Anomalies Around Notice Period in Employment Contract for Non-Workmen

When an employer decides to terminate an employee, the employer must consider the notice period mentioned in the employment contract.

This article examines certain recurring anomalies around the notice period in employment contracts for non-workmen. It focuses on three connected issues: First, how does the court determine the notice period when the employment contract does not specify. Second, whether the uneven notice clause, requiring an extended employee notice, is enforceable. Third, whether an employee may dispense with the requirement of serving a notice period by paying salary in lieu of it.

Determination of the notice period when the employment contract does not specify

When an employer decides to terminate an employee, the employer must consider the notice period mentioned in the employment contract. Ordinarily, the contract will specify either that the employee must serve the notice period or that the employer may pay salary in lieu of notice. However, in a few situations, the employment contract is silent on this issue, leaving the notice period undefined. In such situations, recourse is often found in the termination provisions under the Industrial Disputes Act, 1947, and the State-specific Shops and Establishments Act. The Industrial Disputes Act, 1947, applies only to workmen, while the shops and establishments legislation of various States generally govern non-managerial employees.¹ This creates a legal gap in cases involving non-workmen where neither the contract nor the statute expressly prescribes a notice period. In such circumstances, the issue is resolved through judicial interpretation and precedent.

The first precedent that goes in the direction of determining this issue is J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. State of U.P.² While considering whether voluntary resignation falls within the scope of retrenchment, the Supreme Court observed that the notice period depends on the term mentioned in the employment contract, and where no such period is stipulated, a reasonable notice must be provided. However, the Supreme Court did not define what would constitute a “reasonable time”, leaving the term to be shaped by subsequent judicial decisions.

In Indian Commercial Pilots Assn. v. Union of India³, the Madras High Court, while examining the validity of a 6-month notice requirement for pilots seeking to resign, held that there is no universal formula for fixing the notice period. The court observed that the duration of notice may vary depending on the exigencies, needs, and essentiality of the service concerned, and that what is required is a reasonable notice period. This reasoning was later echoed in Indian Airlines v. Binod Kumar Sinha⁴, where the Supreme Court endorsed a similar approach.

In another case dealing with wrongful termination, the court laid down that where the contract does not specify a notice period, the proper test is to examine the nature of the employment, the relevant employment market, and the time reasonably required for the employee to secure alternative employment.⁵ Therefore, it would be a question of fact, and the notice period may vary depending on the nature of the post and the circumstances. The court further observed that for ordinary posts requiring no special skill and having a wider employment market, the period required to secure re-employment, and hence the notice period, would usually be shorter. By contrast, where the employment involves specialised skills and comparable opportunities are limited, a longer notice period may be justified.

Taken together, these decisions indicate that where a contract of employment is silent on notice, courts may imply a reasonable notice period. The assessment depends on factors such as the employee’s skill level, the nature of the industry, the local employment market, and the time likely to be required to obtain alternative employment. There is no fixed rule; rather, the court must consider the nature of the post and determine the period reasonably needed for transition.

Uneven notice clause requiring an extended employee notice

Many times, the clauses of the notice period are unevenly drafted in the employment contract in such a way that the employer has to give a meagre 30/60 days, whereas an employee has to serve a vast and lengthy notice period, such as 90/180 days. This raises the question of whether such asymmetrical clauses are enforceable, particularly in light of the differences in bargaining power between employers and employees.

The requirement of notice period is mainly set out in the Industrial Disputes Act, 1947 and the specific Shops and Establishments Act of the States. These statutes generally prescribe a minimum notice period of one month or payment in lieu thereof,⁶ and are primarily applicable to non-managerial employees. A longer notice period may be valid only where both parties have mutually agreed to it. However, Indian labour law does not prescribe any upper limit on the notice period that may be imposed on an employee before resignation. Nor is there any direct and settled precedent exclusively on the enforceability of an excessively long notice period. The issue has instead been addressed by courts in broader discussions concerning fairness, public policy, and inequality of bargaining power.

A Labour Court would be unlikely to uphold a contractual arrangement in which the employer is bound by a short notice period, while the employee is required to serve a substantially longer one. In Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly⁷, the Supreme Court considered a service condition under which either side could terminate employment by providing three months‘ notice or salary in lieu thereof, while the employee was also bound by the same requirement if he wished to resign. Although the clause appeared formally reciprocal, it called this condition unconscionable, unreasonable and opposed to public policy. The Supreme Court held the termination clause to be void under Section 23, Contract Act, 1872, because the employer was given arbitrary, unguided power to end a permanent employee’s service without any reason and without any hearing. This judgment held that when a contract is entered into between parties who are not equally placed, and its terms disproportionately benefit one party on a higher pedestal, courts would apply common law principles, i.e. inequality of bargaining power, test of reasonableness or fairness and may deem the provision invalid.

This principle applies where a difference in the economic strength of the contracting parties creates unequal bargaining power. It covers situations in which the weaker party can obtain goods, services, or even the means of livelihood only on terms dictated by the dominant party. It also applies where a person has no real choice but to agree to a term, however unfair or unconscionable it may be. On that basis, a long notice period imposed only on employee-initiated resignation, and not on employer-initiated termination, may be regarded as unreasonable.

The Bombay High Court in Padubidri Pattabhiram Bhat v. Shamrao Vithal Co-operative Bank Ltd.⁸, referred to the Brojo Nath Ganguly case⁹ and held that Clause 4 of the Employment Contract is similar to Rule 9(i), Central Inland Water Transport Corporation Limited (A Government of India Undertaking) Service, Discipline and Appeal Rules, 1979 (1979 Rules). Rule 9(i), 1979 Rules was struck down by the Supreme Court on the grounds that it was harmful, injurious to the public interest, and went against public good. A similar clause, being opposed to public policy, was held void under Section 23, Contract Act.

The application of Brojo Nath Ganguly case to private employment contracts has also been examined by the Delhi High Court in another case.¹⁰ The court considered a clause permitting termination by either party on three months’ notice or salary in lieu thereof. The Division Bench took the view that the principle in the Brojo Nath Ganguly case applies primarily to public sector undertakings or bodies that qualify as “instrumentalities of the State” under Article 12 of the Constitution. In the case of a purely private employer, even if partly government-owned, the court held that such a clause constitutes a valid contractual stipulation, enforceable through damages for breach, and is not a void provision.

Thus, while stark inequality of bargaining power and terms that are disproportionately favourable to the dominant party may render a clause unconscionable and void under Section 23, Contract Act, 1872, private employment contracts are often treated differently. In that setting, notice period stipulations are more likely to be upheld as valid contractual terms, unless they can be shown to be illegal or otherwise opposed to public policy.

Employee’s right to dispense with notice by paying salary in lieu

Usually, in an employment contract, it is the employer who requires the employee either to serve the notice period or to pay the employee’s salary in lieu of such notice. The present question is whether the employee may exercise a similar option, that is, whether the employee may “buy out” the notice period by paying salary in lieu thereof. No single statute confers an absolute right on an employee to do so. However, judicial decisions indicate that such a possibility may arise depending on the terms of the contract, service rules, Standing Orders, or applicable regulations. Although the courts have not addressed this issue in a narrowly framed and direct manner in every case, the question has been considered within wider disputes concerning resignation, withdrawal of resignation, and the legal effect of notice requirements.

In Srikantha S.M. v. Bharath Earth Movers Ltd.¹¹, the Supreme Court went into the Company rules, which provided that resignation by an employee required one month’s notice or payment in lieu thereof. The rules further provided that a resignation would become valid and operative only upon the company’s written communication of acceptance. The court focused on when the resignation actually became effective and whether the employee could withdraw it before that date. Since in this case the appellant had not paid one month’s salary in lieu of notice, the court held that the resignation could not take immediate effect. Moreover, the Company itself fixed a later relieving date, showing that the employment relationship continued even after resignation. The court held that since the appellant withdrew his resignation before it became effective, the company was bound to accept the withdrawal. Therefore, the company’s action in refusing to allow him to continue in service was illegal and unlawful.

The Supreme Court has held that resignation is a right of an employee.¹² An employee cannot be compelled to continue in service if they are not willing, unless the rules or terms of appointment so provide, or disciplinary proceedings are pending. The court has recognised that by virtue of Standing Orders under the Industrial Employment (Standing Orders) Act, 1946, a permanent workman has the right to resign by giving 30 days’ notice or paying wages in lieu of the notice period. In Punjab National Bank v. P.K. Mittal¹³, the court considered a regulation which allowed an employee to seek a shorter notice period only with the employer’s consent. The court treated the reduction of notice as a matter of employer discretion rather than an automatic employee right. The decision suggests that where an employee seeks to exit before the notice period ends by paying salary in lieu thereof, such a course is available only if the governing rules or contract permit it, or if the employer consents. A unilateral buyout by the employee is, therefore, not an absolute right. The court also observed that the employer cannot unilaterally waive notice without the employee’s consent.

Similarly, in Ram Kishore Shukla v. State of U.P.¹⁴, the Allahabad High Court construed Regulation 29¹⁵ to mean that an employee may resign either by giving the prescribed notice or by paying salary in lieu thereof. The court held that in the absence of either, the resignation takes effect only after the notice period expires. In certain specialised or public-interest positions, notice requirements may be applied strictly because the employer must ensure continuity of service, allow adequate time to find a replacement, and avoid disruption in functions that are sensitive or difficult to substitute.¹⁶ In such cases, a mere offer to pay salary in lieu of notice may not by itself be sufficient to dispense with the obligation.

Thus, if the employment contract, applicable Standing Order, rules, or regulations expressly permit resignation either by notice or by payment in lieu of notice, the employee may generally exercise that option. In such cases, the employer cannot compel the employee to serve the notice period.