Resignation penalties: Quit your job early? Be ready to pay, court rules

What happens if you leave a job before completing the minimum service period stated in your contract? According to a recent India's Supreme Court ruling, employers are within their rights to impose financial penalties on employees who quit early—provided the terms are reasonable, clearly defined, and outlined in a valid employment bond.

As reported by media outlets, the landmark verdict stems from the case of Vijaya Bank vs. Prashant B. Narnaware. In 1999, Narnaware joined Vijaya Bank as a probationary assistant manager. In 2006, the bank advertised a position requiring a three-year bond, with a penalty of Rs 2 lakh for early resignation.

Narnaware signed the bond and was appointed senior manager (cost accountant) in 2007. However, he resigned in July 2009—just 18 months later—to join another bank. He paid the Rs200,000 penalty but later challenged the clause in court.

While the Karnataka High Court ruled in his favour in 2014, directing the bank to refund the amount, the Supreme Court overturned this decision in May 2025, upholding the validity of the employment bond and penalty clause.

In its judgment, the Supreme Court observed: “The restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair, or unreasonable and thereby in contravention of public policy.”

The court recognised such clauses as legitimate retention tools designed to protect employers’ investments in recruitment and training, and not as unlawful restraints on employees' freedom to change jobs.

According to legal experts quoted by The Economic Times, minimum service agreements are enforceable if they are time-bound, specific, and not excessive. These bonds are not considered restraints on trade as long as they don’t prevent employees from seeking other jobs after resignation.

The judgment underscores that clearly worded service bonds with fair and proportionate penalties are legally valid.

Employees should be mindful of such clauses before signing contracts—quitting a job prematurely may result in significant financial consequences, even if for better opportunities.