Employment Bonds and Section 27: What Indian Employers Need to Know

Employee attrition is at an all‑time high. In India, attrition rates are spiking again following recent hiring surges—hovering around 17–18% across sectors and rising in IT/ITeS after an initial 2024 cooldown. According to a 2023 Deloitte report, Gen Z employees in India switch jobs within 1.2 years on average, with many citing lack of growth or disinterest as key reasons for quitting. Meanwhile, globally, 65% of Gen Z workers leave within the first year, and nearly half intend to move again within two years. Employers today are grappling with attrition rates never seen before.

The Real Cost of Attrition

Attrition is more than a number—it hits an organisation's bottom line hard. It's estimated that replacing an employee costs a Company 50–200% of the employee's annual CTC, factoring recruitment, onboarding, productivity loss, and morale. Sales and client‑facing roles are particularly vulnerable—when talented sales staff walk out with little notice, businesses lose not just products, but momentum.

Training and upskilling—whether on-the-job or off-site—represent direct organizational investments. These costs evaporate when employees depart early. The real cost of attrition is more than HR churn. It’s money — in training, upskilling, and lost opportunity. Companies invest lakhs in onboarding, site-specific knowledge, compliance protocols, and soft skills development. And then the employee walks away — often with barely a week’s notice.

That’s why many organisations — especially in tech, manufacturing, and field sales — rely on employment bonds. But here’s the legal catch: such bonds often toe a narrow line between enforceable restraint and illegal compulsion. This is because, under Section 27 of the Indian Contract Act, any contract restraining trade is void—putting such bonds in a legal grey zone.

And, Courts have swung between ruling in employers’ favour, particularly in cases where the bonds are explicitly tied to the costs associated with training or the expenses incurred when an employee joins the company, and favouring employees in situations where these bonds resemble post-tenure non-compete clauses that may unduly restrict an individual’s ability to seek employment elsewhere after leaving the organization. This oscillation in judicial decisions reflects a complex balancing act that courts must perform, weighing the legitimate business interests of employers against the fundamental rights of employees to pursue their careers freely.

What Does the Law Actually Say?

Section 27 of the Indian Contract Act, 1872, states as follows:

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

Employment bonds may seem to restrict future employment — and therefore risk falling foul of this section. However, Indian courts have created important exceptions over the years, especially when:

• There’s clear justification for the bond (e.g., training expenses),

• The employee voluntarily entered the agreement,

• The restraint is reasonable in scope, duration, and geography.

So, Are Employment Bonds Enforceable?

This is a question that most businesses contend with. And, the not so straightforward answer is: sometimes — if they’re reasonable and proportionate.

Courts have routinely held that:

a. Employers cannot prevent employees from taking up other jobs.

b. But if the bond involves a genuine cost recovery mechanism, it can be upheld.

Key case law includes:

• Niranjan Shankar Golikari v. Century Spinning (1967): Supreme Court upheld non-compete during employment, noting that restraint during employment is valid, but post-employment restraint is not, unless to protect legitimate interests.

• Satyam Computer v. Ajay Kumar (2007): Andhra Pradesh HC enforced a bond requiring payment of Rupees 2 lakhs if the employee left within two years, holding that recovery of training expenses was legitimate.

But, What Makes a Bond Legally Sound?

To withstand scrutiny, employment bonds should be:

• Specific: Mention exact training, costs incurred, and the tenure expected.

• Proportional: A Rupees 10 lakh penalty for 20,000 Rupees' worth of training won’t hold.

• Time-bound: Typically 1–3 years is viewed as fair.

• Mutual: Businesses must make sure to avoid one-sided clauses that impose obligations only on the employee.

• Transparent: Employee should ideally sign the bond before joining or immediately upon onboarding.

So, what does a sample clause look like that Courts may favour?

It may look something like this - “The employee agrees to undergo induction and project-specific training costing Rupees 1,20,000. If the employee resigns within 18 months of joining, they shall reimburse the pro-rated cost of the training.”

“This bond does not prevent the employee from seeking alternate employment. It only seeks to recover legitimate costs if the tenure is cut short.”

Here's a Practical Example From a Case That Was Presented to Us

A mid-sized IT firm recently approached us after multiple early-exit cases left them with nearly Rupees 35 lakhs in training losses. Upon examining their employee agreements it became clear to us that their existing bond clauses were vague, referencing only “internal resources spent.”

Here's what we did. We:

• Audited their onboarding and training modules,

• Worked with HR to assign cost metrics,

• Drafted role-specific bonds for tech, sales, and support staff,

• Ensured enforceability through proportionate, time-bound, and consent-driven terms.

What did all of these steps result in? Within six months, three employees who had initially planned to exit chose instead to serve out their bond period. Each gave due notice of their intention to leave, allowing for a smoother transition and enabling the company to plan for the change. At this juncture, it’s important to recognise that while an employment bond can help disincentivise abrupt exits, using sanctions to compel someone to stay in a role they no longer want is rarely advisable — from either an HR or employee morale perspective. Bonds can cushion a business against sudden disruptions; they are not, however, a substitute for long-term employee engagement or retention strategies.

Here is a Practical Guide for Employers

1. Cost Clarity: Break down your investment per employee.

2. Consent & Communication: Get signatures after a transparent discussion.

3. Time Frames: Avoid overly long tenures — 1–2 years is typically fair.

4. Soft Enforcement: Use bonds to trigger conversation and mediation, not litigation.

5. Review Regularly: Update bond clauses to reflect changing roles and costs.

In Conclusion

Employment bonds sit at the intersection of commercial pragmatism and legal scrutiny. When thoughtfully designed, they help protect an employer’s investment in training and onboarding without infringing on an employee’s right to pursue alternative opportunities. The key lies in balance and transparency.

They are not meant to serve as punitive traps — but rather as fair deterrents against unjustified early exits. Courts will uphold a bond when it is backed by measurable training costs, executed with informed consent, and proportionate in both scope and consequence.

At a time when employee loyalty is fluid and upskilling investments are high, well-drafted employment bonds can offer much-needed certainty — provided they’re built on fairness, and not fear.