On 14 May 2025, the Supreme Court of India delivered a landmark judgment in Vijaya Bank v. Prashant B. Narnaware, upholding the enforceability of employment bond clauses that require employees to serve a minimum period or pay liquidated damages if they resign early.
The Court ruled that such clauses are valid if they are reasonable, proportionate, and intended to recover actual costs like training and recruitment, rather than to penalise employees.
This verdict, which overturns a Karnataka High Court decision, is expected to reshape employment practices across both public and private sectors in India, impacting job mobility and contractual negotiations.
Supreme Court Upholds Reasonable Employment Bonds: What This Means for Workers and Employers
The Supreme Court’s decision came in response to a case where Vijaya Bank required a newly appointed officer to sign a three-year service bond, with a penalty of ₹2 lakh for early resignation. The employee, Prashant B. Narnaware, left before completing the stipulated period, and the bank sought to enforce the bond.
The apex court found that the bond was clearly communicated, voluntarily agreed upon, and not excessive in duration or amount. The judgment emphasised that such clauses are not a restraint on trade under Section 27 of the Indian Contract Act, as they do not prevent employees from seeking other jobs but merely require them to compensate the employer for specific, quantifiable losses.
The Court also pointed out that the ₹2 lakh figure reflected actual recruitment and training costs, as well as operational disruptions caused by attrition.
Legal experts and HR professionals have noted that this ruling provides much-needed clarity on the enforceability of employment bonds, which are common in sectors like IT, banking, and engineering. “As long as the bond amount is justifiable and the tenure reasonable, employers can now confidently include such clauses in their contracts,” said Rituparna Chakraborty, co-founder of TeamLease Services, in a recent interview.
However, the Court also made it clear that if the amount is arbitrary, punitive, or the period is unreasonably long, such clauses would still be struck down as unconscionable.
Background: Changing Landscape of Employee Rights and Employer Protections
Historically, Indian courts have often sided with employees in bond disputes, citing Section 27 of the Contract Act, which renders agreements in restraint of trade void. Bonds were frequently struck down if they were seen as restricting an employee’s right to work or imposing harsh penalties.
However, the Supreme Court’s latest decision draws a clear distinction between clauses that recover genuine business expenses and those that are intended to punish or deter employees from leaving.
The judgment also referenced the earlier precedent set in Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd., which permitted reasonable restrictions tied to training or skill development costs.
The ruling comes at a time when attrition rates in India’s organised sector remain high, with companies investing heavily in recruitment, onboarding, and training. According to a 2024 report by Naukri.com, average attrition rates in IT and BFSI sectors hovered around 18-20%, leading many employers to seek contractual safeguards.
The Supreme Court’s verdict is expected to encourage more companies to adopt transparent, well-documented bond policies, while also prompting employees to scrutinise contract terms more closely before signing.
News in Q&A:
1. What did the Supreme Court rule regarding employment bonds in the Vijaya Bank case?
The Supreme Court upheld the validity of employment bond clauses requiring employees to serve a minimum period or pay liquidated damages upon early resignation. The Court found such clauses enforceable if they are reasonable, proportionate, and aimed at recovering actual costs like training and recruitment, rather than penalizing the employee.
2. How does this ruling affect employees and employers in India?
For employees, this ruling means that they must carefully consider the terms of employment bonds, as courts may enforce them if deemed reasonable. For employers, it provides legal clarity to include such clauses in contracts, ensuring compensation for investments in training and recruitment if an employee leaves prematurely.
3. What criteria did the Court consider to determine the enforceability of the bond clause?
The Court assessed whether the clause was reasonable in terms of duration and amount, voluntarily agreed upon, and intended to recover actual costs incurred by the employer. It emphasized that such clauses should not be arbitrary or punitive and must not restrain the employee from seeking other employment opportunities.
4. Does this ruling apply to private sector employment contracts as well?
While the case involved a public sector bank, the principles laid out by the Supreme Court could influence private sector employment contracts. However, the enforceability in the private sector would still depend on the reasonableness and fairness of the bond clauses, assessed on a case-by-case basis.
5. What precedent did the Supreme Court rely on in making this decision?
The Court referred to previous judgments, including Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., to distinguish between permissible and impermissible restrictive covenants. It clarified that clauses operating during the term of employment, aimed at recovering legitimate costs, do not constitute a restraint of trade under Section 27 of the Indian Contract Act.
