Employment Bond: What is It & Can It be Enforced in Singapore?
Employer-employee relationships depend primarily on the terms and conditions stated in the employment contract. Upon entering into employment contracts, we might sometimes enter into employment bonds.
An employment bond can be created in a few instances. One example could be where the employer pays for the training of the employee – the employee would then be considered to be ‘bonded’ to the company for a number of years. If the employee chooses to terminate their employment before the agreed-upon period, the employee would be liable to pay a sum of money to the company.
More crucially, an employment bond is different from a liquidated damages clause. A liquidated damages clause is a clause that provides for a sum of compensation if a term of the employment contract is breached. On the other hand, an employment bond is inclusive of all the terms and conditions found in a standard employment contract, including a liquidated damages clause. Hence, the focus of this article is on the bond agreement that exists between the employee and the employer, and not a liquidated damages clause.
This article will provide an overview of employment bonds in Singapore with examples of situations when such bonds may be enforceable. In particular, it will cover:
What is an Employment Bond?
An employment bond is an agreement entered into by an employer with an employee. This agreement would state that the employee is required to remain with the company for a minimum period of time after joining the company, and in scenarios where they are sent for training.
Usually, the employer and the employee would further agree that if the employee leaves before the agreed-upon time, the employee will have to compensate the employer a certain amount of money.
What is the purpose of an employment bond?
An employer might draw up an employment bond agreement because, at first glance, an employment bond appears to be reasonable, fair and advantageous for the employer. In other words, an employment bond is an employer-centric tool. It functions as a way of investing in the employee’s learning and development, where the bond requires an employee to remain with the company in return for training received. This ultimately benefits the company because an employee would be better placed to perform well and succeed in their job having undergone the relevant training.
However, when an employee enters into a bond agreement, it creates an obligation on the part of the employee where they can be liable for a sum of money to replace the employer’s expenses for the training of the employee. If the amount of money used to replace the employer’s expenses is too much, and the employer foresees that the employee will not be able to pay in the event of a breach, they may require the employee to have a guarantor who will take the financial responsibility if the employee cannot.
Does a sign-on bonus create an employment bond?
A sign-on bonus is a financial incentive that an employer offers to the employee. For instance, an employee who completes an initial contract of 1 year, and agrees to sign on as a permanent employee, will receive a sign-on bonus. It is usually a one-time payment, which means that it is not included in your overall compensation plan.
Employers may offer a sign-on bonus to encourage an employee to join their company. For example, if a candidate is planning to leave their current employer before receiving their annual bonus, offering a sign-on bonus during salary and onboarding negotiations can serve as a pull factor to stay in the company. Further, a sign-on bonus could also serve to counter a lower salary or benefits package that may not initially match the candidate’s expectations.
A sign-on bonus creates an employment bond because there is usually a minimum time period that an employee has to fulfil before being awarded the bonus. This creates a contractual obligation on the part of the employee to either fulfil the minimum time period until it is completed, or pay a penalty.
In addition, to prevent an employee from leaving soon after they receive their sign-on bonuses, employers would usually add a clause in the employment contract whereby the employee agrees to refund the sign-on bonus amount (partially or pro rata) if they leave the company before the contractually-agreed upon time period.
Are Employment Bonds Enforceable in Singapore?
The starting point on whether employment bonds are enforceable can be found in the UK case of Dunlop Pneumatic Tyre Company v New Garage and Motor (“Dunlop Pneumatic Tyre Company”).
In Dunlop Pneumatic Tyre Company, the courts decided that an employment bond is enforceable if the contract includes a clause on the payment of liquidated damages, and the amount of damages is an honest pre-estimate of the loss stemming from the early termination or breach of the contract. On the contrary, a provision will be deemed as a ‘penalty’ and unenforceable if the damages or obligation sought is excessive when compared to the losses that could possibly be proven to stem from the breach of contract.
The Singapore case of Xia Zhengyan v Geng Changqing, agreed with the approach used in Dunlop Pneumatic Tyre Company. The UK Supreme Court further expanded this traditional test in the 2015 case of Cavendish Square Holdings v El-Makdessi (“Cavendish”). In Cavendish, the test laid out by the courts is as follows:
- What legitimate interest does the clause protect?
- Legitimate interest refers to either the interests or rights that are created by the clause. In this context, the right that is created by an employment bond is the employer’s right to ensure that money spent training the employee is not wasted. This could occur if the employee leaves right after receiving training, without completing the bond.
- Is there a secondary obligation created by the clause?
- As a matter of contract law, a contract creates primary and secondary obligations. In the case of employment bonds, a primary obligation would be to ensure the fulfilment of the bond period on the part of the employee. Consequently, a secondary obligation would be the obligation to pay a sum of money following a breach of contract.
- Is it the employer’s legitimate interest to impose such a secondary obligation?
- As mentioned above, the question is whether it is valid for the employer to impose a sum of money on the employee following a breach of contract. It could be valid because the penalty is paid to replace the amount of money that was expended on the employee for training.
- Is the secondary obligation of the contract-breaker to protect that interest considered proportional to the legitimate interest of the innocent party?
- This part of the test is to understand if the secondary obligation imposed is proportionate and valid in relation to the penalties paid by the innocent party.
The answer to the questions in the Cavendish test laid out above would determine if the employment bond contains a clause that amounts to a penalty. Even if the amount is not a genuine pre-estimate of loss as stated by the employer, it does not mean that the specific clause detailing the amount is automatically qualified as a penalty clause. In fact, the Cavendish test is more employee-centric in that it is broader and takes into account the legitimate interests of the employee.
Following the Cavendish test, an example where a bond might be unenforceable is when the bond is deemed to be unreasonable or one-sided, e.g., if the penalty amount is disproportionate to or twice the amount invested in training the employee.
I have Signed an Employment Bond with My Employer. If I Want to ‘Break’ the Employment Bond, What Defences Can I Invoke?
When an employee enters an employment contract, all standard contractual obligations would apply and should be followed. A standard contractual obligation could be fulfilling the job scope under the contract, or the fulfilment of a minimum time period before they can quit their job. These contractual obligations are then breached if the employee decides to break the bond, allowing the employer to have a claim against the employee for breach of contract.
Since all standard rules of contract apply and should be followed, normal defences such as duress and misrepresentation would apply when a claim for breach of contract exists:
Duress and unconscionability
Duress can be used as a defence when the employee is able to prove that they signed the contract while being coerced or forced. For example, where there are physical threats of harm or where the employee’s movable personal property, such as personal items like a mobile phone or wallet, was being wrongfully withheld by the employer. Such circumstances may constitute a successful defence against an employment bond claim.
Another situation in which an employee may succeed in their defence against enforcing an employment bond would be in the case of unconscionability. This is a case where the employer had far more bargaining power than the employee. As such, the employee signs the bond without understanding the full extent of their obligations under the bond, and was induced by the employer to sign an unconscionable contract. In this case, the court might declare the contract to be invalid.
If the promised training, upgrading and upskilling never happened, this would constitute misrepresentation of the employment bond contract. The employee cannot be expected to honour the employment bond.
Nevertheless, please understand that even if the various defences are set out above, the applicability of these defences is ultimately fact-dependent on each individual’s case and the specificities of the contract. It is therefore important to seek legal advice from an employment lawyer in this regard, as there are no guarantees that your case might succeed by raising these defences.
If you have signed an employment bond or wish to clarify if your employment contract includes such a bond, it is recommended that you seek legal advice from a lawyer who specialises in Singapore employment disputes.
An employment disputes lawyer can provide you with an assessment of the likelihood that the employment bond is enforceable against you, and therefore assist you in making an informed choice on whether you should terminate your bond early.
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