An employment contract usually governs the formal arrangement between an employer and an employee. An employment bond can be included within the main agreement or is ancillary to the employment contract and covers specific circumstances.
Employment bonds are usually created when an employer has spent money investing in the training and upskilling of an employee. Employment bonds can also be used as an inducement to attract a new employee to an organisation.
Employment bonds are enforceable in law but only if specific criteria apply.
What are employment bonds?
Employment bonds cover specific situations, most commonly when the employer pays for training so that the employee gains more skills or a qualification.
An employment bond will typically require that an employee remains with the company for a set period after completing the training. The correct description is that the employee is bonded to the company for the length of time stated in the bond.
The bond will also contain an amount of compensation that must be paid to the employer if the employee leaves before the end of the bonded period.
Employers benefit from increasing the knowledge and skill of employees via training and further qualifications, which the employer pays for. It’s a form of investment to develop areas of the business where new skills are required.
In return for this investment, the employer will require the employee to commit to remaining with the organisation for a specified period in return for the training received.
Other types of employment bond
A sign-on bonus is an inducement often used to encourage employees to leave their current employment and join a new organisation. There are several different ways this can work.
A sign-on bonus can be used as a top-up or sweetener for a salary or package that is below what the recruit is looking for. This can help the employer get the right person for the job. The bonus may be sufficient to persuade that person to sign on the dotted line, but the employer is not committed to this as part of their ongoing remuneration. It’s literally a one-off payment.
An employee on a temporary or provisional contract could be persuaded to sign permanently with the employer if a financial incentive is offered in the form of a sign-on bonus.
A sign-on bonus creates an employment bond because the agreement usually requires a specific commitment period before the money is awarded. If the employee doesn’t fulfil the minimum period, then under the terms of the bond, they will be required to pay a penalty. Usually, this is in the form of a partial or complete refund of the money.
Can an employer enforce the terms of an employment bond?
Over a century ago, a landmark court case in the UK set a precedent that employment bonds are enforceable. The recent Singaporean case of Xia Zhengyan v Geng Changging (2015) supports the precedent.
In Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd (1914), the court decided that an employment bond could be enforced if the agreement included a clause on the payment of damages. The court stated the amount of the damages must be an honest and representative estimate of the employer’s loss arising from the breach of or early termination of the employment contract.
The flip side to this is a provision to pay liquidated damages can be deemed unenforceable and, in fact, a penalty, if the sum sought, is excessive when weighed against the losses that stem from the breach of contract.
The premise of enforceability was developed in another case in the UK Supreme Court in 2015: Cavendish Square Holdings v El-Makdessi. This case distinguished between enforceable liquidated damages and an unenforceable penalty clause. It also gives specific detail on the test to be applied with four separate elements, known as the Cavendish test:
What legitimate interest is the clause protecting?
The concept of legitimate interest means the rights or interests the bond creates in the specific context of an employment bond. The employer’s right is to ensure that the money spent training an employee is not wasted and the benefit accrues to the company, so the employee doesn’t leave as soon as training is completed.
Does the clause create a secondary obligation?
In the context of an employment bond, the primary obligation is usually the period the employee is required to complete before they can terminate the employment contract.
The secondary obligation is the requirement to pay the employer a specified sum of money if the employee breaches this term.
Is it the legitimate interest of the employer to impose a secondary obligation?
The legitimate interest is the right to recover a sum of money from the employee to replace the amount spent on training for which the organisation has not derived any benefit.
Is the secondary obligation proportional to the legitimate interest of the innocent party?
The secondary obligation must be valid and proportional to the penalty paid by the innocent party, in this case, the employer. The bond amount cannot be disproportionate to the amount of investment made in the employee.
Employee rights of defence against the terms of an employment bond
An employment bond is essentially part of the employment contract, so an employee can cite many common contractual defences when challenging the legitimacy of an employment bond.
The success of an employee’s defence against a claim made by the employer under an employment bond will ultimately depend on the circumstances of each individual case. However, there are some common heads of defence which an employee may be able to rely on.
Duress and unconscionability
If an employee can show duress or coercion at the point of signing the contract, they may be able to mount a successful defence against the employer and potentially defend an employment bond claim from the employer.
Unconscionability is a situation where the relationship between the employer and employee is distorted, and the employer has far more leverage. It could be the employee doesn’t understand the full reach of the bond or what it might mean to their future actions and was induced by the employer to sign.
If the training or further qualification never materialises in the form the employer promises, the employee may be able to make a successful claim under the bond based on misrepresentation.
Final thoughts on employment bonds
The Employment Act governs the relationship between employer and employee in Singapore. However, this statute does not contain any provisions on employment bonds.
Employment bonds can be a fair way to protect an employer who invests time and money in upskilling employees. However, they can also be used unfairly with onerous compensation terms, or invoked when no training has even been provided.
Recently, the courts in Singapore have found numerous employment bonds unenforceable because they were effectively a penalty rather than fair compensation for time and money invested by the employer.
If you are faced with signing an employment bond or are an employer who wants to draft one, it is worth seeking out professional legal advice to ensure the clause or contract is fair and ethical, and likely to stand up to litigation if it ever comes to that.
Frequently asked questions
What happens if an employee terminates their employment before the bonded period ends?
If an employee leaves the employer before the end of the bonded period, they are usually required to pay a sum of money to the company. This reflects the employer’s investment in their training and upskilling, for which the employer will not derive any benefit.
What happens if the financial compensation detailed in the employment bond is likely to be too high for that employee to repay?
If the employer thinks the sum of money in the employment bond is too high for that employee to be able to repay, then they may require the employee to produce a guarantor before the bond is signed.
What is the best way for employees to protect themselves if asked to sign an employment bond?
An employee should never feel rushed to sign a bond and must be allowed time to consider the clause and show it to a legal professional if necessary. The clause should detail the training which is to be offered. The period of the clause should be reasonable, and the damages stated should be commensurate with the time and investment the employer is making.
It can be challenging for an employee to necessarily evaluate this themselves, which is why the professional advice of an experienced employment lawyer can prove so helpful.