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Employment bonds: Should YOU be scared?

Last updated on: May 4, 2011 17:39 IST

Employment bonds: Should YOU be scared?

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My techie friends working in big tech companies often ask me whether their employment bond is valid. After extensive googling, I couldn't find one proper article on the topic, so I thought of writing one myself. In one answer to the above question: don't be too scared of your employment bond.

To understand why, read on.

NEXT: What is an employment bond?

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Employment bonds: Should YOU be scared?

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What is an employment bond?

Employment bond is not a separate agreement or bond entered into between employer and employees -- it is just a clause in the employment agreement.

This clause says that if the employee leaves before the contract period, he will have to pay a certain pre-agreed amount to the company. (Of course, none of us really "agree" to this clause -- we just want the job).

NEXT: What does a typical employment bond clause look like?



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Employment bonds: Should YOU be scared?

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What does a typical employment bond clause look like?

Clause 12: That in the event of the employee leaving the services of the company before the expiry of the contract, as also in the event of the employee making it necessary on the part of the company to terminate his/her services for any reason, of whatsoever nature, the employee shall be liable to pay to the company a sum equivalent to twelve calendar months (Basic) present salary by way of agreed liquidated damages and the employee agrees to pay the same without any proof of actual damages suffered by the company.

In essence, the clause says that if you leave before you are supposed to, you need to pay one year's salary to the company. Such big amounts usually force employees to complete their full employment period.

NEXT: So what does the law say about this?



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Employment bonds: Should YOU be scared?

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So what does the law say about this?

Section 74 of the Indian Contract Act says that when two parties enter into a contract, they can provide for the compensation that shall be payable in case a party breaches the contract.

Such pre-determined compensation is called 'liquidated damages' and is required to be 'reasonable'.

In other words, while employment 'bond' clause is valid and enforceable, it is required to be reasonable, that is, it should be related to the actual loss suffered by the employer.

NEXT: What does this mean in practice?



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Employment bonds: Should YOU be scared?

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What does this mean in practice?

In practice, since the liquidated damages are required to be reasonable, they should be equal to the expenses incurred by the employer in hiring, any special training (not routine training), courses, etc. for the outgoing employee and the cost of finding a replacement for her/him.

Therefore, most employment 'bond' clauses which provide for stringent bond amounts (like one year's salary) are likely to be struck down if challenged in a court of law. You would, however, still have to pay for the above costs incurred by the employer.

There is a more nuanced argument as well (that employment bond clause is a restraint of trade under Section 27), but we think Section 74 argument is more robust.



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