Leaving job early? You could face penalty, per SC

If you’re looking to quit your current job early, without completing the mandatory minimum term that is mentioned in your contract, it's time to think again! Ruling in the case of Vijaya Bank vs. Prashant B. Narnaware, the Supreme Court held that an employer can rightfully impose penalties on an employee who has not fulfilled the minimum service tenure requirement as mentioned in his/her employment agreement.

This means that, for instance, if your employment contract with your company has a minimum tenure of 2 years that you are mandated to complete, and if you decide to quit before this time, your employer could legally penalise you for it.

“The restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair, or unreasonable and thereby in contravention of public policy,” said the SC judgment, calling it essential for reducing attrition and improving efficiency.

What is the maximum time frame an employment bond can enforce in such cases? Are employment contracts absolute in nature, disregarding anything therein could mean hefty penalties for the employee? Read on to know more.

The case, as it happened
In 1999, Prashant B. Narnaware joined Vijaya Bank as a probationary assistant manager. In 2006, the bank advertised for a job that required a 3-year bond or minimum service tenure, failing which would mean a penalty of Rs 2 lakh.

Narnaware signed this bond and was appointed as senior manager (cost accountant) in September 2007. However, in July 2009, Narnaware resigned from his job to join IDBI Bank. While he paid the Rs 2 lakh penalty, he challenged the clause thereafter. In 2014, the high court ruled in his favour, asking Vijaya Bank to refund this amount. However, in May 2025, the apex court overturned the verdict, upholding the minimum service tenure and penalty mentioned in the employment bond.

What is the maximum time frame an employment bond can enforce on employees in such cases?
Suma emphasises that while there is no standard minimum time frame for this purpose, the employment contract should be reasonable. While employment bonds are not absolute, the legality of every employment bond is generally tested considering the following, according to experts:

• The restriction should be operative only during the term of employment and should not restrict the employee from pursuing employment of his interest post-termination of his employment.
  
• The restriction should be reasonable and not against public policy.
  
  
• Each case is different and should be decided considering the factual matrix

How does this impact the employee and employer?
The impact of lock-in clauses can be significant for both employees and employers. From an employer perspective, a minimum service clause can work as effective employee retention and reduce attrition, improve efficiency, and recover costs associated with recruiting and training an employee.

However, from an employee standpoint, such minimum service requirements reduce the flexibility of opting out of a job and could be a major deterrent to joining an organization where such mandated tenures are lengthy.

This could potentially also mean more employees opting for minimum service tenure in service contracts. “Overall, for future employments, this ruling means that employers can lawfully adopt minimum service requirements and reasonable liquidated damages clauses in employment contracts so long as it is not unconscionable, unfair, or opposed to public policy, and the burden would be on the employer to justify their necessity and proportionality,” says Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co.

Do such penalties also affect an employee’s career post their tenure with a company?
No, says Rachit Bahl, senior partner at AZB & Partners. “Clauses in the employment contract, which require the employee to serve a minimum duration and the breach of which requires the employee to pay liquidated damages – are generally considered valid and enforceable, since they only apply to the employee during their term of employment.

However, the same must be very clearly communicated to the employee beforehand.

“Financial consequences for breach should be reasonable & justifiable, and the restriction should also be for a reasonable tenure. The legal position on post-employment restrictions remains unchanged and unaffected by this decision from the Supreme Court,” he adds.

Does this decision mean that employees will be restricted from pursuing employment opportunities with other companies post his/her resignation from the previous company?

No. This, in no way, hampers the freedom of the employee to pursue other career opportunities post they leave a company. As in this case, the SC noted that the Rs 2 lakh charged was not a penalty but rather liquidated damages for Vijaya Bank, which had invested in training Narwarane, a mid-management employee by then. This did not prevent the employee from future employment and, thereby, restrain their trade prospects. Moreover, as Suma R. V., partner at Kochhar & Co., explains, such conditions are not absolute.

“The recent decision of the Supreme Court clarified that the restrictive covenants operating during the subsistence of employment contracts do not put a clog on the freedom of the employees to trade or employment. As per the court, the employers can require the employees to serve a minimum term and to indemnify the employer in case of premature resignations. However, such conditions are not absolute,” she adds.

While the Supreme Court decision did not specifically deal with the restriction not to work with the competitors for a period post-termination in this case, it is important to remember that any bond restricting employees from working with the competitors for a period post-termination (non-compete clauses) is generally not valid and legal. “They are generally seen as a restraint of trade under Section 27 of the Indian Contract Act, and hence, are not enforceable,” adds Suma.