The Supreme Court has ruled that employers can legally impose penalties if an employee resigns before completing the agreed minimum tenure. This landmark verdict reinforces the power of employment bonds and serves as a warning for job-hoppers.
If you’re thinking of leaving your job before completing the minimum period written in your job agreement, you should think twice.
In a recent case between Vijaya Bank and Prashant B. Narnaware, the Supreme Court of India made it clear that an employer can legally impose penalties if an employee resigns before completing the minimum service time mentioned in the contract.
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This means, for example, if your job contract says you must work for at least 2 years, and you decide to leave early, the company can legally ask you to pay a penalty.
The Supreme Court stated that,
“The restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair, or unreasonable and thereby in contravention of public policy,” and added that such rules help reduce employee turnover and improve efficiency in the workplace.
Let’s understand what happened in this case. In 1999, Prashant B. Narnaware joined Vijaya Bank as a probationary assistant manager.
Later in 2006, the bank announced a new job opening which had a rule that employees would have to sign a 3-year bond, or else pay a penalty of Rs 2 lakh if they left early.
Narnaware accepted the condition and signed the bond. He was then hired as a senior manager (cost accountant) in September 2007. But in July 2009, he resigned to join IDBI Bank.
He paid the Rs 2 lakh penalty to Vijaya Bank but later challenged the clause in court. In 2014, the High Court ruled in his favour and said the bank must return the money.
However, in May 2025, the Supreme Court overturned that decision, saying the service tenure and penalty in the bond were valid and must be upheld.
Now the big question – for how long can a company make an employee work under such a bond? According to legal expert Suma, there is no fixed time mentioned under Indian law, but the contract must always be reasonable. Even though employment bonds are legal, each bond’s terms are checked based on a few important points:
The bond should only apply during the job period and must not stop an employee from taking another job after leaving.
The conditions must be reasonable and must not go against the public interest. Every case is different and will be judged based on its own facts.
These kinds of minimum service rules, also called lock-in clauses, have a major impact on both employees and employers.
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For companies, it helps in keeping good employees, reduces people leaving early, and recovers money spent on training and hiring.
But for employees, it reduces flexibility and can stop them from quitting when they want to. It also discourages joining companies that have very long minimum service rules.
Legal expert Pooja Ramchandani, Partner at Shardul Amarchand Mangaldas & Co., explains the outcome of the Supreme Court decision very clearly:
“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.”
So, what happens to an employee’s career after they leave such a job? Do these penalties affect them later?
The answer is no, says Rachit Bahl, Senior Partner at AZB & Partners.
He says,
“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.”
But he also adds that these terms must be made very clear to the employee before they sign the contract.
he explains,
“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,”
So, does this ruling stop employees from joining another company after resigning from the first one?
Again, the answer is no.
The Supreme Court explained that the Rs 2 lakh was not a punishment, but compensation (liquidated damages) for the training and investment made by the employer.
The employee, Narnaware, was a mid-level manager, and the bank had spent money to train him. This did not stop him from getting another job and didn’t stop his career progress.
Suma R. V., partner at Kochhar & Co., also cleared this point, saying:
she adds,
“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,”
The Court did not talk specifically about clauses that stop employees from working with competitor companies after leaving a job.
But it is important to know that such non-compete clauses after leaving the job are usually not valid in India.
Suma adds,
“They are generally seen as a restraint of trade under Section 27 of the Indian Contract Act, and hence, are not enforceable,”
So, to sum up: Companies can ask you to work for a minimum time and make you pay a penalty if you leave early – but only if these rules are reasonable and clearly explained.
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However, your freedom to take up another job after quitting remains protected, and you cannot be stopped from working with other firms once your contract ends.
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