With the start-up environment thriving in India (India ranks 3rd in total funds secured by start-ups in 2015, only behind the Unites States and Britain), 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 rates).

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. Labour lawyers can help you in understanding more about employment or employee bond.

However, legality of such contracts is still a grey area. The simple answer is that these employment agreements with negative covenants are enforceable under Indian law.

However, the requisites for such an agreement to be valid are:

• 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 the following would not be covered under the “reasonable” category:

• 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; 

Have you already signed an agreement like this and are planning to quit? Fortunately, maths and logic have prevailed in situations like this.

For instance, consider the case of Sicpa India Limited v Shri Manas Pratim Deb, where the employee had joined the Company by signing a bond of 3 years.

This case highlighted 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 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 advice of labour lawyers 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 door ke nuksaan ke baarein mein sochna chahiye’ – bottom line is that getting the right legal advice early, can help save a lot of pain and uncertainty in the future. 

MyAdvo can connect you with top employment attorneys in India. Get legal advice from the best legal experts near you. Email us at info@myadvo.in or call us at +919811782573.