How much compensation may be recovered under Service Bonds from Employees?

Employers routinely face legal challenges to service bonds they take from employees. A service bond is an instrument by which an employee binds himself to return a certain amount stipulated in the bond to the company in case he resigns from his job earlier than the stipulated time. An interesting question is how much compensation may be recovered upon such bonds by an employer? Whether entire money under a service bond may be recovered or the court has the discretion to reduce the amount?

The general approach of courts towards service bonds in private employment is rather unsympathetic. They interpret service bonds against the employer as the employee has had limited bargaining power. Another reason for unsympathetic treatment is that the breaching party has paid or undertaken to pay a certain amount in case of breach. This would disincentivize or deter breach. Compensation or restitution and not deterrence, is the object of contract law and hence a service bond is a treated as a penalty.

Since the award of compensation is not penal, the quantum of compensation is to be reasonable based on the actual loss. Remote, or exemplary or penal loss disproportionate to the actual loss is not awarded. If it is not possible to prove the loss, the agreed figure towards loss may be granted if otherwise reasonable. However, if it is possible to prove the loss, only proven loss will be awarded. Since a bond is in the nature of a penalty, only losses as proved will be awarded. Therefore, an employee tendering a service bond incurs the liability to pay only those damages which are proved and reasonable having regard to the facts and circumstances of the case.

@ Rakesh Matwa, Advocate