Startups, Did you include “Refund of Expenses” Clause in Your Employment Contract?

12th Nov 2011
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Lawyers at VakilSearch answer

In this post, we will discuss the ‘Refund of Expenses’ in an employment contract.

The “refund of expenses” or forfeiture clause is very common abroad and in technology companies here in India, where the company has invested a lot of money in training an employee. If the employee wants to leave within a short period of time, the Company naturally insists that he / she must refund the money invested by the Company in the training. This becomes an issue because the employee is sometimes asked to pay an amount stretching into several lakhs for the training.

The big question: Can you ask an employee to refund expenses in training?

In Ledalla Ravichandar and another v. M/s Satyam Computer Services Limited, Mr. Ravichander had been employed in Satyam Computers, which at the time was a flourishing public limited company.

Mr. Ravichander received a monthly salary of Rs. 2250, and the contract he had with Satyam Computers required him to pay a “compensation” of Rs. 200,000 to Satyam Computers in case he left. The amount was justified on the ground of expenses incurred by Satyam Computers in training Mr. Ravichander, and other miscellaneous costs.

The Court found that Mr. Ravichander had been unfairly asked to pay the amount, and granted him partial relief.

The lesson from this case is that you cannot ask an employee to pay you an exorbitant amount if he quits your company. In other words, you cannot penalize the employee for deciding to leave the company.

However, you can ask the employee to refund the expenses you incurred, provided:

  1. You have the receipts or some record of the expenses
  2. The expenses are reasonable

How do I include this in our contract?

It is best to include a basic clause in your employment contract saying that the employee has to pay an amount of Rs. 15,000 (for example) towards training and other expenses. It is not really necessary to list what those expenses are at the time of entering into the contract, because that may change after the employee joins.

For instance, you may send the employee on a training programme overseas, and that may involve considerable expense for the company. If you have left the agreement a little more open ended, you can include this expense and recover it from the employee.

If you have specifically mentioned the expenses, the employee can raise objections saying that the contract does not require him to pay that amount.

I have hired 5 employees but not included this clause in the employment contract? What do I do?

You have two options. Create a modification agreement, where you modify the old agreement to include this clause, or just draft a fresh agreement dating back to the date of the previous agreement.

This is a simple procedure but first get the consent of the employees to the inclusion of the clause. Any employee may be a little reluctant to having this clause included in the employment contract, especially if he did not consent to it in the beginning. And remember to include it the next time!

About VakilSearch

VakilSearch is India’s leading online legal services provider for businesses and individuals. As the official partner of the Confederation of Indian Industry (CII) and knowledge contributor to Sulekha.com, the Hindu Business Line, Entrepreneur Magazine and the All India Rubber Association, VakilSearch reaches out to thousands of businesses, entrepreneurs and individuals on a regular basis. So when you visit vakilsearch.com, you can be assured of quality legal guidance and comprehensive documentation for your business and personal needs, at affordable prices.

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