Supreme Court Upholds Validity of Employment Bonds in India

In a significant judgment, the Supreme Court of India has ruled that employment bonds requiring employees to serve a minimum period or pay a penalty for early resignation are legally valid, as long as the conditions are fair and apply only during the term of employment.

The Case: Bank vs. Employee

The case was heard by a bench of Justice PS Narasimha and Justice Joymalya Bagchi. It revolved around an employment bond signed between Vijaya Bank, a public sector bank, and a Senior Manager (Cost Accountant).

As per the bond, the employee was required to serve for at least three years, or pay a penalty of ₹2 lakh if he resigned early. However, the employee resigned before completing his tenure to join IDBI Bank and had to pay the penalty. He later challenged the bond in court, arguing that it was unfair, against public policy, and violated Section 27 of the Indian Contract Act, 1872, which prohibits agreements that restrain a person’s right to work.

Supreme Court’s Observations:

The Court rejected the employee's arguments. It held that:

• Employment bonds are valid if they only apply during the period of employment.

• These bonds do not stop employees from working elsewhere after they resign, so they do not violate Section 27.

• Public sector companies like Vijaya Bank have a legitimate reason to include such clauses – mainly to retain skilled staff and avoid the time-consuming and expensive recruitment process.

  
  

Justice Bagchi, who authored the judgment, pointed out that the ₹2 lakh penalty was not excessive for a senior managerial employee drawing a high salary. The Court also noted that the employee voluntarily paid the penalty and left, so he could not later claim it was forced or illegal.

Why Employment Bonds Are Not Unfair:

The Court emphasized that:

• Public Sector Undertakings (PSUs) need to retain talent in a competitive, deregulated market.

• Having a minimum service period helps reduce attrition (staff turnover) and ensures better efficiency.

• Such policies are not against public policy, especially when they help in reskilling and retaining specialized staff.

  
  

What About Employee Rights?

The Court was clear that employment bonds should not be harsh or oppressive. In many cases, employees have less bargaining power, especially when signing standard-form contracts. The judgment reminded employers that:

• Restrictions must be reasonable.

• Any clause that restricts employees after they leave the job is not valid.

  
  

This aligns with earlier judgments like:

• Niranjan Shankar Golikari v. Century Spinning Co. (1967) – where the Court upheld reasonable restrictions during employment.

• Superintendence Company v. Krishan Murgai (1981) – which clarified that post-employment restrictions usually go against Section 27.

  
  

Conclusion: Bonds Are Legal, But Must Be Fair:

The Supreme Court's decision clearly states that employment bonds are legal in India, provided they:

• Impose reasonable conditions only during employment.

• Do not unfairly block future job opportunities.

• Include penalties that are proportionate and transparent.

  
  

This ruling gives employers more confidence in retaining skilled employees through fair agreements, while also protecting employees from overly restrictive or unfair contract terms.