In companies where the notice period can stretch up to several months, it can be tough to switch to a new job unless the employee or the new employer pays off the notice period with the existing employer.
While notice period buyouts are often talked about as if they are a standard employee right, there isn’t a specific legal entitlement that allows an employee to simply ‘buy out’ a notice period, nor is there any legal obligation for an employer to accept payment in place of service during the notice period.
Gerald Manoharan, Partner at JSA Advocates & Solicitors, talking to ET Wealth Online said that if the employment contract provides that an employee may terminate employment by giving notice ‘or’ making a payment in lieu of notice, then the employee may choose either option and the employer can’t just demand that the notice period be served.
According to Manoharan, the new Labour Code, specifically the Industrial Relations Code, 2020, is silent on resignations, and prescribes notice and compensation requirements in case of employer-driven terminations.
Manoharan says notice periods and notice buyouts in case of an employee resignation is governed by the contract terms agreed between the employer and employee, unless these are covered under the state-specific shops and establishments’ legislations.
What can employees do if a company rejects notice period buy-out?
Employers often seek to compel employees to continue working and not to buy out the notice period. There may be some genuine reasons for this, such as meeting client deadlines, finding a suitable replacement, handing over the work, training the new employee, setting standards for other employees, etc.
Prof. Paramjeet Singh, Associate Professor of Practice, BITS Law School says: “Sometimes, the reason may be retaliatory, that of revenge, deterrence to avoid mass exit or other reputational reasons, which must be checked for legal consequences and potential liabilities.”
However, if an employee chooses not to serve the notice period and also refuses to pay instead of serving the notice period, there may be penal/ monetary consequences for the employee, says Singh.
Singh says: “The employer generally deducts the applicable amount from the final settlement, and if the amount is insufficient, the employer may file a suit for recovery of the balance.” (PF, gratuity cannot be used for such deduction)
However, under no circumstances may the employee be forced to work during the notice period. At best, such an action on the part of the employers will be treated as a breach of contract for which civil remedies are available.
Singh says: “Forcing an employee to work may amount to forced labour, which is prohibited under the Indian Constitution.”
Additionally, Singh says any clause in the employment contract trying to force people to work cannot be enforced under law. Any obligation involving continuous duty, requiring ongoing court supervision, or dependent on the personal qualification of the employees is not specifically enforceable under Section 14 of the Specific Relief Act, 1963.
Therefore, employees should note that monetary remedies are the only viable way forward for employers. With that in mind, employees have to arrange the money to pay for reasonable damages caused to the company due to the employee’s resignation. If the damages sought does not seem reasonable, then the employee can take legal action.
If employer does not accept the notice period buyout, and the employee leaves, the employer can sue for recovery of damages
Sweta Sinha, Assistant Professor, OB and HR, IMI Kolkata, told ET Wealth Online that based on the standing orders and employment contract, the employer may prescribe a notice period and other service conditions, making the notice period contractually enforceable.
But if the employee refuses to serve the notice period, generally, the employer can’t obtain a judicial decree to compel the employee to do so. Sinha says this is because the law treats employment contracts as contracts involving personal skill and confidence.
Sinha says: “Instead, the employer can recover the notice pay, claim damages for breach of contract or loss of trade secrets, and recover company property if there is an actual loss.”
According to Sinha, even if an employee has resigned, refused to serve the notice period, and also refused to pay salary in lieu of notice, the employer cannot compel the employee to continue working.
Sinha says the remedies available to the employer are limited to enforcement of the contractual terms, such as recovering notice pay (if there is explicit mention in the employment contract), adjustment of dues from the full-and-final settlement (excluding statutory payments like PF or gratuity), or, in extreme cases, they can file a civil suit for recovery of notice pay or damages.
Sinha says: “…the employee's refusal to pay notice period pay may result in a financial liability, but it still does not implies legal obligation to continue rendering services.”
For instance, in the case of Hewitt Associates India Pvt. Ltd. v. Naveen Goyal (Delhi High Court, 2013); the high court had ruled that the only remedy a company has is to seek damages from the employee for not complying with the requirement of serving a mandatory notice period. The High Court in that case had also said that the employer cannot compel an employee to join his company for 30 days when he himself does not wish to do it and has already resigned from the company.
