to cheating? By social promises, we mean social engagement, like going for a movie or a dinner date. The answer is no. As said earlier, there must be a dishonest intention to deceive the other for some gain. A mere breaking of social promises won't amount to cheating. So next time before canceling your dinner date, do not fear criminal punishment of cheating.
The person being cheated must suffer damage or harm in body, mind, reputation, or property
The damage must be a consequential result of cheating and must not be too remote. The loss suffered because of cheating must not be vague. Where a person is selling steel coated in gold and it can be reasonably figured out that the article sold is not gold, will this amount to cheating? Does reasonableness from the side of the buyer is not required? The answer is, this too will amount to cheating. It could be, say, the person might be buying gold for the first time. There was a deceiving act done from the seller's end to gain wrongfully and he succeeded too. This will amount to cheating.
Cheating is a criminal act or mere civil wrong
The question is worth mooting. A civil wrong is a matter pertaining only between two parties, e.g., breach of contract, non-repayment of a loan, etc. Civil wrongs are matters which do not harm society in any way. An act which has the tendency to harm society at large is called a criminal wrong. Cheating is both a civil as well as a criminal wrong in the same way as defamation is. When a criminal proceeding is set into motion, several disabilities arise, for example, institutions might not accept your admission or difficulty in applying for a passport. Therefore, the court sees to it that cheating is not used as a tool to harass the offender. The court applies its brain in every case of cheating. If the court thinks that the effect of cheating is more civil in nature, it sets civil procedure into motion. Although, in a few cases such as chit fund cases where a large stake of people is involved, cheating is often dealt with criminally. https://blog.ipleaders.in/cheating-fraud/
Introduction
The present era is experiencing phenomenal changes in the economy and industrial processes, which has resulted in greater business competition. To cope with competition, employers incur huge expenditure in imparting training to their employees for improving the quality of goods and services of the company. However, sometimes the employees leave their employment after honing the skills and improving their knowledge of the industry for better salary and incentives. The increasing rate of attrition subjects the employers not only to financial losses but also delays in completing the ongoing projects, thereby directly impacting their goodwill and reputation in the market. Therefore, in order to safeguard their interest, employers have of late started to obtain an employment bond from their employees who are found suitable for training or skill development. Such employment bonds are agreements between the employer and employee wherein among other terms and conditions of the employment, an additional clause is incorporated which requires the employee to serve the employer compulsorily for a specific time period or else refund the amount specified as bond value.
The question that arises here is whether such a method to retain employees is effective, acceptable, and enforceable under the law. This article discusses the enforceability of employment bonds and the rights available to the employers and employees under the agreement in light of various court decisions.
1. Employment bond: need and enforceability?
Generally, before selecting employees for providing training or skill enhancement programs, employers take necessary safeguards of conducting interviews and take assurances that the employee will stick to complete the projects for which he is being trained and shall also train the other co-employees so that an effective and efficient work environment is created. However, employees still tend to leave for greener pastures and, therefore, it is increasingly becoming necessary for employers to enter into an employment bond to safeguard their interests. If an employee leaves the employment without serving the company for the agreed time period, the employer is expected to suffer due to the undue delay in completing the work undertaken, which can ultimately affect its reputation/credibility in the market. To prevent such situations, the employer can compensate for the loss incurred if a valid employment bond has been executed. Such bonds also deter the employees from committing any breach of the agreed terms and conditions.
Now, the most pertinent question that arises here is whether the employment agreement with a negative covenant is enforceable under Indian laws? The simple answer is yes. Such employment agreements with the negative covenant are valid and legally enforceable if the parties agree with their free consent, i.e., without force, coercion, undue influence, misrepresentation, and mistake. The courts in India have held in various judgments that in the event of breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of money was spent on providing training or incurred other expenses for the employee. Further, the courts have been reluctant to restrain the employee from joining a competitor/other employer. The employment bond will not be enforceable if it is either one-sided, unconscionable, or unreasonable. Therefore, it is pertinent to be cautious while drafting the employment bond because it is mandatory that the conditions mentioned in the employment bond, including the compulsory employment period and amount of penalty, are reasonable in order to be valid under Indian law. The term "reasonable" is not defined under the legislation and, therefore, the meaning has to be determined on a case-by-case basis depending upon the issues involved and circumstances of the case. In general, the conditions stipulated in the contract should justify that it is necessary to safeguard the interest of the employer and to compensate for the loss in the event of breach of contract. Further, the penalty or compulsory employment period stipulated in the contract should not be exorbitant to be considered as valid and to be regarded as reasonable.
2. Challenging the enforceability of employment bond
The validity/enforceability of the employment bond can be challenged on the ground that it restrains the lawful exercise of trade, profession, or business. As per section 27 of the Contract Act, 1872, any agreement in restraint of trade or profession is void. Therefore, any terms and conditions of the agreement which directly or indirectly either compels the employee to serve the employer or restricts them from joining a competitor or other employer is not valid under the law. The employee, by signing a contract of employment, does not sign a bond of slavery and, therefore, the employee always has the right to resign from the employment even if he has agreed to serve the employer for a specific time period. However, the restraints or negative covenants in the agreement or contract may be valid if they are reasonable. For a restraint clause in an agreement to be valid under law, it has to be proved that it is necessary for the purpose of freedom of trade. For instance, if the employer is able to prove that the employee is joining the competitor to divulge its trade secrets, then the court may issue an injunction order restricting the employment of the employee to protect the interests of the employer. Whenever an agreement is challenged on the ground of it being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests.
In order to execute a valid employment bond, the parties have to ensure that the following requisites have been complied with: (i) the agreement has to be signed by the parties with free consent; (ii) the conditions stipulated must be reasonable; and (iii) the conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer. Further, the employment bond stipulating conditions such as to serve the employer compulsorily for a specific time period or penalty for incurring the expenses is in the nature of the indemnity bond and, therefore, such kind of employment bond has to be executed on a stamp paper of appropriate value in order to be valid and enforceable.
3. Remedies available to employer and employee
In the event of breach of employment bond, the employer might incur a loss and, therefore, may be entitled to compensation. However, the compensation awarded should be reasonable to compensate for the loss incurred and should not exceed the penalty, if any, stipulated in the contract. Usually, the court determines the reasonable compensation amount by computing the actual loss incurred by the employer having regard to all circumstances of the case. Even if the bond stipulates payment of any penalty amount in the event of breach, it does not mean that the employer shall be entitled to receive the stipulated amount in full as compensation on the occurrence of such default; rather the employer shall be entitled only to reasonable compensation as determined by the court. While exploring alternate remedies available to the employer in the event of default by the employee, it would be interesting and worthwhile to discuss whether the employers are entitled to seek reinstatement of their employee or obtain a restraining order against the employee from joining any competitor/alternate employer because many such similar reliefs have been sought by the employers in various suits. The apex court, while dealing with a similar query, has held that the specific performance action cannot be sought for breach of contract of personal service or bond and, therefore, the employer shall not be entitled to seek reinstatement of their employees as relief in the event of breach of bond. In another matter, the apex court has held that it is not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee to idleness or to serve the employer and, therefore, the courts are also reluctant to grant an injunction against the employees restricting their employment with other employers unless it is necessary for the protection of proprietary interests or trade secrets of the employer.
As mentioned, the conditions stipulated in the employment bond should be reasonable in order to be valid and, therefore, even if unreasonable conditions/clauses are stipulated in the contract such as imposing an exorbitant duration of compulsory employment period or huge penalty upon the employee, the court shall award compensation only if it determines that the employer has incurred loss by such breach of contract. The court normally considers the actual expenses incurred by the employer, the period of service by the employee, conditions stipulated in the contract to determine the loss incurred by the employer to arrive at the reasonable compensation amount. For instance, in the case of Sicpa India Limited v Shri Manas Pratim Deb, the plaintiff had incurred expenses of INR 67,595 towards imparting training to the defendant for which an employment bond was executed under which the defendant had agreed to serve the plaintiff company for a period of three years or to make a payment of INR 200,000. The employee left the employment within a period of two years. To enforce the agreement, the employer went to the court, which awarded a sum of INR 22,532 as compensation for breach of contract by the employee. It is crucial to note that though the bond stipulates a payment of INR 200,000 as compensation for breach of contract, the judge had considered the total expenses incurred by the employer and the employee's period of service while deciding the compensation amount. Since the defendant had already completed two years of service out of the agreed three-year period, the judge divided the total expenses of INR 67,595 incurred by the plaintiff into three equal parts for three years period and awarded a sum of INR 22,532 as reasonable compensation for leaving the employment a year before the agreed time period. Similarly, the High Court of Andhra Pradesh in the case of Satyam Computers v Leela Ravichander had also reduced the compensation amount considering the period of service of the employee.
Conclusion
In view of the aforesaid discussions and various court decisions, the employment bond is considered to be reasonable as it is necessary to protect the interests of the employer. However, the restraints stipulated upon the employee in the said contract should be "reasonable" and "necessary" to safeguard the interests of the employer or else the validity of the bond may be questioned. The employees are always free to decide their employment and they cannot be compelled to work for any employer by enforcing the employment bond. The court can, however, issue an order restricting the employment of the employee only if the said action is deemed necessary to safeguard the trade secrets/proprietary interest of the employer. In the event of breach of contract by the employee, the only remedy available to the employer is to obtain a reasonable compensation amount. The compensation amount awarded shall be based upon the actual loss incurred by the employer by such breach. Enforceability Of Employment Bond - Employment and HR - India
After going through some of the extensive legal provisions, it is clear that criminal procedure can be initiated if the employer even asks for a security deposit at any stage, simply because except for the Central Government, no one is permitted to collect taxes (money) by whatever name called or of whatever nature and if one does so regardless of its status under the Companies Act, is liable for violation of law.
From India, Anand
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Employee Appraisal Form new.doc
CiteHR.AI
(Fact Checked)-The user's reply is correct regarding the situation described in the original post. (1 Acknowledge point)