Business law

assignment:PGCBM22 Uncle Sam Software Inc.

Uncle Sa m Inc. is a UUS based Soft Ware Company. They oopened a subsidiary company in Bangalore

India. They gave each of their employees a training program of 1 month costing the company Rs.220,000

each. Attrition rate in the company was high and the management decided to enter into an employment

bond agreement with each of the employees

Guide : Prof. Tina K Stephen

Submitted BY:- Group

1)Ms Suman Rani :2224206, Sector 14 Gurgaon

2)Ms Kusum Nagpal :2224273, Sector 14 Gurgaon

3) Ms Esha Kalia :2224236, DLF PHASE1,Gurgaon

4) Ms Meghna Govil , 2224276 ,Sushant lok I ,Gurgaon

5)Mr Ravi Pratap singh Tomar: 2224997,Sushant lok I,Gurgaon

6)Mr Sachin Suri:2224214: Sushant lok I,Gurgaon

7)Mr Manoj Kumar :2224302 : Sushant lok I,Gurgaon

8)Mr Saurabh Singhal :2224364: Sushant lok I,Gurgaon

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Question 1:

All employees shall work for a minimum of 1 year for the company. Any employee

who decides to leave the company before the mentioned period has to deposit all

salary and incentives paid to him by the company.

Answer 1:

Issue under consideration:

a) Whether the organization can bind the employees to work for a minimum

period of one year.

b) In case of breach of one year condition, the organization can recover from

the employee all the salary and incentive cost borne by the organization on

such an employee.

Analysis

Facts involved:

Considering the cost incurred by the organization on its employees, it wants to retain

the employees for a minimum period of one year to recover the training costs.

Additionally, the organization has incurred recruitment cost of the employee. A

trained employee, upon leaving the job also involves an opportunity cost to the

organization in form of salary and incentives paid to such employee.

Legal Aspect:

Per se, no clause in a contract which forcibly requires one of the party involved to act

in a manner is legally binding as per law. Such clause may amount to coercion and

thus render a contract void.

However in peculiar circumstances of the case, the organization is incurring huge cost

for training, recruitment and staffing cost for the employees, which becomes a dead

cost for the organization upon quitting of employees.

Keeping in perspective, an organization has the right to indemnify itself against all

the damages and losses incurred because of quitting of a trained employee. The clause

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becomes all the more justifiable under the law, wherein a timeline of one year has

been attached to it wherein the organization has fixed a period within which it

reasonably expects to reap the return of the investments made in the employees.

Section 73 of the Indian contract Act, 1872 provides for compensation of breach of a

contract. As per the said section, where a contract has been broken, the party who

suffers by such breach is entitled to receive, from the party who has broken the

contract, the compensation for any loss or damage caused to him, which the parties

knew is likely to result from breach of contract.

The compensation for the loss or damage would be awarded for any loss or damage:

a) Arising naturally in usual course of things from breach of contract; and

b) Which parties knew at the time of contract as likely result from the breach.

In the given case, the employment contract shall be between the employee and

organization, requiring the employee to serve the organization for a stipulated period

of one year.

On breach of the stipulation of one year period, law entitles the organization to

receive compensation for loss incurred on account of training and salary / incentive

costs for such employee.

However, merely writing in the clause the salary and incentives shall make it a

subjective clause. As an HR manager, it is suggested to the management that an

amount should be provided for in employment agreement at the beginning itself to

avoid any subjectivity. The amount an be arrived at by estimating the amount of

salary and incentives being offered to an employee.

Question 2:

Any employee send on foreign assignment shall not leave the company for a period of

2 years after the completion of the assignment. Any employee who decides to leave

the company before the mentioned period shall have to deposit all salary and

incentives paid to him by the company along with an amount of Rs 5,00,0000/-.

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Answer 2:

Issue under consideration:

a) Demanding payment for all those services ,which has been rendered by

employee.

b) Unreasonable monitory Fine of additional 500,000.

c) Unreasonably asking for 2 Years of BOND.

Analysis

Facts to be involved:

a) Monitory cost of foreign training.

b) Non tangible benefits of training.

Facts involved:

Company finds risky investment when employee leaves the company and trying to

protect the losses.

Clubbing together Point 2 and 3, it becomes 2.5 years of bond (for points relevant to

3, we are answering at separate place).

Legal Aspect:

Very first , compensation of breach of contract needs to be verified with section 74 of

contract act 1872.

Here performance is being measured by time frame and not by other efforts for

paying back the company.

Worth is determined by organization itself and on prima facie it doesn’t look Illegal

hence enforceable.

Certainly breach of a duration shall attract liability for fines / monitory penalization

but bond amount needs to be clarified , if the training is worth 2 years salari+

incentices etc+ 500,000 , it can be enforceable.

Final Comment:-

Bond needs to be there covering companies interest but liqudatory damages needs to

be revivified with proper reasoning.

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Question 3

After the initial period of one year any employee, who wants to leave the company

shall give the company a notice of 6 months, failing which he/she shall deposit to the

company 1 lakh rupees as compensation.

Answer

Situation, on prima facie be partially valid and, therefore, enforceable. In order for

this negative covenant to become valid, partial restraint would have to be reasonable

in the interest of the Uncle Sam Inc. , Employee ,of the all eligible candidates under

the constitution of India.

In the case of covenants of restraint between Company and Employee three

Important question necessarily arise.

1. What are the interests of the employer that are to be protected?

Concerns the Employer is

a. Safeguarding that attrition shall be stopped or minimized.

b. To be able to arrange/delegate / recruit the responsibilities of the Employee

leaving the company.

2. What is the remedy available to the employer to protect the interest?

Notice period shall be high so that Employee will find it almost Impossible to

leave, should be penalized for high monitory (1 Lakh) value

3. Is the mentioned condition is the best solution for safeguarding the interest.

Though the interest expressed in this for is having the risk mitigation toward the

smooth and proper working , but the conditions are extreme and unreasonable as:-

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A Candidate selected for company , shall minimum serve 18 months (12 during

Training and 6 months before leaving the organization). This can be reduced to 60

to 90 days, which gives fairness to the bond.

Monitory compensation needs to be worked out for various levels of employees,

during the service of employee company is using the benefit of training and

employment befits, which needs to be clarified. Maximum deduction shall be

limited to “Basic Salary” component, for the 60 to 90 Days’ Duration .

Please note ,compensation of breach of contract needs to be verified with section

74 of contract act 1872.

Question 4:

At the time of employment the employee shall deposit with the company following

documents

i. All education certificates from 10th

standard and above

ii. Passport

iii. Experience certificates

These documents shall only be released to the employee on complying with all the

exit requirements prescribed by the company.

Answer:

Issue under consideration:

Whether the organization can legally ask the employees to submit the

original certificates and other documents and retain the same till the time

of their exit.

Analysis:

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Facts involved:

The clause in the bond requires the employees to submit all the

educational certificates, passport and experience certificates in original

which shall not be released until the proper exit as per organization’s

policies.

Such a clause has been inserted in the bond bearing the past experience of

the organization, wherein the employees post the mandatory training have

secured alternate jobs. This has resulted the organization’s resource

leakage in terms of money as well as talent built in employees during the

training.

Legal Aspect:

An agreement is a contract between two or more parties and one signed by

the parties involved, it is binding on them . However, there can be certain

circumstances which can render an agreement unenforceable for instance

in case of fraud, coercion etc.

As per the provisions of section 27 of the Indian contract Act, 1872, an

agreement in restraint of trade is void.

Thus, where an absolute clause in agreement is such , which has been

inserted in the contract with an intent to restrict / disable the employee to

carry on the profession or forcibly render his services to the organization,

such clause may not be legally enforceable. No organization can force the

employee or create such conditions for the employees to work against his /

her free consent or under coercion. Possessing the original certificates,

with a view to disable the employees to find alternate job opportunities,

thus retaining them forcibly shall not be a valid provision as per the law.

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However considering the past experience of the organization, a negative

covenant an be inserted in the clause wherein it can be clearly provided

that the original certificates are being retained as a surety for the bond.

Such a covenant shall hold valid on the grounds that the organization

wanted to secure its investments made in terms of financial cost as well as

grooming of the employees.

Thus as an HR manager, the following revised language may be proposed

to the management to achieve the twin objective of the management

under the valid provisions of law:

“ At the time of employment the employee shall deposit with the company following

documents in original

i. All education certificates from 10th

standard and above

ii. Passport

iii. Experience certificates

These documents shall be retained as a surety for the bond and shall be released to

the employee on complying with all the exit requirements prescribed by the

company.”

The aforesaid clause shall safeguard the organization against any coercion

or forceful behavior towards the employees for retaining them on the job.

Further, to the extent possible the passport not only being necessary

document for foreign travel but is also an identity proof, may not be

retained. Attested copy of the same should suffice for organization’s

purpose.

Question 5

The plaintiff shall be working in the business of US based Software Company

within Uncle Sam Inc. subsidiary opened in India and operates in stipulated

business applications.

Present Bond Conditions is:-

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“Employee Shall Not takes up a job with Software Company in Bangalore for a

period of 5 Years, from the date of leaving the company”

Under Section 27: Agreement in Restraint of trade Void. Pro tanto

Given case presents erroneous requirement and demand which is unreasonable

in nature, and violets the principle stated in Sec 27 which is:-

Every agreement by which any one is restrained from exercising a lawful

profession, trade or business of any kind, is to that extant void.

The source of lively hood in Bangalore is lost for a specific skill holder, and hence

the contract term is unreasonable unfair or unconscionable. A contract imposing

a general restraint would, in all probability, be void..

Referring to

“JetAirways(I)Ltd. Vs Mr. Jan Peter Ravi Karnik on 17 April,2000”

Bombay High Court

Bench: S S Nijjar (Who has been Elevated to Supreem Court).

“1. This order will dispose of Notices of Motion 632 of 2000 in Suit No. 711 of 2000, 633 of 2000 in Suit No. 712 of 2000, 634 of 2000 in Suit No. 713 of 2000 and 676 of 2000 in Suit No. 766 of 2000. Since the facts are substantially the same in all the four suits, for facility of reference, the facts are being reported from Suit No. 711 of 2000.” (Source:- Indian Kanoon - http://indiankanoon.org/doc/1359138/)

Where similar situation was raised as :-

Cl 22. During this period of seven years, you shall be exclusively employed by Jet

Airways and perform your duties towards Jet Airways. You shall agree that

during the said period of seven years you shall not take up employment with any

other

Persons/organisations/companies requiring you to perform similar duties as

required to be performed by Jet Airways and shall not engage in any similar

business or vocation requiring you to fly any other Aircraft

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Expression of negative covenant was found in the case, to mitigate the same but

to keep company`s interest intact following was the advisory which connects to

this situation as well.

Employee shall devote the whole of his time, diligence and energy exclusively to

the Uncle Sam Inc. and affairs of the company and shall not engage directly or

indirectly in any business or serve whether as principal, agent, partner or

employee or in any other capacity either full time or part time in any business

whatsoever other than that of the