With the start-up environment exploding in India (India ranks 3rd in total funds secured by start-ups in 2015, only behind Unites States and Britain1), holding on to employees and top talent has become a challenge for startups and established companies alike (most IT biggies are facing high double digit attrition rates2):
Many companies are resorting to employee bonds and adding restrictive covenants in employee contracts to protect their interests and investments in training and hiring employees.
However, legality of such contracts is still a grey area. Simple answer is that employment agreements with negative covenants are enforceable under Indian law. However, with the requisites that:
- The agreement has to be signed by the parties with free consent;
- The conditions mentioned must be reasonable; and
- The conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer. (read non-compete clauses, protecting trade secrets etc)
To put that into perspective, an employee bond for a fresher which states:
- Employee has to serve the employer for at least 3 years, and
- Employee has to pay Rs 2L, even if he leaves after 2 years, 11 months, 29 days; might find it really difficult to fall under the ‘reasonable’ category
Have you already signed an agreement like this and are planning to quit? Fortunately, maths and logic have prevailed previously in such situations.
For instance, consider the case of Sicpa India Limited v Shri Manas Pratim Deb3, briefly highlighted here, where the employee has joined the Company signing a bond of 3 years.
The above example highlights that in case an employer goes to court for a breach of an employee bond, the court would normally consider the actual expenses in training and development and the period of service to determine the loss incurred by the employer and to arrive at the reasonable compensation amount, which is less than the penalty mentioned in the bond. As a result, bonds that are not thought through lead to employees eloping, companies holding on to experience certificates and court cases, which costs time; time that can be used to focus on business growth for companies, and to focus on career growth for individuals.
Therefore for startups and HR professionals, it would be prudent to get your employee contracts vetted or drafted by a lawyer outside your firm (in-house lawyers could suffer from ‘bounded rationality’, preventing them from offering unbiased & fair advice) to ensure that:
- Covenants stand as ‘reasonable’ if challenged in court at a later stage by an employee,
- Interests of your company are protected, and
- Prospective employees aren’t scared away, because of one-sided or highly restrictive conditions in the employee bond.
From an employee’s perspective, taking a lawyer’s advice (which you’ll soon be able to take for free through MyAdvo) before signing an employee bond would help:
- Negotiate terms which are fair and reasonable, and
- Protect yourself if things go south with your employer.
So if you prefer clichés like ‘prevention is better than cure’ or Bollywood dialogues like this one from Sarkaar ‘paas ke fayde se pehle dhoor ke nuksaan ke baarein mein sochna chahiyen’ – bottom line is that getting the right legal advice early, can help save a lot of pain and uncertainty in the future. We at MyAdvo are working towards bridging that gap.
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2 Company earnings results