By: Ashish Chauhan and Nipun Sapru*

INTRODUCTION

There has been a visible shift in mature jurisdictions pertaining to the enlargement of assessment of competitiveness on the labour/employment side of the market. This is particularly important because anti-competitive practices on the labour side of markets undermine the allocative efficiency and welfare outcomes that competition law seeks to preserve. When employers collude through mechanisms such as no-poach agreements, wage-fixing arrangements, or independently through restrictive non-compete clauses, they suppress competition for labour and artificially depress workers’ wages. Employment bonds are of similar nature, which have been in discussion post the Supreme Court Judgement in the case of Vijaya Bank v Prashant B. Narnawane, where the court upheld their validity. However, until now, such bonds have only been assessed on the altar of Constitutional and Contract Law. Through this article, the authors would try to analyse these bonds through the Competition Act 2002 and allied notes released by the Competition Commission of India (hereinafter ‘CCI’), questioning the antitrust feasibility of these bonds.

CASE BACKGROUND

The dispute in Vijaya Bank & Anr. v. Prashant B. Narnaware revolved around the enforceability of an employment bond. The employee had executed a service bond that required him to serve the bank for at least three years or pay ₹2 lakh in liquidated damages to compensate for recruitment and training costs, if she plans on an early exit. The employee, in the case, resigned before completing the mandatory tenure and went ahead to challenge the clause as void under Sections 23 and 27 of the Indian Contract Act, 1872 alleging that the bond constituted an unreasonable restraint of trade along with violation of his constitutional rights under Articles 14 and 19(1)(g). The High Court had accepted these contentions and declared the clause unenforceable by the virtue of being oppressive and against public policy.

However, allowing the employer’s appeal, the Supreme Court reversed the decision stating that the clause did not amount to a restraint of trade under Section 27 of the Indian Contract Act, 1872 because it operated only during the subsistence of employment and did not restrict post-termination occupational freedom. The Court focused on the doctrinal distinction between restrictive covenants that operate to secure continued performance during employment and post-employment restraints disabling an employee from pursuing their profession. It further rejected the public policy argument, noting that in a competitive banking sector employers incur significant hiring and training costs, and that minimum-tenure obligations help maintain workforce stability and protect legitimate commercial interests. The liquidated damages were found to be reasonable and not penal in nature. Consequently, the Supreme Court set aside the High Court’s decision and upheld the validity of the service bond.

AN ALTERNATIVE ANTITRUST ASSESSMENT OF EMPLOYMENT BONDS

Before engaging in this discussion, it is necessary to understand the nature of an employment bond. Employment bonds are defined as an agreement between an employer and an employee that imposes certain conditions on employees. These conditions include a minimum period of service, repayment of training costs, or restrictions on early termination. The penalty for early termination is often a sum of “liquidated damages”. Essentially in such cases the employee’s freedom to pursue alternative employment opportunities are limited due to financial constraints, therefore, making the employer attain a position of monopolist nature during the tenure of contract. Best remuneration for the labour no longer remains as the sole determinant of the competition. Furthermore, the market forces are upset through additional factors like the employment bonds’ liquidated damages.

The following hypothetical can assist us in understanding the situation:

A Company ‘A’ hires ten Artificial Intelligence (hereinafter ‘AI’) engineers on a bond that forces them to work for three years at a fixed pay of $100 a month. Company ‘B’ hires five engineers on normal contracts at the same pay. After two years, the AI market grows quickly and the usual wage for these engineers rises to about $1,000 a month. Company B raises salaries to keep its workers and starts looking for new hires at the updated rate. But the engineers at Company A remain stuck at $100 a month because they are tied to the bond. Leaving the job would mean paying high damages, so most of them have no real choice but to stay. This creates a clear imbalance. Company B cannot hire enough engineers because those at Company A cannot move, even though the market now offers far better pay. At the same time, the workers at Company A continue to receive wages far below the market rate.

Under the Indian Competition Law, these bonds would be treated as an agreement entered between an employer and their employee who are at different stages of the production chain, that is,  the employee renders specialised services to the employer, who in turn utilises such services and labour as a factor of production. Hence, its violation can then be argued as a vertical anti-competitive agreement falling under Section 3(4) of the Competition Act, 2002.

Section 3(4) of the Competition Act deals with agreements between enterprises. Here, an employee may be characterised as an enterprise within the meaning of Section 2(h), insofar as the definition encompasses any person engaged in an economic activity involving the provision of services. The explanation to Section 2(h) further clarifies that “economic activity” includes a profession or occupation. Complementing this, Section 2(u) recognises that an employee renders a service to a potential user, namely the employer. On this basis, an employment bond may be conceptualised as a vertical agreement between the employee and employer where the employee operates in the upstream market as a supplier of labour services, while the employer functions in the downstream market as a purchaser utilising those services as an input.

Employment Bonds then may be characterised within the framework of Section 3(4) of the Competition Act in the form of exclusive dealing or refusal-to-deal arrangements. Conceptually, they resemble an exclusive dealing agreement insofar as they restrict an employee from engaging with any undertaking other than the employer, without an additional burden of a certain sum. Simultaneously, they operate as a refusal-to-deal arrangement by compelling the employee to abstain from supplying services to competing enterprises unless the conditions laid in the bond are fulfilled. The competitive harm arising from such restraints is cognisable under Section 19(3) of the Competition Act, as employment bonds impede the free mobility of labour which is an essential factor of production and prevent employees from offering their services in the market, artificially limiting the availability of talent to rival firms, thereby generating appreciable adverse effects on competition (hereinafter ‘AAEC’).

RELATIONSHIP BETWEEN AN EMPLOYMENT BOND AND A NON-COMPETE AGREEMENT

It is essential to delve into another instrument that the employers utilise to restrict labour mobility, and which has been discussed to a large extent, i.e., Non-Compete Clauses. A non-compete clause is a contractual restraint that prohibits an employee from engaging in professional activities that may be regarded as competitive with the employer’s business ‘post the termination’ of his employment as against the Employment bonds that are effective ‘during the period’ of the employment. Such clauses are typically justified by employers as methods to protect legitimate proprietary interests such as confidential information, trade secrets, client relationships and goodwill which the employee receives in the course of employment. However, Section 27 of the Indian Contract Act, 1872 declares every agreement restraining a person from exercising a lawful profession, trade or business, void subject  to only the narrow statutory exception applicable to the sale of goodwill. Thus, unlike common law jurisdictions that employ a reasonableness test to evaluate the scope and duration of post-employment restraints, the Indian position is marked by a statutory presumption in favour of labour mobility and freedom of trade.

From an antitrust lens, the problems posed by the non-compete agreements are similar to that posed by Employment Bonds as discussed above. Just like the employment bonds, non-compete agreements disrupt the process of efficient allocation of talent across the market by artificially preventing employees from offering their services to rival firms for a specified duration and within a defined geography, thereby suppressing the competitive mechanism of wage bidding and job matching. This restraint reduces employers’ incentives to improve working conditions, impedes wage growth, and may create informational asymmetries in favour of incumbent firms. At an aggregate level, pervasive post-employment restraints reduce labour market fluidity, raise rivals’ hiring costs, and can induce a form of input foreclosure by limiting competitors’ access to skilled personnel.

With respect to non-compete, Indian competition regulators have something to say, unlike the employment bonds. In 2017, CCI issued a non-binding Guidance Note pertaining to non-compete clauses in combinations. A two-prong test was recommended which stated a non-compete to be justified only in instances of them being a) directly related to the transactions; and b) necessary and proportionate for the implementation of the combination. Thus, a non-compete must be ancillary and economically and factually linked to the main purpose of the combination. Furthermore, the temporal length, geographical length, persons covered, and the subject matter of the restraint must be proportionate in nature.

Similarly, a  two-pronged threshold can be borrowed for employment bonds.

First, the employment bond must be closely connected to the bonafide employment investment and restricted in temporal and other substantive scope to the extent necessary for recovering such investment (close connection test).  The employer should document the specific and quantifiable outlay that justifies the bond through evidence-based justification. Even territorially and functionally, the bond must be limited to the markets and roles where the employer actually uses the trained skills.

Second, there must be a proportionality inspection, and the employer must show that less burdensome alternatives like prorated repayment or retention bonuses would reasonably not protect the legitimate interest of the employers (proportionality test). The bond amount must not be an arbitrary or punitive figure being used as a deterrent to resignation.  It must reflect a reasonable advance estimate of the actual loss, the employer is likely to suffer, if the employee leaves early and should decrease proportionately with the time already served.

CONCLUSION

The neutral outlook of the courts for employment bonds under the labour law and contractual jurisprudence requires fresh re-inspection. In current economy, labour itself constitutes a critical input market and any restriction on it has the capacity of distorting competitive outcomes as profoundly as restraints in product markets. From an antitrust lens, employment bonds can have AAECby suppressing wage discovery, foreclosing access to skilled labour for rival firms, and insulating employers from competitive pressures that would otherwise correct remuneration and working conditions. Although temporal differences exist between the two, effects caused by non-compete clauses and bonds significantly overlap. Thus, the Guidance Note on Non-Compete in Combinations issued by CCI offers us a template to address this gap. A similar close-connection and proportionality framework can be transposed on employment bonds. Such a framework would distinguish legitimate cost-recovery mechanisms from anticompetitive devices that entrench monopsony-like control over labour. It is of growing importance that we integrate competition law principles into the assessment of employment bonds as labour markets are becoming more specialised and dynamic, preserving allocative efficiency and worker welfare requires recognizing that restraints on employee mobility are also restraints on competition. Such an approach is necessary if India wishes to align its antitrust enforcement with the global standards.

Ashish and Nipun are 5th year law students at Dr. Ram Manohar Lohiya National Law University, Lucknow and members at Kautilya Society, RMLNLU.