Employment Bonds and the Law: When Resigning Comes with a Price Tag

In India’s evolving labour landscape, employment bonds have become a familiar, though often controversial feature, especially in sectors like banking, IT, and education. These contracts typically require employees to serve a minimum term or face financial penalties, ostensibly to compensate employers for the costs of training. While such arrangements may seem pragmatic from a business standpoint, they also raise important questions about fairness, freedom, and the boundaries of contractual obligation.

The Supreme Court recently stepped in to clarify this legal grey area in Vijaya Bank v. Prashant B. Narnaware, 2025 INSC 691. The case centred on a former employee who resigned before completing a three-year bond period. The bank sought recovery of training-related expenses as per the bond terms. The Court’s ruling, however, did more than decide the fate of one employment dispute—it recalibrated the legal lens through which employment bonds are viewed in India.

At its core, the judgment bridges contract law with constitutional protections. Under the Indian Contract Act, 1872, employers are allowed to recover “liquidated damages” if an employee exits early, but only if the sum reflects a genuine pre-estimate of loss. Penalty clauses that are excessive or punitive in nature fail this test. The Court reinforced this, making it clear that employment bonds cannot operate as deterrents cloaked in the language of compensation.

Crucially, the Court also invoked Article 19(1)(g) of the Constitution—the fundamental right to practice any profession or occupation, warning that overly restrictive bonds may run afoul of this freedom. In doing so, the judgment echoes long-standing constitutional principles: that the freedom to work must not be stifled by unreasonable contractual barriers, and that the dignity of labour is inseparable from the dignity of the worker.

This reasoning is also consistent with Section 27 of the Indian Contract Act, which prohibits agreements in restraint of trade – While the law allows employers to safeguard legitimate business interests, any restriction on employee’s mobility must be proportionate and justifiable.

The broader policy context further supports this shift. As far back as 1984, the Law Commission of India’s 103rd Report on Unfair Terms in Contract cautioned against the widespread use of one-sided clauses in standard employment contracts, particularly where there is an imbalance in bargaining power. The report called for legislative reform to prevent exploitation masked as contractual agreement. More recently, the Industrial Relations Code, 2020 reinforced the need for equitable frameworks that balance employer interests with worker protections.

In practice, many major employers, such as Infosys, TCS, and HDFC Bank, do implement bonds, especially during training or probation periods. But the best of these adhere to the spirit of the law: their clauses are transparent, proportionate, and anchored in actual training costs. Such practices show that it is possible to align corporate interests with legal and ethical obligations.

Yet, concerns persist. According to India Employment Report 2024, jointly released by the Institute for Human Development and the International Labour Organization (ILO), restrictive employment contracts, particularly for younger professionals, dampen labour mobility, hinder innovation and affect long-term skill development. These consequences ripple outward, slowing economic dynamism and undermining aspirations.

Vijaya Bank v. Narnaware therefore marks more than just a legal precedent—it is a call for cultural recalibration. Employers must design bond clauses that protect investment without punishing ambition. Employees, in turn, must read contracts with care, resisting the pressure to sign away their rights.

The takeaway is clear: Employment bonds are not inherently unjust. When crafted and enforced with fairness and transparency, they can reflect a mutual commitment to growth. But they cannot—and must not—be used as tools of coercion. In an economy that thrives on flexibility, innovation, and talent, the law now reminds us that freedom to work is not a privilege; it is a constitutional promise.

Endnotes

1. S.73–74, Indian Contract Act, 1872.

2. Vijaya Bank v. Prashant B. Narnaware, 2025 INSC 691.

3. Constitution of India, Art. 19(1)(g).

4. Law Commission of India’s 103rd Report on Unfair Terms in Contract (1984).

5. Code on Industrial Relations, (2020).

6. Chapter 4: Labour Market Flexibility and Youth Employment, India Employment Report 2024 (Institute for Human Development & International Labour Organization).