Jumping jobs? A Supreme Court judgement just made it tough, especially for freshers

Mint

20-05-2025

In a development that has the potential to lower attrition rates across industries, a Supreme Court judgement late last week allowed employers to enforce a service bond. The court order clarified that companies can mandate a minimum tenure and recover training costs from employees who leave prematurely without worrying that it will violate the country's contract law.
The judgment stemmed from a dispute where an employee–Prashant B. Narnaware of Vijaya Bank–was required to pay ₹2 lakh as 'liquidated damages' for quitting his job before completing a mandatory three-year service. While the Karnataka High Court ruled in favour of Narnaware, the apex court reversed the judgement in its order on 16 May.
'From the prism of employer-employee relationship, technological advancements impacting nature and character of work, re-skilling and preservation of scarce specialized workforce in a free market are emerging heads in the public policy domain which need to be factored when terms of an employment contract is tested on the anvil of public policy," the court said in its order that has been seen by Mint.
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The order further stated that the service bond in Vijaya Bank's appointment letter did not constitute a 'restraint of trade"–a legal principle enshrined in Section 27 of the Contract Act that typically prohibits agreements restricting someone's right to practice a lawful profession–and was also not opposed to public policy.
Experts said the ruling would pave the way for both public and private sector firms to incorporate and enforce such clauses to protect their training costs and curb early attrition, as long as they keep the terms reasonable and accurately estimate the costs involved.
For instance, 'training bonds'–meant for freshers and junior roles–are already popular in the IT and ITeS sector. Typically ranging from six months to a year with amounts between ₹50,000 and ₹1 lakh, these bonds cover the costs of training new employees and are also used when employees are sent abroad for projects, recognizing the exposure and experience gained.
The latest order will see widespread adoption of such practices beyond the IT and ITeS sector, experts said.
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'The employer can implement such a term of employment and enforce it in case of breach by the employee, by recovering the costs incurred including for training," said Vikram Shroff, partner for employment law at AZB & Partners, while adding that companies need to ensure that 'conditions imposed are reasonable in nature and are not treated as restraint of trade".
At the same time, lawyers point out that it cannot be a penalty. 'The amount payable under bond is not a penalty, as penalty is non-enforceable. It would be in the nature of liquidated damages, which assumes general pre-estimate of damages," noted Arka Majumdar, employment law partner at Argus Partners.
The judgement comes at a time when hiring is going through a sluggish period but companies remain vulnerable to losing their top talent. During the pandemic and for a year after that, attrition was at record highs with employees moonlighting, juggling counter offers and leaving within months. The latest order will impact quick exits in many firms, if applied.
'Pursuant to the latest judgement, employers across sectors may now feel more confident about including such provisions in their contracts, but it remains critical that these are carefully drafted," said Anshul Prakash, partner for employment labour and benefits at law firm Khaitan & Co.
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Prakash pointed out that a bond period of one-three years and compensation reflecting actual training costs or a reasonable estimate is 'likely to be enforceable". The amount should not be disproportionate to the employee's salary or arbitrary.
Both private and public sector firms are likely to follow suit. 'While the order pertains to PSUs, it is not limited to PSUs only and it could lead to private players reworking their employment contracts," said Adil Ladha, partner at Saraf and Partners. 'What constitutes training costs and how much should be recoverable in case of an early exit will be decided by companies on their own and, therefore, employees must pay attention to such clauses."
However, Majumdar of Argus Partners expects public and private sector service bonds to be assessed differently, with courts applying more scrutiny to private sector bonds.