Article: The Counsellor: Uncommon practice in India

Compensation & Benefits

The Counsellor: Uncommon practice in India

Putting a penalty clause in an offer letter is an uncommon practice in India, but it is still legal in the country
The Counsellor: Uncommon practice in India

The contractual considerations mentioned in an offer letter should be reasonable and legally valid


A subsidiary company of a major conglomerate has inserted a ‘penalty clause’ in its offer letters, where it makes the candidate liable to pay 5 per cent of the offered salary (cost-to-company) if they accept the offer but don’t join. This practice is uncommon in India. The firm has cracked the whip on the recruitment companies as well. Is it valid on the company’s part to insert such a mandatory clause?

An offer letter once accepted becomes a contract and has a mutually binding character. A contract is a legal document wherein two parties voluntarily enter into an agreement; hence the terms of the contract are binding on both parties. The elements of a contract are “offer” and “acceptance” by “competent persons” having legal capacities who exchange “consideration” to create “mutuality of obligation”.

The contractual considerations, however, have to be always legally valid and must be reasonable. A contractual relationship is complete when there is an offer, acceptance to the offer and valid/legal consideration. Each party thereafter acquires rights and duties.

In this case for the corporation to ask for the candidate to pay a certain penalty if he/she does not honour the contractual obligation may not be legally wrong. One will have to read the exact wording of the contract to understand the whole issue and come to any conclusion. Similar consideration will exist in case of the contracts between this corporation and the recruitment firms.

One should look at this case from the perspective of this corporation also. It is extremely time consuming and expensive process to fill a vacancy, especially for middle and senior management roles. After an offer is made and the same is accepted by the candidate, the management assumes that this person is going to join and therefore abandons the search process. To restart this process is not only expensive but it also leads to considerable inconvenience and loss due to inability of the corporation to fill a vacancy on time. It is also very unethical on part of the candidate not to join a corporation after he/she has accepted the offer. In a free democratic world, no candidate is under pressure to accept an offer without due diligence and application of mind.

Though what is stated in the case is an uncommon practice in India, prima facie I don’t see anything wrong in this new emerging practice. One will have to, however, examine this in more detail for the reasonableness of the quantum of penalty and the wording of the clauses. One will have to also examine this from the perspective of the corporation’s ability to enforce such an agreement, especially in India wherein the civil disputes take a huge time for resolution.

(Vivek Paranjpe will solve a live and current business case scenario every month)

Read full story

Topics: Compensation & Benefits, Talent Acquisition, Strategic HR, #BestPractices, #Jobs, #TotalRewards

Did you find this story helpful?



How do you envision AI transforming your work?