All you need to know about employee bonds

If an employee bond is used to ensure that the employee never leaves, then it is illegal, experts tell Tinesh Bhasin & Chirag Madia.

Quitting a company can be challenging at times.

To safeguard their business interests, employers make employees sign contracts that put restrictions on joining the competition.

Then, there are certain bonds that disallow an employee from leaving the company for a certain number of years.

The question is, how many of them are legally tenable?

Recently, Trigo Quality Production Services went to a civil court in Pune against its former employee Kaushik Pal Chaudhary. He had signed a contract that had a non-compete clause.

This prevented him from taking up employment with any competitor for a year after leaving his job. But the court ruled in Chaudhary's favour.

"Section 27 of the Indian Contracts Act prevents employers from restraining any employee from joining another company even if it's a competitor," says Nalin Bhat, Chaudhary's lawyer and founder of Law Beacons.

On their part, employers have a reason to worry.

Many times, employees do have access to clients, confidential data, and so on. So, they try to safeguard their business as much as possible from leakage of data and vital information through bonds and clauses.

But these clauses can also be used to prevent employees from leaving their jobs or harassing her/him unnecessarily.

Bonds can be tricky

The legal sanctity of a bond depends on its content.

If it's used to ensure that the employee never leaves, then it is plain and simple illegal.

A human resource consultant points out the case of an employee of a Mumbai-based software company who wanted to quit after serving the notice period, but the employer played hardball.

This company makes all employees sign a bond every year.

It states that on leaving the company within one year, they need to pay a compensation of Rs 1 lakh for the training and resources spent.

The mid-tier software firm also takes a signed cheque for the said amount.

The employee sent a legal notice as the company asked for additional Rs 1 lakh in compensation. The employer backtracked after the notice.

But lawyers say that when a company actually spends money on training employees, bonds are legally tenable.

"While a company cannot prevent an employee from joining another employer, it can always seek compensation for the incurred costs. Usually, bonds have a pre-estimated amount mentioned, which is also known as 'liquidated damage'. When an employee signs the contract, it means he has agreed to it," says Pooja Ramchandani, partner and head, employment law at Shardul Amarchand Mangaldas.

But if your employer continues to renew it year after year to be in a dominating position, without actually spending on training, then it can be challenged.

"An employer will need to prove with documents the money actually spent on training. The court will examine whether the company actually enrolled the employee in a programme to enhance the skill. On-the-job learning is not considered as training," says Bhat.

Relevance of contract clauses

Say, an individual is working in the research and development department of a company. He joins a competitor on a similar project.

The former employer can drag the individual to court for leaking the company's secrets and sue for damages.

Lawyers say there have been court orders in the past that favoured the company in such cases.

"But such clauses are for a limited time only. They can't be perennial," says Kris Lakshmikanth, founder, CEO and MD, The Head Hunters India.

The clauses differ from sector to sector.

"In the software industry, employees are made to sign bonds on matters like project development, privacy of information and ownership of the code. In the food industry, they are made to sign bonds on not sharing recipes and other information on manufacturing or cooking," says Ashish Agarwal, founder, WORKNRBY, an online portal for job seekers and employers.

HR experts say most employees don't even realise the repercussions.

"We have seen that many employees in sales and marketing feel if they have got clients for the company, they can engage with them in the future on joining the new organisation. Many times, employees copy the database of clients when quitting. Most employers have clauses against this and employees can face legal action," says Dinesh Goel, CEO, Aasaanjobs.com.

Exit formalities

HR experts say that in many cases, employees, including senior management, just leave the job after putting in their resignations. There can be repercussions if a company decides to take action.

Employees also need to surrender the company's properties.

In many instances, companies have filed police complaints against employees who have not returned the laptop, phone, and so on.

But an employer cannot terminate an employee without any reason.

"Most of the state-specific shops and establishments laws specify that termination of employment should be for a reasonable cause. Similarly, the Industrial Disputes Act, 1947, also requires reasons to be provided for termination of employment," says Ajay Raghavan, partner and head, Employment Law, Trilegal.

Depending on the reason for termination, certain processes also need to be followed by the employer.

Where the termination is for redundancy, for example, the employer is required to follow the last-in, first-out rule and make certain payments such as the statutory severance payment.

Also, if an employee is asked to leave for misconduct, the principle of natural justice has to be followed.

"The employee has to be given a hearing to clarify himself. Without this, the termination can be challenged in court," says Ramchandani.

IMAGE: A scene from the Hindi film Bewakoofiyan, published only for representational purposes.