Employment Bonds – Constitutionality and Criminal Liability

1.?Introduction

An employment bond is a contract that mandates that a worker stay with their company for a predetermined amount of time under penalty of paying the business a monetary forfeiture in case of non-compliance.

An employment bond is a type of contract, similar to a surety bond, where the breach of the conditions in the employment bond makes the employee liable to pay a certain amount of money as compensation. It is different from an offer and appointment letter as an offer is a preliminary, personal, non- binding communication about the broad terms of the employment which the employee may accept or reject. An appointment letter has legal value and it is proof of employment. It certifies that the person is an employee of the company and is more detailed than the offer letter.

In the capitalist market, the motive of profit and benefits guides both employers and employees. Accordingly, companies, while trying to ensure dominance in the competitive market, come up with certain mechanisms to ensure that their profits or resources will not be wasted. These resources include training, and skill- development of employees.

With this motive in mind, Employment Bonds began to be used by employers. These are contracts entered between the company or employer and employees (hence falling under the Indian Contract Act 1872) which stipulate certain clauses that the employee must adhere by.

2.?Important clauses in Employment Bond

a.?Lock in Period

This is the minimum period that the employee must stay within the company and is given in the employment contract. The employment agreement cannot be terminated by either of the parties within this time period. A lock-in period is different from employment bonds as a lock-in period is mutual ( both employee and employer cannot terminate the agreement)and an employment bond is only related to the employee.

In addition to this, employment bonds can also contain clauses that specify that the employee will have to remain with the company for a specified period of time, failing which, they would be liable to pay the employer a specified amount as a fine. This is due to the fact that the employer invests a considerable amount of money for the training of the employee and if the employee, after utilizing the same, leaves the company for another, it would prove to be a grave loss.?

b.?Penalty or Compensatory Clause

A contract's penalty clause is an explicit clause. It requires the party who violated the contract to compensate the party who was harmed as a result of the violation. In a sense, non-solicitation, non-compete clauses etc are penalty clauses as breach in these conditions can result in compensation, if stipulated through the contract.

c.?Non-solicitation

It is one of the clauses that appear in employment contracts that forbid the employee from using confidential information or from soliciting clients connected to the current job in case they leave the company for a competitor company. It ensures that the company will not have to undergo any loss from the employee stealing clients or confidential information from the company and presenting it to the rival company.

d.?Non-compete

Another type of clause commonly found in employment agreements, non-compete clauses stipulate that the employee, after resigning from the company, will not; Work for an individual or company that is directly competing with the current one, Start an enterprise that directly competes with the company, Conduct business within a specific market in a specific area and a specific amount of time, Recruit employees of the company etc.

e.?Non-disparagement?

It is called a “restrictive covenant” as it restricts the employee from criticizing the company or making derogatory comments about the company after termination of employment for a specific period of time. A non-disparagement clause helps the company to protect its reputation and goodwill in the market as criticism by a former employee would prove to be extremely injurious to the company’s public perception.?

f.??Confidentiality clause

The Employee shall protect the Confidential Information by using the same degree of care, but no less than reasonable care, to prevent the unauthorized use, dissemination or publication of the Confidential Information as the Employee uses to protect its own Confidential Information. This shall be survive the termination of employment.

3.?Illustrations

For example if an employee, say Sam, works in ABC Company, which is a shoemaking company. Through the years, Sam has gained a lot of experience and knows a lot of clients personally through the company. And years later, Sam gets a much better offer at another company XYZ and decides to go there. He also informs the clients with whom he has a good connection about his transfer and they decide to shift to that company for their services. To prevent this from happening, and employees from stealing clients for the new company they work at,?companies put non-solicitation clauses in their agreements.

Sam, from the previous example, decides to leave company ABC and start his own firm. With the experience he gained from working in company ABC, he starts a rival firm DEF dealing with the same shoemaking services. He also asks his friends in ABC company to join him. Since this would cause a huge risk to company ABC, as they lose their employees as well as their former employees?use the skills they gained from the company to directly compete with them, companies put non-compete clauses.

Again, we take the example of Sam from the shoemaking company ABC. Sam gets fired from his job and due to his anger and disappointment, he posts a derogatory post on social media about his employers. Since goodwill and reputation have a role in the success of the company, critical comments from a former employee can cause huge losses to them if it gets to the larger audience or market. Hence, to prevent this, companies put non-disparagement clauses.

4. The legality of Employment Bonds

The validity of employment bonds has been discussed for a long period of time, as they might prove to be a hindrance to the right to Speech and Expression given in the Constitution of India or even Restriction of Trade by the clauses of the Indian Contract Act.

a.?Constitution of India, 1950

Article 19(1)(g) of the Constitution of India provides every citizen of India the right to carry on any occupation, trade, or business. Article 21 of the Constitution grants every citizen of India the right to livelihood as a part of the Right to Life. Therefore, the question of these clauses, especially the non-compete clauses as infringing upon these fundamental rights arise. However, one must also note that reasonable restriction exists regarding the rights. If we look at the history of how the Indian judiciary dealt with non-compete clauses, it is clear that the courts have tried to draw a line between the employer’s right to protect their business and the employee’s right to trade. Here, the “reasonableness” test is used. All clauses that are reasonable are accepted. The court in Kumar Apurva v. Valuefirst Digital Media Pvt. Ltd.[i] Held that “the onus of proving the reasonability of a given non-compete clause is on the employer or the party supporting its validity.”

The Court upheld the non-compete clause in the case of Niranjan Shankar Golikari v. The Century Spinning And Mfg Co.[ii] and held that during the course of employment, these clauses are valid, as the employee has the obligation to exclusively serve the employer. However, the non-compete clauses that go beyond the period of employment have been struck down in the case of Gujarat Bottling v. Coca-Cola Co [iii] .

Regarding non-disparagement clauses, their constitutionality as regards to the right to speech and expression is a point to note, however, they have not been discussed extensively in the Indi Courts. It is generally held that these clauses ought to be enforceable in the commercial field between employers and employees. However, corporate law in India has not yet definitively defined the scope of non-disparagement clauses, and the legality of such clauses has not yet been contested in Indian courts.

Essentially, the court has taken a balancing approach and upheld clauses that are seen to be reasonable. In cases of employment bonds, since they impose restrictions on the employee not after the termination as in relation to the right to pursue a profession of their choice, they cannot be said to violate an employee’s right to trade, as long as they are reasonable.?

b.?Indian Contract Act, 1872

The validity of the Employment Bond in relation to the Indian Contract Act, the essentials of a valid contract?given in Chapter I and Chapter II of the Indian Contract Act such as lawful consideration (section 24,25), capacity to contract (section 11), free consent( Section 13, 14) etc.?Those being an offer which on accepted becomes a promise. And the promise, with consideration becoming an Agreement. And finally, an agreement becoming enforceable by law, a Contract. Therefore, for an agreement to be enforceable by law, it must be reached with free consent; that is, lack of force or fraud or misrepresentation, or mistake. In the case of employment bonds, both parties are not on a level playing field. We have the employer, with resources and legal knowledge and on the other hand, we have the mostly uninformed potential employee. Therefore, there is a high chance that these employment bonds could have been signed by forcing the employee or giving the employee partial information. Such Employment Bonds, will not be valid in the eyes of law and can be contested in court. The Indian Contract Act states that no contract can be executed against the will of the person if done?so would be against natural justice principles. ( Section 15, coercion)?There are various rulings on employment bonds by the courts which would be elaborated later in this essay.

5.?Remedies available for Breach or Misuse of Employment Bond

a.?Enforce the Employment Bond

The employer may enforce the clauses of the employment bond and seek for specific performance. If they are breached then he deserves the right to seek compensation for breach of contract. The employer should be able to prove the test of reasonable beyond any reasonable doubt in the court.

b.?Indian Penal Code, 1860

According to Section 368 of the Indian Penal Code, if a person or organization withholds any documents or prevents their use, threatens legal action, or coerces another person into doing something against their will or that is against the law or unethical, they are guilty of a criminal offense. Therefore, if an employer holds back original documents of the employee as a way to threaten them into following the terms of the bond (which may have been entered into illegally), this section can apply.

The Indian Penal Code's Section 368 addresses extortion through threats of judicial action. The minimum sentence under this law is two years in prison. No person may be forced into employment against his will simply because he has signed a contract with the employer, the Supreme Court of India has ruled in the case of Sanjay Jain v. National Aviation Company of India Ltd[iv] . The court also ruled that since employees earned their personal documents, the business cannot withhold them because it has no legal claim to them.[v] As the corporation is a legal entity rather than a living thing, and the management is its hands and heads, any complaint against the firm would result in the Directors and Managing Directors of the company going to jail. Bonds are only valid if the business has invested in its employees' personal development and enhancement, not only in training that improves performance which was held in the case of?Toshnial Brothers (Pvt.) Ltd. v. E. E. swarprasad.[vi]

In cases of the employer uses the terms of the employee to threaten the employee, their actions can be penalized in the IPC. This would come under section 503 of the IPC which defines Criminal Intimidation. Criminal intimidation refers to the accused coercing the victim into doing something illegal by threatening him with damage to his body, property, reputation, etc. The punishment for the same is provided in Sections 506, 507 which stipulates imprisonment of 2 years.

6.?Judicial Pronouncements

a. Toshnial Brothers (Pvt.) Ltd. v. E. E. swarprasad[vii]

In this case the employment contract's contractual clause required the employee to pay the employer compensation if he left his position within three years. When he left his employment after fourteen months, the employee broke the terms of the contract The Madras HC held that the employer must show a legal injury automatically resulting from the breach of the commitment to serve for a minimum period. Here,, it was proved. The agreed-upon employment contract's compensation provisions were mandated, and the employee was required to pay them.

b.?M/s Sicpa India Limited v. Shri Manas Pratim Deb[viii] and in Satyam Computer Services Limited v. Ladella Ravichander[ix]

The Delhi High Court and the Andhra Pradesh High Court, respectively, held that the compensation imposed by the employer was too large when compared to the expenses faced in the hiring process, training the employee, hiring a replacement, etc. in the above cases. The courts in both of these cases supported the legality of employment bonds but reducing the exorbitant compensation due under the terms of the contracts to a "fair" sum.

c. Pepsi Foods Ltd v. Bharat Coca-Cola Holdings (P) Ltd[x]

The Delhi High Court ruled in that a negative covenant prohibiting employees from pursuing occupation for 12 months after leaving the plaintiff's service constituted a breach of Section 27. It was decided that these contracts are illegal, invalid, and contrary to?public policy and that an injunction cannot make something legal that is illegal.

7.?Checklist to decide whether an Employment Bond is Legal/Illegal for Enforcement

a. The “reasonability” of the bond period.

b.?The bond must place restrictions during the time of employment, not after.

c.?In cases of non-compete clauses, it must not be unreasonable.

d.?In cases of Employment Bonds, the employer has to prove that they accrued loss due to the premature leaving of the employee. This must be proved by relevant documents such as training materials given to the employee.

e.?The employment contract must be entered to with valid consent

f.?The clauses must not be vague, the bond must contain details of the lock-in period as well as the penalty for leaving the company before the said period clearly, for example.

8. Conclusion

According to various Indian laws, employment agreements are generally permissible and legally enforceable in India if both parties freely accede to them without engaging in fraud, coercion, error, undue influence, or misrepresentation. The agreement must also be reasonable and enforceable by law. In cases of Employment Bonds, the employer as to prove loss due to the premature leaving of employee, the quantum of damages to be reasonable and if not so, to be decided by the court.

End Notes

[i] Kumar Apurva v. Valuefirst Digital Media Pvt. Ltd., 2015 SCC OnLine Del 8360.

[ii] 1967 SCR (2) 378.

[iii] Gujarat Bottling Co. Ltd. v. Coca Cola Co., (1995) 5 SCC 545.

[iv] Sanjay Jain v. National Aviation Co. of India Ltd., (2019) 14 SCC 492.

[vi] ?Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad & Ors., 1997 LLR 500.

[vii] ?Ibid.

[viii] Sicpa India Limited v. Manas Pratim Deb, 2011 SCC OnLine Del 4805.

[ix] Ledalla Ravichandar v. Satyam Computer Services Limited, 2011 SCC OnLine AP 76.

[x] Pepsi Foods Ltd. v. Bharat Coca-Cola Holdings Pvt. Ltd., 1999 SCC OnLine Del 530.

Authored by Adv Krithika and DIYA JAIMON !!

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