Subthemes: Regulation of ER through Contract

&

Breach of Contract and Remedies

The Nature of Exchange in ER

Dimensions of Employment Relationship

The employment relationship covers every aspect of labour either explicitly or implicitly.

Time, Qualifications and Wages are three central dimensions to employment relationship.

Hence, the employment relationship is based on an exchange between work and non-work hours,

required and available qualifications; and

wages and performance

Williamson’s Analysis of Employment Relationship

Loose Relationship Market-like aspects of employment relationship dominate.

Temporary employment to perform a specific job; or

Contracting out the jobs to small independent businesses or subcontractors outside the company when

Qualifications required are not firm-specific; and

Performance can measured easily and regulated by coercive power of contract

Permanent Organizational Relationship Organization-like aspects of employment relationship dominate

Permanent full-time job when

Qualifications required are firm-specific; and

Performance is difficult to measure and regulated by intricate control structure having control systems like promotion ladders, compensation systems etc.

Watson’s Analysis of Employment Relationship

Restrictive Employment Relationship More specification of implicit employment contract by giving detailed

instructions to employee

Employment relationship is based on mistrust

Cooperation achieved by direct control

Diffuse Employment Relationship General specification of implicit employment contract by giving employee

more discretion and autonomy

Employment relationship based on mutual trust.

Cooperation achieved by “responsible autonomy”

Watson’s Analysis and Organizations’ Choice

An organization can, incidentally, have both types of employment relationship as well as control systems for different types of work:

Restrictive employment relationships for simple, manual tasks in parts of the organization with a strict division of labour and an extensive hierarchy of managers supporting a regime of “direct control”.

Diffuse employment relationship for more complex work in parts of the organization with a modest division of labour and a regime of “responsible autonomy”.

Restrictive to Diffuse Employment Relationship

Implications for Employment Relationship Dimensions

Time

More autonomy in determining the relationship between working time and recovery time or to a more intense level of work?

Qualifications

More responsibility and pressure on individuals in developing new skills and competencies required for continuous development?

Wages and Performance

Will the employee take charge of his own performance or will new control systems evolve to replace supervisory hierarchy like career planning and group compensation?

Employment Relationship as a Power Relationship

Employment relationship is a power relationship and it can lead to conflict since Employer’s desire to control employee behavior. Employee’s desire to control conditions of employment.

Employee’s dependency on wages will always be more disadvantage to him / her than to employer’s dependency on employee’s performance.

Therefore, the relationship between employer and employee in the labour market is uneven, asymmetrical.

Asymmetry in relationships between parties is a preconditions for the exercise of power.

Power in Sociological Exchange Theories

The basis for power (Pfeffer and Salancik) in terms of dependence.

A has power over B in so far as: The resources in question are more important to B than A

B will have more trouble than A obtaining the same resources elsewhere

B is unlikely to find a substitute for the resource in question to satisfy its need.

Regulating Employment Relationship

Employment relationship is a regulated relationship through rules and regulations governing the exchange which takes place on a continuous basis.

Internal regulation takes place within the company and with a specific employer.

External regulation takes place at levels above the company.

The region;

The industry; or

Central level

The employment exchange dimensions (Time, Qualifications, Wages and Performance) can be regulated at one of these levels or multiple levels.

Employment Relationship Regulation Models

Internal Regulation Only The conditions of employment determined unilaterally by the employer

Predominant External Regulation The conditions of employment determined by collective agreements and in

legislation with little or no scope for regulating the exchange internally.

Mixed Regulation

The conditions of employment determined by both external and internal regulation with the employer having the power to make supplementary with his employees while complying with collective bargaining agreements.

The supplementary agreements can be established either unilaterally or in consultation with the employee(s).

Breach of Contract and Remedies

Breach of Contract

Breach of Contract could be either anticipatory or actual and could

lead to termination of contract

Anticipatory breach could occur when a contracting party refuses

to accept and /or acts in a way which could potentially affect the

performance of the contract before the arrival of the time where

performance of the contract / clause / ancillary contract starts.

E.g., A trainee employee refuses to undertake the test or delays undertaking

the test which could qualify him as a confirmed employee of the organization

and thereby entrusts various obligations like service bond, notice period

etc.,

E.g., A senior executive of the firm joins a competitor firm which makes the

firm apprehensive that s/he may disclose the trade secrets to benefit the

competitor at the expense of his/her previous employer.

Handling Anticipatory Breach

In case of an anticipatory breach, the affected contracting party

may cancel the contract and at once initiate legal proceedings

against the party which repudiated the contract in order to get

compensation for damages

Or

The affected party could wait till the time for execution of the

contract and sue the other party for not honoring the agreement.

It means that the affected party recognizes the validity of the contract until

the arrival of the time for execution and it provides an opportunity for the

other party to perform the contract.

Actual Breach

Actual Breach by contracting parties may happen either at the time

of performance of contract is due or during the performance of the

contract.

E.g., Ram Kumar accepted the offer letter from Firm “A” which had one

month notice period clause. However, the Firm had revised the notice period

clause to “3 months” when Ram kumar was about to sign the employment

contract at the time of the joining the firm.

Or

E.g., Jan Peter signed an employment contract with Jet Airways Rs. 1500

Flight Duty Allowance per day. However, Jet Airways reduced that amount

to Rs. 500 during the employment term and thereby breaching the contract.

Handling Breach of Contract

Cancellation or Rescission of Contract

Seeking Compensation for Damages

Seeking a Decree for “Specific Performance” from Court of Law

Seeking An Injunction from Court of Law

Seeking Quantum Meruit

Rescission of the Contract

Affected Party may approach the court of law in order to rescind

the contract so that s/he could be free from obligations.

Rescinding the contract enables the affected party to seek

compensation from the party who breaches contract for damages.

It depends on the nature of breach on a case to case basis as what

kind of damage could be obtained from the party who breaches the

contract.

Understanding Damages

Ordinary Damages:

The affected party would be entitled to ordinary damages for any loss s/he

might have naturally suffered as a direct consequence of a breach by the other

contracting party. (E.g., Flight ticket cancellation and the direct

inconvenience but not the opportunity cost in terms of loss of business etc.,)

Special Damages

Special Damages are sought for any loss the affected party might have

incurred as an indirect consequence of a breach by the other party. (e.g.,

Loss of revenue or market share because a pilot resigns from his service

without fulfilling his notice period and / or training bond obligations)

The affected party may seek special damages for loss of profit etc., in

addition to actual damages when there is an extraordinary circumstance

present and it is communicated to the other contracting party. In such cases, the

party who breach the contract is liable to pay special damage due to non-

performance of the contract.

Understanding Damages

Vindictive Damages (or Punitive or Exemplary Damages)

The party which breaches the contract may be taken to court by the affected

party not solely with the intention to seek monetary compensation but for penalizing

the party for affecting the sentiments of the affected party. In such cases, the

penalty would depend upon the severity of shock received by the affected

party due to non-performance of contract.

Nominal Damages

The affected party is entitled to nominal damages when it is difficult or

almost impossible to calculate the actual loss suffered due to the breach of

contract.

Understanding Liquidated Damages and Penalty

Liquidated Damages

It essentially means that contracting parties conscientiously attempt to

estimate the loss in case of breach of contract by either party and mention

the same in the contract as liquidated damages.

Penalty

Unlike liquidated damages, the contracting parties do not make any attempt

to estimate the loss in case of breach by either party but specify a sum with

the objective to coerce the offending party to honour the contract by

fulfilling the obligations.

Understanding Liquidated Damages and Penalty

When a contract has been broken, if a sum is named in the

contract as the amount to be paid in case of such breach, or if the

contract contains any other stipulation by way of penalty, the party

complaining of the breach is entitled, whether or not actual

damage or loss is proved to have been caused thereby, to

receive from the party who has broken the contract reasonable

compensation not exceeding the amount so named or, as the

case may be, the penalty stipulated for. (Section 74 of ICA)

The above section is applicable for “Service Bonds” which are

entered between the employer and the employee wherein the

employee agrees to work for the employer for a stipulated period.

The 1946 Love Story of Arvind Mills

Mr. Deshpande was working for Arvind Mills as a Weaving Master and in the year 1941, he entered into a “service agreement” with his employer for a period of 3 years. It said;

“.. shall not during the said term whether he be in the employment or not, get in the employ of or be engaged or be connected as weaving master or as an employee under any title discharging substantially the same duties he may be discharging here with any firm or company or individual in any part of India including. the Indian States for the space of the said years or any portion of the remaining period of the said term.”

Later, Mr. Deshpande joined Rohit Mills Ltd and subsequently Arvind Mills sued him for breach of “service agreement.”

After hearing the legal councils, The Bombay High Court said, “We,…grant an injunction against Deshpande restraining him from getting in the employ of or being engaged or connected as a weaving master or as an employee under any title discharging substantially the same duties as a weaving malster, in the Rohit Mills or any other company or with any firm or individual in any part of India including the Native States for the term ending on December 31, 1946.”

Seeking Injunction

The court may give an injunction, either temporary or permanent,

depending on the circumstances of the case, preventing the

offending party from doing something which s/he agreed as per

the contract that s/he would refrain from doing so.

Seeking Relief for Specific Performance

The affected party may approach the court of law to seek relief for

“Specific Performance” when monetary compensation would not

be sufficient as a remedy.

This means that the court of law would coerce the offending

party to fulfill the obligations as per the contract rather than

paying an amount to mitigate the loss occurred due to the

breach.

However, relief for specific performance would be given to the

affected party only if the affected party would not be able to

get a substitute in the market using the monetary

compensation.

Seeking Quantum Meruit

A Quantum Meruit litigation arises in an event when an express

contract is not completed or it is rendered unperformable by the

contracting parties.

In such event, the court may award compensation by calculating “the

reasonable value of services,” irrespective of the contract terms,

to measure the damages arising out of this breach and thereby ensuring

equity.

The Onus of Damage Control…

Mitigation of Damages

The affected party should do everything possible to mitigate the gravity of

damages due to the breach of contract. It essentially means that the affected

party could not seek compensation for breach of contract when s/he fails to take

reasonable efforts to prevent the losses after the breach.

Further Reading

“Employment Bond: Legal Status and Current Issues” by Prof. P.K.

Padhi and Prof. E.M. Rao. (The article is available in your

reading material)

Focus on Types of Employment Bond and Analysis of the Scenarios

Scenario I – Fixed Period – Type A

Scenario II – Fixed Period – Type B

Scenario III – Special Fixed Period

Scenario IV- Fixed Period – Type C (Return the complete salary)

Scenario V- Fixed Period – Type D (Compensation for loss incurred)

Scenario VI- Fixed Amount

Scenario VII- Prior Deposit

Scenario VII- Training Expenditure

Scenario VIII- Foreign Bond

Scenario IX- Non – release of Personal Document