Legal Status of Employment Bonds

Legal Status of Employment Bonds

It has become prevalent that employees of most organizations are being bound to sign an undertaking to neither join the organisation’s competitors nor disclose any business information. Many are forced to enter into contracts which contain a lot of negative covenants/clauses, making employees feel like they can never leave their current employer.

Some organisations deploy this practice under the guise of providing “on-the-job training” to qualified persons, compelling the employees to sign employment bonds for specified periods. In case of a breach of such condition, employees are dragged into protracted litigation and compelled to pay hefty sums to get out of the contractual bond.

Let us analyze the legal status of employment bonds and review some constitutional provisions. Articles 9, 11, 14 and 18 of the Constitution of Pakistan confer fundamental rights on the citizens of Pakistan and allow the right to liberty, right to dignity, prohibition from slavery and forced labour, right to enter into any lawful profession or occupation and the right to conduct any lawful trade or business. So any restriction on these fundamental rights of a citizen goes against the protections granted and guaranteed in the Constitution of Pakistan. Most employers violate these fundamental rights of citizens and use forcible, arm-twisting tactics in the name of contracts and employment bonds which create impediments in the enjoyment of these fundamental rights guaranteed by the Constitution.

The most important legal provision which safeguards the rights of employees is contained in Section 27 of the Contract Act, 1872 which reads as under:

“Agreement in restraint of trade void: Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

The following is notable Indian case-law related to employment bonds/non-compete clauses:

• Negative terms of the contract i.e. preventing/restraining an employee from not working with a competitor during the continuance of employment is not void to such extent but would be considered void post cessation of employment whether voluntarily done by the employee or by dispensation of services by the employer (Superintendence Co. of India Pvt.Ltd Vs. Krishan Murgai, AIR 1980 SC1717).
  

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• Whether or not restraint is general/specific or totally /partially qualified/unqualified, if it is extending beyond the term of services, it is void (Madub Chunder Vs. Rajcoomar Doss, (1874) 14 Beng LR 76 at pp.85-86).It is evident from the above-mentioned judicial pronouncements that an employer can impose a negative covenant i.e. a non-compete clause, but only during the subsistence of the employment and not beyond the tenure of employment.
  

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• Unclear, obscure, unreasonable and uncertain confidential negative covenants are unenforceable (Polaris Software Lab Ltd., Vs. Suren Khiwadkar, 2004 I LLJ 323 : 2003 (3) Mah.L.J. 557 (Mad. HC).
  

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• A negative covenant between a “master and servant” has been viewed strictly by the courts (Niranjan Shankar Golikari Vs. Spinning & Manufacturing Co. Ltd., 1967 I LLJ 740 (S.C. 2J).
  

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• A restrictive covenant beyond the period of employment cannot be valid (Shree Gopal Paper Mills Ltd. v. Surendra K. Ganeshdas Malhotra, AIR 1962 Calcutta 61).
  

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• The rights of an employee to seek and search for better employment cannot be restricted by an injunction. It has also been observed that an injunction cannot be granted to create a situation which implies something like “once a Pepsi employee, always a Pepsi employee”. It has been observed that such a situation would amount to “economic terrorism” or a situation creating conditions of “bonded labour”. It has also been observed that the freedom to change employment for better service conditions is a vital and important right of an employee which cannot be restricted or curtailed by a court injunction (Pepsi Foods Limited and Others v Bharat Coca-Cola Holdings Pvt. Ltd. and Others, 1981-1985 DLT- 122, Delhi HC).
  

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• The law is well settled on the matter that all contracts for restraint of trade are void and subject to section 27 of the Contract Act. The court has also observed that an employee, particularly after the cessation of relationship with the employer, is free to pursue his or her own business or seek employment with someone else. However, during the subsistence of employment, the employee may be compelled to not engage in any other work or divulge business/trade secrets of the employer to others especially competitors (Ambience India Private Limited v Naveen Jain, 2005 122 DLT- 421, Delhi HC).
  

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In suit no 1788 of 2017 on CMA 10760/2017 (Colgate Palmolive (Pakistan) Ltd v Rai Tahir Iqbal), the honourable High Court of Sindh observed with following:

“The restrictive covenant sometimes become unenforceable and creates chaos and anarchy unless some compensatory conditions are assimilated to make it commonsensical, executable and implementable.”

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“So in my considerate view while putting any such condition in the appointment letter the employer keeping in mind the rampant unemployment and joblessness, should also incorporate a condition that if the agreement or bond imposing condition not to join any competitor for a certain period of time then for that particular period of time, the employer must pay the compensation also for the livelihood of such employee who cannot coerce and force to face starvation, deprivation or to remain idle for such period of time without any compensation or remuneration. While determining the question and interpretation of negative covenant in the terms and conditions of the employment, the court ought to persevere with true-to-life approach appreciative to the ground reality rather than interacting outmoded point of view and attitude.” 

Conclusion

Any condition in an employment contract which is against the law or the fundamental rights of a citizen is void and inoperative. Furthermore, any agreement with an employer restraining the exercise of the employee’s right to excel in his or her profession, trade or commerce post-employment is void to such extent. Such terms may only be an attempt on the part of the employer to create some sort of psychological impact in the mind of the employee but cannot withstand the touchstone of law. Hence, negative covenants in employment bonds seem to be a modern form of corporate slavery.

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any organization with which he might be associated.