• 19 Jun 2025

Is ₹2 Lakh Penalty for Resignation Before Job Bond Term Legal? – Supreme Court Verdict Explained

In India’s competitive job market, many employees unknowingly sign job bonds that impose penalties for early resignation. One such case recently reached the Supreme Court, raising the question: Can an employer legally impose a ₹2 lakh penalty for resigning before the bond period ends?

Case Background: Vijaya Bank vs Employee

Vijaya Bank hired a Senior Manager under a contract that required a minimum three-year service, failing which the employee had to pay ₹2 lakh as a penalty. The employee resigned after two years to join another bank, paid the penalty under protest, and challenged the clause in court as a violation of Section 27 of the Indian Contract Act, which bars agreements restraining trade.

While the High Court ruled in the employee's favor, Vijaya Bank appealed to the Supreme Court.

Supreme Court’s Ruling: Validity of the Job Bond

The Supreme Court overturned the High Court decision and upheld the employment bond and the penalty. The Court clarified that the clause did not restrict the employee from working elsewhere after resignation. Instead, it only required a minimum service period or payment of compensation for leaving early.

The Court emphasized that Section 27 targets post-employment restrictions, not conditions tied to the employment period itself.

Why the Penalty Was Considered Reasonable

The Court highlighted that public sector banks invest heavily in training and recruiting employees for senior roles. The ₹2 lakh penalty was deemed reasonable and proportionate to the salary and position of the employee. It wasn’t considered an unjust enrichment or arbitrary punishment.

Section 27 of Indian Contract Act: Key Legal Position

Section 27 of the Indian Contract Act prohibits agreements that restrain lawful trade or profession. However, courts have consistently held that conditions applicable only during employment (and not after) do not fall under this prohibition. This principle was reaffirmed in the Vijaya Bank case, following earlier rulings like Niranjan Golikari v. Century Spinning.

Practical Takeaways for Employees and Employers

For Employees: Always read job bonds carefully. Understand penalty clauses and clarify potential financial obligations before signing. Early resignation could trigger enforceable penalties if the clauses are reasonable and proportionate.

For Employers: Ensure employment bonds are drafted clearly, with fair service periods and proportionate penalty amounts that reflect actual training or recruitment costs. Proper communication during hiring can prevent legal disputes later.

Broader Perspective: Employment Bonds in India

Employment bonds are widely used across sectors like banking, IT, and education. However, their enforceability depends on reasonableness, employee level, job nature, and the actual loss incurred by the employer.

Conclusion: Know Your Rights Before Signing Job Bonds

The Supreme Court’s decision confirms that reasonable job bonds with minimum service clauses and proportionate penalties are legally enforceable. Employees must stay informed, understand their contractual obligations, and seek legal advice if unsure before signing such agreements.