THE LEGALITY OF SERVICE BOND IN EMPLOYMENT RELATIONS

Whether employees can bolt after benefitting from employer training?

A service bond under employment relations is a special agreement between an employer and an employee whereby the employee agrees to work for the employer for a specified period under certain conditions. The agreement is usually necessitated where, for instance, an employer trains an employee and wishes to keep the employee in the service of the employer for a particular period in order to reap the benefits of the employee’s training and expertise. 

Usually, one of the main conditions of the service bond is that should the trained employee desire to terminate his or her employment before the specified period, the employee would be obligated to refund an agreed amount calculated as the cost of the training received. 

The question is whether a service bond as described above is a legal and enforceable contract. Sentiments around the legality of service bonds centre on the idea that no employee should be held in servitude. This underscores one of the fundamental principles of employment law—the principle against forced labour. Conversely, employers who rely on service bonds hope to advance and secure their business interests by ensuring that they get value for expending their resources in training an employee. 

In quite an interesting case, the National Industrial Court of Nigeria, Owerri Division, was recently called upon to determine the legality of a service bond. 

Ashbard Energy Company Ltd v. Mr. Jeremiah Agbarakwe*

Mr. Agbarakwe is a Petroleum Engineer employed in November 2019 as a Quality, Health, Safety and Environmental (QHSE) Officer in Ashbard Energy Company Ltd.

Sometime in October 2021, the Company arranged an oversea training program in Spain for some of the employees (which included Mr. Agbarakwe) to develop and advance their professional capacities. The training was scheduled to hold from 1 November 2021 to 5 November 2021.

Meanwhile, before sending Mr. Agbarakwe and others for the training, the Company made the employees to execute a service bond. Mr. Agbarakwe executed his on 15 October 2021. The main conditions in the service bond were that after the training, Mr. Agbarakwe would remain in the Company’s employment for a minimum period of 3 years which would elapse on 1 November 2024. But in the event that Mr. Agbarakwe fails to work for the stipulated period, he would refund to the Company the cost of the training in the sum of NGN3 Million. 

According to the Company, it had a primary reason for executing the Service Bond Agreement with the employees including Mr. Agbarakwe. The Company acknowledged, in apprehension of early exit, that the trained employees might have the tendency and high propensity to leave the Company’s employment and apply the skills acquired from the training to other competing organizations. 

Interestingly, Mr. Agbarakwe seemed to have confirmed the Company’s fears when he suddenly tendered his resignation (with immediate effect) on 21 February 2022 shortly after participating in the overseas training which ended on 5 November 2021. His resignation was without refund of the NGN3 Million training cost. This was notwithstanding the provisions of the Service Bond Agreement which he voluntarily executed. 

As you would expect, the Company could not tolerate Mr. Agbarakwe’s conduct. Upon his failing to refund the cost of the training as demanded by the Company, the Company commenced an action at the National Industrial Court of Nigeria, Owerri Division, against him claiming the NGN3 Million (training cost), NGN180,000 (being Mr. Agbarakwe’s one month salary in lieu of notice for the termination since he failed to give adequate notice) and general damages in the sum of NGN5 Million.

Mr. Agbarakwe’s Defence

What you might find even more interesting was the defence set up by Mr. Agbarakwe. The summary of his contention was that:

1. the Service Bond Agreement was fraudulently obtained and therefore unenforceable, in that the Company never sent him for any training. Rather, that the Company sent him and others to Spain to act as representatives of the Company in respect of a new product the Company would be marketing on behalf of their business partners; 
2. he is not a Marketer but a Petroleum Engineer, and that he was never trained in any engineering field by the Company or any related field while in Spain; 
3. when he returned from Spain, he had protested to the Human Resource Coordinator that what they went for was not a training but an excursion, but his complaints were not treated; and
4. the Service Bond Agreement amounted to forced or compulsory labour which offends section 73 of the Labour Act and section 34(1)(d) of the Nigerian Constitution (as amended).

Court’s Decision

What is the legal status of a service bond?

The Learned Trial Judge, Hon. Justice N.C.S. Ogbuanya, took time to consider the parties’ arguments. His Lordship established the legal status of a service bond holding that generally, a service bond is not illegal and does not amount to forced labour except where it is found to be unreasonable and unfair. According to his Lordship:

As the highly persuasive Alberta Court of Queen’s Bench held in the Canadian case of Jones v. Gerosa (2016) ABQB 207), contest against any restrictive covenant in employment contract is subjected to ‘fairness and reasonableness’ test, as to whether such restrictive covenant is ‘fair and reasonable’ in the circumstance of its execution. In my view, adoption of restrictive covenant in form of Service Bond is borne out of business expediency and legal reality of the vagaries of labour market in modern time, which necessitates using legal instruments to curb and moderate the myriad of odious competitive attitude of labour market operators and fervent mobility of labour in the modern world of work. Where an employer expends funds and other resources to train a core employee, who later without any beneficial impact of the training on the operations of the employer, just walks away without more from the employment, vide resignation, and may even quickly hop-in the waiting hand of the business rivalry of his/her erstwhile employer, certainly calls for adoption of reasonable restraint on such labour mobility. Such restraint agreement, in the form of Service Bond, is not only valid, but also reasonable and fair, provided that the terms are not capricious and unduly lasting for a long time. In other words, Reasonable Service Bond is not forced labour or contrary to public policy.

Also, by the above, the Learned Jurist justified the fears of the Company in introducing the Service Bond Agreement before sponsoring Mr. Agbarakwe for the training. No employer desires to be caught by the risks associated with the unpredictable mobility of employees especially when trained by an employer.

Was the Service Bond Agreement executed by the parties fair and reasonable?

Having established the legal status of a service bond, the Court was left to consider whether the Service Bond Agreement executed by Mr. Agbarakwe was fair and reasonable and whether there was any merit in the other defences set up by him. The Service Bond Agreement in question is a 3-year bond duration with a release condition stipulating repayment of the sum representing the training cost of NGN3 Million.

The Court found that the terms of the Service Bond Agreement were fair and reasonable in the circumstance of its execution. Also, the Court found that contrary to Mr. Agbarakwe’s claims, he was indeed trained abroad in the area of his engagement as a QHSE officer. His Lordship held:

In alleging that the Service Bond was fraudulently procured, the Defendant had laid the particulars of the fraud to the effect that the Claimants knew that the training was not meant for him, being an Engineer but for Marketers, but arranged such to back up their desire to keep him in the employment against his will, without any gain from the deceptive training. The Claimants did not agree that the training was not adequate and proper for the value expected for the office of the Defendant as Quality Health Safety & Environment (QHSE) Officer. The Claimant tendered the Training Report (Exh.C8), which showed the details of the training program. From the record, a close look at the exh.C8 shows that on Day 3 (Wednesday 3rd November 2021), there was a training program on “Quality Control”, which falls squarely on the domain of the Defendant’s line of duty and office. This piece of evidence is direct on the core contention that the training programme was for marketers as alleged by the Defendant, who did not tender a better evidence than what the exh.C8 has indicated. The Defendant also maintained that the training was sham and that he reported to the Human Resources of his dissatisfaction with the training, but did not tender any evidence to that effect. Even the Defendant’s resignation did not reflect the training issue as a basis for his leaving. He rather praised the Claimants for a good relationship he enjoyed with them, while tendering a resignation letter with immediate effect.

No fractionalization of payment in periodic employment

Regarding the Company’s claim on the payment of salary in lieu of notice of resignation, Mr. Agbarakwe disagreed. He argued that he worked in the month of February 2022 till 21 February 2022, leaving out 7 days before the end of the month. Consequently, Mr. Agbarakwe was willing to pay for the 7 days only.

The Learned Trial Judge disagreed with Mr. Agbarakwe’s position. His Lordship relied on the principle of “No fractionalization of payment in periodic employment” established in earlier cases. The Court then held that monthly salary is not calculated by fraction per day but whole sum payment monthly. Therefore, having decided to terminate the employment (by resignation) within the new month of February, Mr. Agbarakwe was liable to pay the full salary of that exit month since he did not work till the end of February. It was immaterial that he worked and had only seven days left for which he did not work. The Court would not allow him to pay a prorated amount.

The Learned Trial Judge relied on his earlier decision in the case of Abe Adewunmi Babalola v. Equinox Int’l Resources Ltd**, wherein  his Lordship explained the rationale behind the position as follows:

…Pro rata/fractional payment of salary is not applicable to workers in periodic employment who receive salary per calendar month; not calculated by the number of days, otherwise, there will be no equal salary monthly per year, given that the twelve months of a year do not have equal days, particularly the month of February, with days as low as 28 or 29 days.

The Company was entitled to compensation

The Court also considered the manner of Mr. Agbarakwe’s resignation and held that the Company was entitled to compensation by way of damages. The Learned Trial Judge awarded NGN2 Million to the Company as general damages on the basis that Mr. Agbarakwe was in breach of his employment contract and service bond—he resigned without proper handover of his duty before resigning; and his resignation was abrupt, and without prompting by the Company. In fact, the Court appeared to frown at Mr. Agbarakwe’s disposition because in his resignation letter, he praised and relished the relationship he had with the Company in the course of his employment but still resigned with immediate effect while subsequently criticizing the Company. The Court held that all of these constitute anomalous conduct and acts of unfair labour practice.

Conclusion

The Court is highly commended for such a sound judgment. It is hoped that lessons have been learnt. Before taking any important step in their employment relationships, employees are advised to seek legal advice and proper legal guidance.

*Suit No: NICN/PHC/39/2022 decided on 11 February 2025

**Suit No. NICN/166/2015; Judgment delivered on 17 June 2020