- 30 May 2025
Is Employment Bond imposed on Employee post resignation legal? A Key Supreme Court Verdict Explained
In today’s competitive job market, many employees sign contracts that include restrictive clauses, often without fully understanding their legal implications. A common question that arises is whether an employer can compel an employee to pay a hefty penalty, such as ₹2 lakh, if they resign before completing a specified tenure. Is such an employment bond legally valid?
Recently, the Supreme Court of India delivered a landmark judgment providing clarity on this issue. This article explores the legality of employment bonds, the scope of Section 27 of the Indian Contract Act, and the rationale behind upholding the penalty clause in this particular case.
Background of the Case
The dispute involved Vijaya Bank, a public sector bank that offered a job for the position of Senior Manager. The appointment letter contained a clause stating that the employee was required to serve a minimum of three years; failing which, a penalty of ₹2 lakh would be payable.
The employee agreed to the bond and joined the bank but resigned after approximately two years to join another bank. Though the resignation was accepted, Vijaya Bank demanded the penalty amount of ₹2 lakh. The employee paid the penalty under protest and challenged the clause in court, arguing that it was unconstitutional and violated Section 27 of the Indian Contract Act, which prohibits agreements in restraint of trade.
The High Court ruled in favour of the employee, but the bank appealed to the Supreme Court.
What Did the Supreme Court Say
The Supreme Court overturned the High Court’s decision and held that the employment bond and the ₹2 lakh penalty were both valid under the law.
The Court clarified that this clause did not restrict the employee from working elsewhere in the future. Instead, it imposed a condition to complete a minimum service period during employment. Since the restriction applied only during the course of employment and not after resignation, it could not be treated as a restraint of trade under Section 27 of the Indian Contract Act.
This distinction is important because Section 27 primarily targets agreements that prevent a person from engaging in a trade or profession indefinitely or for an unreasonable duration. Here, the employee was free to seek employment anywhere after fulfilling the minimum service period or after paying the penalty.
Public Policy and Reasonableness
The Court further emphasized that in today’s highly competitive environment, public sector banks must retain skilled staff to compete effectively with the private sector. Frequent turnover leads to costly recruitment processes, causing inconvenience and financial loss to the institution.
The penalty amount of ₹2 lakh was neither disproportionate nor an unjust enrichment. The Court noted that the employee held a senior position with a good salary package, making the penalty reasonable.
Additionally, the Court pointed out that employees in senior roles often receive specialized training and benefits, which represent a significant investment by the employer. The penalty clause helps the employer recover such costs when an employee resigns prematurely.
Legal Framework: Section 27 and Employment Bonds
Section 27 of the Indian Contract Act, 1872 declares agreements that restrain lawful trade or profession to be void. However, in precedent rulings such as Niranjan Golikari v. Century Spinning and Superintendence Company v. Krishan Murgai, the Supreme Court has held that restrictions applicable only during the course of employment are valid and not considered restraints of trade.
In the Vijaya Bank case, there was no long-term restriction on the employee’s ability to work elsewhere after resignation only a minimum service period clause was enforced.
This legal principle ensures a balance between protecting an individual’s right to work freely and safeguarding an employer’s legitimate business interests.
Practical Implications for Job Seekers and Employers
For Employees:
It is essential to carefully review and understand any employment bond before signing. While restrictive covenants may seem intimidating, many are legally valid if they are reasonable and limited in scope. If you foresee a possibility of early resignation, clarify the penalty or compensation obligations upfront.
For Employers:
Drafting clear and reasonable employment bonds is crucial. Employers should ensure that penalty clauses are proportionate and reflect actual losses or costs incurred due to early resignation. Transparent communication about such clauses during recruitment can help avoid future disputes.
Broader Context: Employment Bonds in India
Employment bonds are commonly used across various sectors in India, particularly in public sector undertakings, IT, banking, and education. They serve as a tool to retain talent and protect investments made in employee training and development.
However, the enforceability of such bonds depends on multiple factors, including the nature of the job, the level of the employee, the penalty amount, and the reasonableness of the service period.
Conclusion: What Can Job Seekers Learn?
The Supreme Court’s ruling clarifies that employment bonds containing reasonable minimum service clauses are legally enforceable. A penalty clause like the ₹2 lakh amount in this case can be justified to compensate for losses caused by premature resignation.
If you are signing a job bond, it is crucial to carefully read and understand all terms. Conditions that are fair and serve a legitimate purpose are unlikely to be deemed illegal or against public policy.
Being informed about your rights and obligations under such contracts can help you make better career decisions and avoid legal complications.
Disclaimer
The contents in this article are just for informational purposes only. Efforts have been made to ensure the accuracy and reliability of information, the author(s) and publisher do not guarantee its completeness or precision. Any matter written in this article does not express the opinion of the author or the publisher. Additionally, it does not reflect the views of the organisation. Readers should self-analyse the information and perceive accordingly. The author(s), The publisher and the organisation are not responsible for any losses or damage occurring due to the interpretation of the article.
