Evolving worker classifications and stricter rules on dismissal highlight the challenges businesses face in navigating labour laws in these jurisdictions

India’s Supreme Court on tenure-linked employment bonds

In the current business environment, where talent mobility has become the hallmark of modern employment relationships, a question that often arises is how courts should strike a balance between the legitimate interests of employers in retaining skilled personnel on one hand, and employees’ fundamental rights to pursue their chosen trade, business or profession on the other. In Vijaya Bank v Prashant B Narnaware (2025), the Supreme Court of India was most recently faced with this question.

Factual matrix

The employee, Prashant B Narnaware, joined Vijaya Bank in 1999 and applied for a new senior position within the same organisation in 2006. The advertisement for this new position had an explicit condition that selected candidates would execute an indemnity bond of INR200,000 (USD2,268), payable if they left the employment of the bank before completing three years.

Cognisant of this condition, the employee applied for and secured the said senior position, and accepted an appointment letter containing a clause that mandated such minimum service tenure of three years and execution of an indemnity bond for the aforesaid sum.

He joined the position in September 2007, and executed the required bond pursuant to the employment bond clause. However, he resigned in July 2009 – before completing the stipulated minimum service tenure of three years – to join another bank, and paid the bank INR200,000 as per the employment bond clause, albeit under protest.

The employee subsequently filed a writ petition before the Karnataka High Court, challenging the employment bond clause as violative of articles 14 and 19(1)(g) of the Constitution of India, 1950 (Constitution) and sections 23 and 27 of the Indian Contract Act, 1872 (ICA). The court ruled in the employee’s favour and directed the bank to return the bond amount paid by the employee under protest. The bank appealed this decision before the SC.

Issues considered by SC

In view of the facts of the case, the key issues that arose before the SC were whether the employment bond clause:

1. 1. Was an agreement in restraint of trade under section 27 of the ICA (which renders void every agreement restraining a person from exercising a lawful profession, trade or business); and/or
   2. Was opposed to public policy (since it was a standard form contract in which the respondent had no bargaining position), and hence violative of section 23 of the ICA, and articles 14 and 19 of the Constitution.

The decision

The SC upheld the validity of the employment bond clause and reversed the High Court’s decision. More specifically, on each of the issues, the SC’s findings were as follows.

On restraint of trade, the SC’s analysis began with section 27 of the ICA. Relying on its earlier judgments, including the landmark judgment of Niranjan Shankar Golikari v Century Spinning and Manufacturing Co (1967), the SC held that:

1. 1. Restrictive covenants operative during the term of employment do not constitute an agreement in restraint of trade;
   2. The employment bond clause sought to restrict the employee’s option to resign and so perpetuated the employment contract for a specified term; and
   3. The objective of the employment bond clause was not to restrain future employment, and hence it cannot be said to be violative of section 27 of the ICA.

On the issue of public policy, the SC held that:

1. 1. The employment bond clause cannot be said to be unconscionable, unfair or unreasonable since it was incorporated by the bank to reduce attrition and improve efficiency, and was therefore not opposed to public policy;
   2. The INR200,000 liquidated damages amount was not disproportionate and did not cause unjust enrichment of the bank, considering an ultimely resignation would cause the bank financial hardship as it would require “the bank to undertake a prolix and expensive recruitment process involving open advertisement, fair competitive procedure lest the appointment falls foul of the constitutional mandate under articles 14 and 16”; and
   3. The employment bond clause was therefore not unconscionable or opposed to public policy.

In conclusion, the SC ultimately held that the employment bond clause neither amounts to a restraint of trade nor is against public policy.

Key considerations

It is pertinent to note that the Supreme Court took cognisance of certain critical industry-wide considerations while coming to its conclusions.

First, by distinguishing between covenants that operate during the subsistence of employment and those that restrain future employment opportunities, the SC has re-emphasised the need for accommodating legitimate employer interests while preserving employee mobility rights, which have predominantly guided courts in India thus far.

Second, the SC’s public policy analysis proved more complex and revealing of contemporary employment law tensions. Responding to arguments that the employment bond clause constituted an unconscionable standard form contract imposed through unequal bargaining power that resulted in unjust enrichment, the court engaged with fundamental questions about contractual fairness in employment relationships.

Third, and perhaps most significantly, the SC’s analysis extended to contemporary economic realities faced by employers today, particularly by public sector undertakings in India. In this regard, the court noted that “technological advancements impacting nature and character of work, re-skilling and preservation of scarce specialised workforce in a free market are emerging heads in the public policy domain”, and that since liberalisation, “public sector undertakings like the appellant bank needed to compete with efficient private players”. This analysis demonstrates judicial recognition of the unique constraints within which public sector employers operate.

This recognition led the SC to con-clude that incorporation of a minimum service tenure “to reduce attrition and improve efficiency” was reasonable in
the circumstances.

The SC’s treatment of the INR200,000 indemnity bond quantum reveals a sophisticated analysis of liquidated damages principles in the employment context. The court not only considered the bank’s pleadings regarding financial hardship and administrative efforts expended due to premature and untimely resignations, but also that the employee held a senior middle managerial grade with a lucrative pay package, while concluding that the amount was justifiable.

Going forward

While this judgment was rendered based on a pragmatic view taken by the SC, in context of a public sector bank, it is likely to have far-reaching implications not only for public sector employers but also for the private sector.

The judgment may even provide a legal basis for private sector employers to now amend their employment agreements and recruitment notices to include similar restrictions. For any such clause to be enforceable, it is imperative that the nexus between the employee’s early resignation and the liquidated damages sought to be imposed for such exit is sufficiently established, as this formed the basis for the SC’s decision in this case.

Such clauses should also not restrict the future employability of the employee or impose an unreasonable penalty or duration of restriction.

AZB & PARTNERS
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Noida – 201301, National Capital Region, India
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Navigating ‘worker’ status and new Freelance Act in Japan

Various industries are facing a labour shortage in Japan as the inevitable consequences of a declining birthrate and ageing population become increasingly pronounced. This clearly poses a challenge for companies, since securing personnel is of crucial importance.

When workers are hired based on an employment contract, the strict provisions of Japanese labour-related laws – such as regulations on working hours and stringent restrictions on dismissal – naturally apply. Consequently, to utilise personnel more flexibly, many companies consider staffing through arrangements such as outsourcing agreements rather than employment contracts.

Because Japan’s labour-related laws are employee-friendly, determining whether an individual qualifies as a “worker” under the Labour Standards Act (LSA) is of particular significance for companies. Even in contracts with freelancers, companies may bear various legal responsibilities under certain circumstances.

This article provides an overview of legal criteria governing the classification of an individual as a “worker” under the LSA, and also outlines the recently enacted Freelance Act.

Determining worker status

Whether an individual qualifies as a “worker” under the LSA – such as rules governing wages, working hours and related protections – is not determined by the form or title of the contract, whether it is styled as an employment or outsourcing agreement, subcontract or entrustment such as an outsourcing contract.

Rather, such determination is made on a case-by-case basis, taking into account the contract’s substantive provisions, how services are provided, the nature of remuneration and other relevant factors.

The prevailing criteria are:

1. 1. Whether the labour is performed under the direction and supervision of another; and
   2. Whether remuneration is paid in consideration for the work or service under such supervision.

Relevant considerations for determining whether work is performed under supervision include: whether the individual in question has the freedom to accept or decline assignments and instructions; whether the performance of work is supervised; whether there are constraints on the workplace and working hours; and whether there are available replacement workers for the worker in question.

As for remuneration, the decisive question is whether compensation is recognised as consideration for the provision of services under another’s direction and supervision.

Additional factors may also determine the analysis, such as whether individuals bear business risks by providing their own equipment, whether individuals may work for other companies, and whether individuals enjoy the freedom to transact with other entities.

Ongoing policy discussions

As mentioned, merely labelling a contract as an outsourcing agreement does not preclude the possibility of it being deemed an employment contract in fact. Once the individual in question is considered a worker, the LSA will apply, including possible stringent restrictions on dismissal.

The Ministry of Health, Labour and Welfare has established a study group that is reconsidering criteria for defining a “worker” under the LSA, on the ground that the current framework may no longer be adequate amid evolving and diversifying work styles.

Any eventual reformulation of these criteria is likely to exert a profound impact on the Japanese labour market, and warrants close attention going forward.

The Freelance Act

1. 1. Legislative background and enactment. The 2024 Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators, otherwise known as the Freelance Act, was enacted last year in response to diversification of work arrangements in Japan – most notably the rapid spread of freelance engagements, particularly in the digital economy where gig workers have become increasingly prevalent.

Freelancers frequently suffer from issues such as delayed or unpaid remuneration, and face disparities in bargaining power and access to information relative to corporate clients. The Freelance Act aims to provide a more secure working environment. Companies falling within the Freelance Act’s scope must therefore comply with its obligations and prohibitions.

1. 2. Relevant entities and transactions. The Freelance Act applies mainly when a specified entrusting business operator (as described below) engages a specified entrusted business operator to perform entrusted business.
      1. Business entrustment (article 2, par 3): This is defined as an enterprise entrusting the manufacture (including processing) of goods or creation of an information-based product to another enterprise for its business, or an enterprise entrusting the provision of services to another enterprise for its business (including having another enterprise provide services to itself).
      2. Specified entrusted business operator (article 2, par 1): This category includes:
         1. individuals who do not employ workers; and
         2. corporations with only one representative, no other officers, and no employees. Employment of “workers” for this purpose refers to engaging persons expected to work at least 20 hours per week for a period exceeding 31 days. When sole proprietors employ only cohabiting relatives, these are not deemed to be employed workers. Notably, even “one-person corporations” fall within this category.
      3. Entrusting business operator and specified entrusting business operator (articles 2, pars 5 and 6): An entrusting business operator is any business operator entrusting to a specified entrusted business operator. It should be noted that the question of whether a party is deemed to be outsourcing to a specified contracting entity is determined on a substantive basis; the mere fact that a party has entered into an outsourcing agreement with such an entity does not, in and of itself, suffice to classify it as a commissioning entity.

Furthermore, attention must be paid to the fact that even sole proprietors and so-called one-person corporations may fall within the scope of entrusting business operators. Whenever such an entrusting business operator employs workers or has multiple officers, it qualifies as a specified entrusting business operator. Unlike the Subcontracting Act, the Freelance Act applies even to entrusting business operators that are individuals or corporations with capital under JPY10 million (USD68,000).

1. 3. Principal obligations of entrusting business operators. (a) Disclosure of transaction terms (article 3): These terms must be promptly disclosed, in writing or electronically, specifying the nature of the work, remuneration, and payment deadlines on outsourcing.

• • 1. Payment deadlines (article 4): Payment must be made within 60 days of receiving performance from a specified contracting entity, or within 30 days of receiving payment from an upstream client in cases of re-outsourcing.
    2. Prohibited practices (article 5): In relation to outsourcing lasting one month or longer, specified entrusting business operators are prohibited from:

       i. Refusing acceptance without fault attributable to the specified entrusting business operator;
       ii. Reducing remuneration without cause attributable to the specified entrusting business operator;
       iii. Unjustly stipulating remuneration markedly below prevailing market rates;
       iv. Forcing the purchase of goods or use of services without legitimate reason; and
       v. Engaging in any other acts that unjustly harm the specified entrusted business operator’s interests.

    3. Improvement of working environment. specified entrusting business operators must also:

1. 1. 1. 1. Ensure accurate recruitment information (article 12): Ensure that recruitment information is accurate and up to date, refraining from any false or misleading representations;
         2. Consider balancing childcare and nursing care (for contracts of six months or longer) (article 13): In the case of outsourcing arrangements lasting six months or more (including those extended by renewal beyond six months), if a specified entrusting business operator requests consideration for balancing work with childcare or nursing care responsibilities, appropriate accommodation must be made;
         3. Establish measures against harassment (article 14): Specified entrusting business operators are obliged to establish systems for consultation and support addressing harassment directed at specified entrusting business operators; and
         4. Give advance notice of termination or non-renewal (contracts of six
            months or longer) (article 16): Where an outsourcing arrangement continues for six months or longer, any ter-mination or non-renewal must, in principle, be preceded by at least 30 days’ prior notice.

Conclusion

The utilisation of human resources is indispensable to conducting business. Companies operating in Japan must inevitably secure personnel in Japan. While reliance on outsourcing contracts may present difficulties in a seller’s labour market, the need for flexibility in responding to fluctuations in business demand continues to motivate companies to consider such arrangements.

Even where outsourcing contracts are validly maintained, companies must be aware of their obligations under the Freelance Act, including the duty to improve working conditions.

CHUO SOGO LPC
Osaka Dojimahama Tower 15th Floor
1-1-27 Dojimahama, Kita-ku
Osaka, 530-0004 Japan
Tel: +81 6 6676 8834
Fax: +81 6 6676 8839
www.clo.jp/english

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Philippine labour laws and jurisprudence on illegal dismissal

The Philippine Constitution guarantees an employee’s right to security of tenure, such that no employee shall be terminated from work except for just and authorised causes, and on observance of due process. The Department of Labour and Employment Department Order No. 147 (2015) lays down the procedural and substantive guidelines that employers must observe to effect a valid termination of employment, which is founded on two principles:

1. 1. The legality of the act of dismissal, which means that the dismissal must be for just and authorised causes provided under article 297 (termination by employer), article 298 (closure of establishment and reduction of personnel), and article 299 (diseases as grounds for termination) of the Labour Code of the Philippines; and
   2. The legality of the manner of dismissal, otherwise known as the “twin notice” requirement, which requires the observance of procedural due process in the termination of employees.

The presence of both procedural and substantive due process requirements determines the legality of dismissal and shall be the basis for granting relief as provided under the Labour Code.

Valid termination

In cases where the dismissal is for just cause under article 297 of the Labour Code, or authorised cause under articles 298 and 299, and the requirement of the “twin notice” rule is observed, the dismissal shall be upheld as valid, and the employer will not suffer any liability.

Entitlement to separation pay. The law imposes an additional requirement of payment of separation pay to effect a valid termination for authorised causes. Section 298 of the Labour Code mandates separation pay of at least one month’s pay, or at least one-half to one month’s pay, for every year of service, whichever is higher, depending on the cause.

The requirement of separation pay in termination for authorised cause is imposed because the dismissal process in this case is initiated by the employer’s exercise of management prerogative. However, no separation pay is due if closure or cessation of operations results from serious business losses or financial reverses, as the employer’s financial incapacity negates this obligation.

Nevertheless, the payment of separation pay is not exclusive in terminations for authorised causes. PCIB v Abad would dictate that separation pay may still be granted to employees dismissed for just causes on the basis of equity, as long as the dismissal does not fall under either of two circumstances:

1. 1. There was serious misconduct; or
   2. The dismissal reflected on the employee’s moral character.

Therefore, an employee dismissed for just cause may still be awarded separation pay as a measure of social justice, except when the dismissal involves serious misconduct or grounds that reflect on the employee’s moral character or personal integrity.

Illegal termination

If the termination is without just or authorised cause, regardless of whether due process was observed, the termination is illegal. In this case, the law mandates that the employee is entitled to:

1. 1. Reinstatement without loss of seniority rights and other privileges;
   2. Full back wages, inclusive of allowances; and
   3. Other benefits or their monetary equivalent, computed from the time the compensation was not paid up to the time of actual reinstatement (article 294 of the Labour Code).

Reinstatement. An employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges. They are also entitled to full back wages, including allowances, and other benefits or their monetary equivalents computed from the time that compensation was withheld up to the time of actual reinstatement.

Separation pay in lieu of reinstatement. As an exception to the general rule under article 294 of the Labour Code, as mentioned in the preceding discussion, when reinstatement is no longer feasible due to strained relations, separation pay of one month’s salary per year of service is granted to the employee.

For illegally dismissed employees, back wages are only granted from the time of the termination until the decision declaring the dismissal as illegal. Thereafter, the employee will only be entitled to separation pay because of strained relations, which must be supported by substantial evidence.

Back wages. Illegally dismissed employees are entitled to back wages only for the period they could have worked had they not been illegally dismissed.

Generally, the grant of reinstatement carries with it an award of back wages. However, in Palteng v UCPB, the Supreme Court ordered reinstatement without back wages as a penalty for the misconduct committed by the employee. Thus, an employee who is illegally dismissed will not be entitled to back wages if the employee is not entirely without fault for the offences imputed against such employee.

Just cause, no due process

While procedural due process is an indispensable requirement to effect a valid dismissal, it must be emphasised that failure to observe such a requirement does not render the dismissal illegal per se. The Supreme Court has promulgated numerous decisions on the effect of failure to comply with procedural due process despite the existence of a valid cause for dismissal.

In 1989, the case of Wenphil v NLRC laid down the doctrine that in dismissals for just or authorised cause, but which failed to observe due process, the employer is liable for a certain indemnity depending on the facts of each case and the gravity of the omission by the employer.

In the case of Serrano v NLRC, decided in 2000, the Supreme Court revised Wenphil, holding that an employer’s failure to observe due process warranted payment of full back wages from dismissal until the court’s decision became final.

In 2004, the court reversed its decision and partially reinstated Wenphil with its ruling in Agabon v NLRC. The court ruled that an employer who fails to comply with procedural due process will have to pay indemnity in the form of nominal damages, but not back wages. The indemnity to be paid by the employer will depend on the gravity of the disregard of due process. In the Agabon case, the amount of indemnity was PHP30,000 (USD526).

Not long after, in 2005, the court further modified the doctrine in Agabon with its ruling in Jaka Food Processing Corp v Pacot et al. This case created a distinction between just causes under article 297 and authorised causes under article 298 of the Labour Code, where there was a violation of procedural due process.

Nominal damages are tempered when the dismissal is for a just cause since it was a result of an act of the dismissed employee. The award of damages is higher if based on an authorised cause since the dismissal was an exercise of the employer’s management prerogative.

The Jaka doctrine was reaffirmed in the case of Genuino v NLRC, when the court ruled that dismissals will remain valid if a just or authorised cause is established by substantial evidence, despite failure to comply with procedural due process. However, the employer was liable to pay nominal damages to the employee in recognition of the violation of his right to due process.

Similarly, in the case of Bughaw Jr v Treasure Island Industrial Corp, the court applied the Jaka ruling, setting the amount of nominal damages to be paid depending on the cause of termination. If the cause was based on a just cause, the employer shall be liable for PHP30,000. The amount is increased to PHP50,000 if the termination is based on an authorised cause. In the latter case, the sanction is stiffer because the dismissal process was initiated by the employer’s exercise of management prerogative and does not necessarily imply culpability on the part of the employee.

Jurisprudence has consistently underscored that dismissal must be both substantively justified and procedurally proper, with any deviation subject to remedies under the law. While valid terminations shield employers from liability, equity and social justice principles occasionally temper the strict application of the rules. Conversely, illegal dismissal triggers full statutory relief, emphasising the Philippine labour laws’ policy of affording protection to labour.

The long line of Philippine jurisprudence on the substantive and procedural rules for dismissals, as well as the liabilities and indemnities for violations, reflects a deliberate balance between the employer’s exercise of management prerogatives in business operations and the employee’s constitutional right to security of tenure.

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Gil Puyat Ave. Makati City 1227, Philippines
Tel: +632 7751-8889; +632 7751-8899
Fax: +632 7751-4000
Email: info@omlawphil.com
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