Are employment bonds helpful?

The biggest issue that a lot of employers face today is attrition. In layman’s terms, it is what you can call job-hopping by employees. It is seen most frequently among the youth who have just joined the workforce. They leave the job after a year or two to pursue a better opportunity. 

While it is understandable that every person wants to work towards their career advancement, how does that sit with us employers?

Not very well, that’s for sure. After spending significant money and resources on the recruitment and training of the employee, it does feel like a betrayal, abandonment or ungrateful move. Many will write bad references in retaliation. But while that possibility does discourage and even restrict some employees, most would not care. They have already gotten the other job, right? So what’s the solution?

Employee bonds. A magical word to most employers. But mind you, they are not as effective as you think, so tread with caution. Here’s why.

The Indian Contract Act, 1872

This law states that any contract that puts a restriction on an employee from pursuing any legal profession, trade, or business will be considered null and void. Thus, if you have made your employee sign a contract that restricts them from leaving their job to join another without a suitable exit clause, your contract will mean nothing. 

An exit clause allows you to put certain restrictions and conditions on the employee, given that they are valid and reasonable. Thus, if you allow termination before the term period on the condition that the employee pays a certain amount in liquidated damages and serves a notice period, the contract can be enforced. You can also frame the contract with a penalty amount stipulated for the breach of contract by Section 74 of this Act. 

Cases of Contention

If, however, the bond is one-sided, it would also be considered void. The Indian Contract Act also has certain criteria you must fulfill for the contract to be legal, like offer and acceptance, free consent, the capacity to contract, consideration, etc. If the employee can prove there was coercion, misrepresentation, fraud, or an infringement of their fundamental rights was involved, the contract will not hold. On the contrary, you might be punished.

Moreover, an employee can counter you to prove that you did spend money on their training or suffered losses due to them leaving the job. If you cannot show appropriate records for the same, you may gain nothing from pressing charges. 

Protection Against Competitors

Now you definitely can have apprehensions that if the employee is joining a rival company, they might divulge your trade secrets. If that is the case, you should definitely add a non-compete clause and a confidentiality clause in the contract. While the former can be upheld only during the bond period, the latter has effect post-termination too.

 A non-compete clause will also be applicable in cases where it is reasonable, ie, it interferes with the freedom of trade of your company. But to obtain an injunction in your favor, you will have to prove that the intention of the employee is to aid the competition unfairly as so, or that they have already performed such an action.

What to Keep in Mind When Drawing Up an Employee Bond

Taking legal advice, either in-house if feasible or otherwise, is a good idea if you want to prevent future ugliness and legal battles. In any case, make sure your contract checks these boxes:

  • The bond contract should meet the criteria laid in the  Indian Contract Act, 1872.
  • The bond period should not be unreasonable and reflect the seniority of the position.
  • The bond amount should be reasonable and not higher than the expected amount to be expended on the employee during the bond period.
  • It should contain a confidentiality clause. 
  • If it contains a non-compete clause, it should be reasonable and valid.
  • Make sure you have provisions in place to prove the money and resources you spent on the candidate.

Final Note

Many will argue that employee bonds are useless, restrictive, and often counter-productive. In most cases, prospective candidates reject job offers if they see the possibility of signing a contract. Most often, they just ignore it. This is because of the willful misuse of bond contracts by recruiters. If used judiciously, they can actually help you reduce attrition at your company.