Enforcing Employment Contracts and Reducing Workforce Turnover
Any entrepreneur or a businessman running a services business, be it startup or an established corporate entity, would understand the pain of having spent a significant time and amount on training an employee and the employee leaving you before you could even utilise the expenses incurred in their training. Another difficult situation comes up when you spend a lot of time looking for the right employee, you hire them and enter into deals with your customers thinking that you have sufficient work force to deliver upon your commitments to your customers, but to your surprise, your new employee found a higher paying job and quits your company right when you needed them the most, that too without serving the notice period. This is not an exhaustive list of situations where an employees quitting your company not only can leave a bad taste in your mouth, but also an impediment to overall growth of your business.
Being more vigilant while hiring can be helpful but its definitely not the entire solution to this never ending problem. To avoid this risk, it’s important to pay close attention to the Employment Contract since this is the basic document governing the relationship between the employee and the employer. While drafting the standard ‘Employment Contracts’, the business owners and management must pay very close attention to terms related to the ‘notice period’, ‘lock-in period’ and ‘employee bonds’ that they are carefully drafted . But the most essential part is to make sure that these provisions don’t end being redundant, they must actually work! Not only should you be able to get a compensation for such non-palatable acts, but also have a perceptible deterrent value.
It is important to understand that Employment contracts are more than just a document that outlines the terms and conditions of employment relationship. This document should actually serve as reference point for answering any ambiguities that may arise in course of employment. One of the ambiguities that often arises during course of employment is related to notice period in the termination clause. It is very essential to clearly define notice period in employment contract. Less ambiguities in notice period will actually help employees to take notice period seriously. It will help employers with necessary time to find suitable replacements or redistribute work , ensuring business continuity. The contract should clearly state the length of notice period and the consequences of non-compliance, such as the withholding of final compensation or the execution of security cheque.
Notice periods and Employment bonds are two important components of employment contract that helps protect the interest of both employer and employee. It is because if an employee breaches the bond by leaving before the agreed period , well drafted notice period clause can act as additional layer of deterrence. The employer can seek reasonable compensation for both the bond breach and failure to serve the notice period.
In Fertiliser and Chemical Travancore Pvt. Ltd v. Ajay Kumar and Others the Kerala HighCourt has clearly ruled that the employer would indeed suffer damages when a trainee breaches the bond and leaves prematurely. The judgment highlighted that the breach of such bonds causes real and measurable harm to the employer, emphasising the need for compensation. The catena of several other judgments also illustrates the crucial role that well-drafted employment bonds play in protecting an employer’s investment in training and development. Such bonds ensure that employers are compensated for their losses when employees do not fulfil their contractual obligations, thereby reinforcing the importance of including robust bond agreements in employment contracts. Employers are entitled to seek compensation, which may be limited to the expenses incurred for training the employee. However, the compensation demanded must be reasonable and not punitive based on the facts and circumstances of each case.
The above restrictive covenants like ‘notice-period’, ‘lock-in period’ and ’employee bonds’ etc are essential for protecting an employer’s interest and ensuring that employees adhere to agreed-upon terms.Here are suggestive ways employer’s can enforce these covenants:
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Serving the employee with a legal notice: This legal notice is served upon employee for breach of employment bond thereby demanding the compensation for training expenses in a certain time frame mentioned in Notice Period.
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Enforcing Undertakings or Encashing Cheques: Employers can seek to enforce undertakings or encash security cheques as stipulated in the employment agreement. However for such cheques to be legally enforceable certain conditions must be met. Firstly, the contract must clearly stipulate the purpose of security cheque, conditions under which it can be encashed. Secondly, The cheque amount should represent a genuine pre-estimate of the loss that the employer is likely to occur in case of breach. Thirdly, the employee must voluntarily accept terms of the cheque without any coercion or undue influence.
- Initiating a Civil Suit and seeking specific performance: The Indian Contract Act 1872 governs the enforceability of employment contracts, providing framework for seeking remedy in case of breach . Two types of relief can be seeked by employers : damages for employee’s breach of contract or Injunction prohibiting employee from engaging in certain activities. The damages may be quantified in the employment agreement itself, allowing for predetermined calculation of losses. However, Employer must prove the actual loss incurred such as costs associated with training the employee, additional cost incurred in hiring and training of new employee etc . While vigilance during the employment process is crucial, it is not the only solution to the persistent issue of employee turnover. The key lies in meticulously drafting and enforcing robust employment contracts. The contract should include clear terms related to notice periods, lock-in-periods, employment-bonds to protect business interest. Ensuring that these provisions are not just formalities but effective tools can help mitigate the risks associated with premature employee departures. By establishing a framework that allows for compensation and serves as deterrent against breaches, employers can safeguard their safeguard in employee training and maintain the operational stability of business. A well crafted and thoughtfully written employment contract is not merely a legal necessity, in fact , it is a strategic asset for effectively managing employee workforce.
By Priyvrat Chauhan, Partner at Advik Law Partners
Assisted by Surbhi Sharma , Communications Head at Advik Law Partners
