The ins and outs of contractual bonds

At times, service bonds and contract of service with employees talk about employee being expected to serve a minimum number of years. For example, clause expecting employee not to leave job be

Published: 20th May 2012 08:45 AM  |   Last Updated: 02nd June 2012 10:27 PM   |  A+A-

At times, service bonds and contract of service with employees talk about employee being expected to serve a minimum number of years. For example, clause expecting employee not to leave job before three years; or in cases where the employer spends money on employee’s training, he may expect him to work for a certain period.

With growing competition, employees breaking bonds, joining competitors, etc. is increasing in the corporate world. To curb it, certain clauses are there. But what if the employee breaks the bond, or fails to work for the period mentioned in the contract? What if he joins the competitor even if the contract prohibits so?

Clauses in bonds as stated above are legal. As per the law, however, an employer cannot force his employee to work for him. This is known as “contract of personal service not being enforced”. At most, the employer can claim compensation, damages, interest, etc. as per the bond/contract. For example, if an employee leaves at the end of one year, whereas the contract expected him to work for two years, the employer can claim compensation equal to his one year salary. Compensation claimed has to be generally proportionate to unserved period. Certain amount of damages and interest can also be claimed.

In case the employer incurs expenditure on employee’s training, there could be a bond by which employee is liable to serve for a period stipulated in the bond and in alternative, being liable for payment of proportionate amount for unserved bond period as well as amount spent on training, and other monetary reliefs.

Likewise, the employee too  cannot impose himself upon the employer. Exception in such cases will be if employee is a workman under the Industrial Disputes Act or is a public servant or termination is in breach of a mandatory provision. In such cases, the employee can seek reinstatement from court. However, if none of these exceptions apply, he can only seek compensation, damages or interest etc.

An important clause inserted these days is not joining competitor for certain number of years. Pursuant to termination, the employee cannot be stopped from joining  the competitor; at most, relief of compensation, damages can be claimed. However, as per certain judgments of the Supreme Court, during the term of contract, negative covenant of not joining the competitor can be enforced. For example, if a contract expects employee to work for five years, it further states that in case the employee leaves prior to the said period, he shall be estopped from joining the competitor till five years end. If the employee violates the clause, this can be stopped by the court. Reasoning given by courts is that during such period, the employee was expected to serve the employer and if not stopped, it would be against the company’s interests unless contract is too harsh. However, such estoppel would not be applicable in case the employer terminates the employee. There the employer may be entitled only for monetary benefits.

Service bonds/contracts need to be carefully drafted. It is advisable to have the period mentioned for which the employee is expected to work. Clause of not joining competitor should be specifically mentioned alongwith time period. Clauses should be reasonable and not of unlimited   nature. Bar should not be beyond same or similar nature of business performed by the company. Unreasonable clause shall be considered harsh and violative of the Contract Act. Damages, compensation, etc. should be mentioned as far as possible. For companies to avoid issues relating to employees leaving jobs before specified time or joining competitor, it is advisable that legal notices be given, and suits be filed. Claim for damages, compensation, interest itself will act as a deterrent for other employees.

E-mail the writer at raavibirbal@gmail.com.

The opinions expressed in this column are the author’s own.

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