Mix views on misuse of service bonds as SC reiterates validity

The Supreme Court’s recent judgement of validity of service bonds has sparked conversations around it with experts having a mixed view. While staffing firms and law experts believe that employers are unlikely to misuse and bond they make employees sign, banking unions oppose it due to possible exploitation.

Service bonds are fairly common across both public and private sectors, particularly in banking, healthcare, engineering, and IT industries—where employers incur upfront costs on employee training, onboarding, relocation or sponsor an employee’s education or certification.

The apex court’s judgement roots from a dispute between Vijaya Bank and its former employee Prashant B. Narnaware, who was asked to pay Rs 2 lakh under ‘liquidated damages’ for quitting his job before the mandatory serving period of 3 years. While the Karnataka High Court had ruled in favour of Narnaware, the Supreme Court reversed it.

“Supreme Court is saying is that if training has been provided to someone to put across a particular position and there’s a private contract clause which has been entered because let’s say that person has been put on a project, then there’s going to be damages experienced by the company and that particular reasonable amount is put as liquidated damages for early resignation which is a fair thing to do as far as a financial consequence for early exit,” said Teamlease Staffing’s Chief Executive Officer Kartik Narayan.

However, analysts suggest that there are grey areas which can be misused by corporations, especially when enforced on junior-level employees who have very limited or no bargaining power. “This new judgment is slightly different as no training policy has been discussed or described. The reason people are talking about it is because it is slightly overstepping beyond what has been held before,” said Adil Ladha, Partner, Saraf and Partners.

There are two factors at play here. One, that no one can force someone to work for any company. Second, no one can stop someone from working for anybody else, as long as there is no breach of confidentiality. Moreover, the fairness of a service bond depends not just on how much the employee is asked to pay if they leave early, but also on their individual situation.

“While the service bond doesn’t stop an employee facing serious issues like harassment, discrimination, or a hostile work environment—from leaving, the real question is whether they’re still expected to pay. As of now, there’s no clear legal principle on this, it will be interesting to see how courts look at such cases,” said Gerald Manoharan, Partner, JSA Advocates and Solicitors.

Experts say that the situation is likely to evolve over time, as and when cases of exploitation come into the picture as such a law cannot be regulated well, unless both the parties are fair.

“A supervisory intervention is usually present which employees can make use of, hence, I don’t feel that industry grievances are completely employer favoured,” said Ascent HR Chief Executive Officer Subramanyam S.

“If an employee serves a notice period of the required time, then I don’t think anything should be recovered. Something reasonable is ok, otherwise, the whole thing is about deterring employees from resigning,” said CH Venkatachalam, General Secretary, All India Bank Employees Association (AIBEA).

“People should have the freedom to move. If there is a better opportunity, they will go because then there is also an unequal bargaining power that stands between an employer and employee,” he said.