Dealing with Breach of Contract by Departing Employees: Rights of an Indian Employer

Employers often face challenges with enforcing the contractually stipulated notice period when employees resign from their services and leave (or intend to leave) without serving the entirety of their notice period. A common knee-jerk reaction of employers in such instances would be to, inter alia, withhold or refuse to pay any outstanding salary/amounts owed to the departing employee or to deduct salary in lieu of the unserved notice period from the exit payments of such employees. However, such practice may not entirely align with the extant law, which prohibits such measures in respect of certain categories of employees.

The mishandling of employee exits (in haste or otherwise) and the resultant spiteful behaviour of departing employees may have a host of adverse repercussions for the employer, including reputational and legal risks. Accordingly, it is imperative for employers to understand the existing Indian law governing resignation by employees, the rights of employers and the measures that they may take to prevent or mitigate any potential damage that a departing employee may cause.

Employees have an inherent right to resign from their employment and they cannot be restrained from joining another organisation as that would amount to “restraint of trade” in violation of Section 27 of the Indian Contract Act, 1872. Having said that, it is also a settled principle that unilateral resignation by the employee would not automatically result in the cessation of employment – the employer needs to accept the resignation in order to effectuate cessation of employment.

The Indian Supreme Court has held that a person who takes up employment will have to abide by the contractually agreed terms in order to terminate that employment, and any restrictions in terms of a notice period cannot be held as violative of their right to livelihood or their right to carry on any occupation of their choice. Therefore, while employees have the right to resign, employers have a corresponding right to mandate such employees to serve the notice period as per their employment contract or the organisation’s policies, as may be applicable, unless the parties agree to an earlier or later release date.

Various judicial precedents have upheld the deduction of wages if employees fail to serve the notice period as per the terms of their employment. Courts have held that it would be meaningless to insist upon the requirement of serving the notice period unless there was a corresponding liability on the employee to forego the salary for the unserved notice period. Based on such reasoning, in certain instances, courts have upheld an employer’s act of deducting salary for the unserved notice period, even if the employment terms do not contain an express provision enabling the employer to withhold/deduct salary for the unserved notice period.

However, salary for the unserved notice period cannot be adjusted against any statutory dues payable to the employee, such as gratuity, leave encashment or statutory severance compensation. Furthermore, as per the Payment of Wages Act, 1936, for employees earning wages amounting to INR24,000 or less per month, deduction from salary on account of an unserved notice period is permissible only up to 50% of the wages for the relevant wage period.

In situations where employees are not agreeable to serving their notice period, or abandon their employment without completing the notice period, there are a few other measures that Indian employers may take to protect their interests, in addition to the recovery of salary for the unserved notice period (subject to the conditions/thresholds mentioned above).

Extant Indian labour laws generally do not require employers to issue an experience certificate and/or relieving letters to employees at the time of their exit. However, it is industry practice for prospective employers to require such documents as a prerequisite for onboarding employees. If employees are unwilling to serve their notice period, they may be informed that they will not be entitled to any such exit documents by the employer, as may be required by their prospective employers.

If any reference check/background verification is initiated by an individual’s prospective employer, appropriate comments may be given by the employer regarding the individual’s act of undermining the terms and conditions of their employment at the time of their exit and their failure to honour contractual obligations and complete the relieving formalities.

To strengthen an employer’s position and to inform the employees of the consequences of failure to serve the notice period, employment contracts should contain robust termination provisions and protections in terms of recovery of salary in lieu of any unserved notice period, etc. The provisions should also provide that employees have the right to “buy out” their notice period, subject only to the employer’s approval in this regard. As soon as an employee resigns, an employer should reiterate the requirement for them to serve the entire notice period and remind them about their post-employment obligations, including restrictive covenants (if any).

If an employer is not concerned with the recovery of salary in lieu of the notice period but considers it imperative for a departing employee to serve the notice period (on account of the employee proposing to immediately join a competitor, etc), then it may initiate legal proceedings against the individuals concerned for enforcement of the notice period. However, Indian courts would be inclined to entertain such claims based on the specific facts concerning the extent of the adverse impact on the employer due to the individual's exit on short notice.

While employers have the right to require employees to serve their entire notice period, sometimes it may be more suitable/beneficial to relieve them immediately without serving any notice, to minimise the risk of the disgruntled employees attempting to disrupt the work environment and misappropriate the employer’s confidential and proprietary information. Accordingly, employee exits involving breach of contract are often factually and legally complex, and will have to be managed sensitively. Employers should take note of their options in handling employee exits and exercise their discretion depending on the facts and circumstances of each case.