Job lock-in clauses are valid if fair, but not always enforceable: Supreme Court

In a key judgment, the Supreme Court has said that companies can include minimum service requirements or job lock-in periods in employment contracts if these conditions are reasonable, fair

and protect business interests. This means that employers can now ask for compensation from employees who leave early, if the clause is not unfair or too harsh. The ruling is expected to

shape how job contracts are written and followed in India going forward.

The case Vijaya Bank & Anr. vs. Prashant B. Narnaware involved a dispute over a clause in an appointment letter requiring the employee to serve at least three years or pay ₹2 lakh as

liquidated damages upon premature resignation. Prashant resigned early and paid the amount under protest, then filed a writ challenging the clause as unconstitutional and against public

policy.

The High Court agreed with him and quashed the clause. Vijaya Bank appealed to the Supreme Court, which upheld the clause, stating it was not a restraint of trade or unfair, and served a

legitimate business interest.

The ruling clarified that minimum service requirements in employment contracts, often called employment bonds or lock-in periods, are legally valid if they are not unjust or unreasonable and

are meant to protect legitimate business needs.

The Supreme Court decision signals that minimum service clauses are not against public policy, but they must be fair, proportionate, and justified. Employers must show why such conditions

are necessary, and courts will assess them carefully. This ruling sets the tone for more balanced employment contracts in the future.

Debjani Aich, Partner at IndusLaw, explained the broader legal backdrop. “The Vijaya Bank case highlights the difference between an employment bond and a non-compete restriction after

employment ends. Restrictions during active employment do not count as restraint of trade under Indian contract law, because they support the ongoing job relationship rather than limit

future opportunities.”

Rachit Bahl, Senior Partner at AZB & Partners, said the court has followed established principles. “It has long been accepted that restrictions placed during employment, like asking for

compensation if an employee leaves before the lock-in period, are valid if they are reasonable and meant to support the employment relationship.”

Bahl also cautioned against reading the verdict as a blanket approval of all such clauses. “The court’s decision does not automatically make every minimum service clause valid. Employers can

ask for damages only if the clause is fair in scope and duration. Each case will still be judged on its own facts.”

Pooja Ramchandani, Partner at Shardul Amarchand Mangaldas & Co., put the judgment in a broader context of workplace trends.

“Today’s fast-changing work environment is shaped by technology and specialised training, which has forced companies to retain skilled employees. That is why minimum service or lock-in

clauses have become more common, and the Supreme Court has rightly taken these modern realities into account.”

She also explained the impact on both sides: “For employers, these clauses help reduce attrition, improve efficiency, and recover training costs. For employees, though, they can feel like a

loss of freedom, especially if the job contract ties them down for too long.”

Additionally, Moksha Bhat, Partner, AP & Partner, said, "The decision reflects a trend where courts have upheld lock-in provisions in employment contracts. The SC decision clarifies the law

on lock-in provisions and employment bonds. We expect that more employers will include such provisions going forward, especially for senior management. By the same token, this will

accelerate the trend in C-Suite employment agreements towards stronger, more heavily negotiated contracts that offer increased protection for both employers and employees."