Can a penalty clause in offer letter stop ghosting by candidates?

If a candidate does not show up on the stated date of joining, after having accepted the offer letter, the organisation does incur losses in terms of time, effort and money

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Back in 2013, Philips Carbon Black included a penalty clause in its offer letters to selected candidates making them liable to pay five per cent of the offered CTC if they failed to show up on the joining date. As strange as it may sound, apparently, a vice-president hopeful had to cough up Rs 4.5 lakh under a similar policy! This isn’t uncommon in the West where companies do include such clauses in their offer letters, and they are not entirely wrong in doing so prove some data.

A USA Today report from 2019 claims that as much as 20-50 per cent of job applicants and workers fail to report on their joining dates. Another 2019 survey reveals that 28 per cent of candidates back out of offers. Receiving a better offer from another organisation has been seen as the key reason, along with a higher counter offer from the existing employer. These are reasons enough for organisations to look for means to stop ghosting. After all, some of these hirings are a result of months of interviews and discussions. A no-show takes the employers back to square one and the process has to be started from scratch. However, is a penalty clause the only solution?

“While a penalty clause can act as a deterrent, its efficacy in preventing ghosting is insignificant. Sensing abilities of a recruiter aided by AI can predict the likelihood of a candidate’s joining. It is more effective to have a panel of candidates to fall back on — the second best — in the event of the first one not joining at the last moment.”

Lalit Kar, senior VP & head-HR, Reliance Digital

Is a penalty cause feasible?

Subir Verma, HR head, Tata Power DDL, says, “In the event of a candidate not joining after accepting the offer letter, the company can initiate action and claim cost of recruitment, provided such a clause is mentioned in the offer letter. Although difficult to quantify, some companies are known to ask candidates to pay an ad hoc sum of eight per cent of CTC, or some fixed amount. There have been cases, especially in the Middle East, where companies have taken candidates to court for not joining after accepting the offer letter.”

Is a penalty cause legal?

“Legal implications are time consuming and not preferred by candidates or companies. Some companies, especially in the IT sector, have started the practice of blacklisting the candidates for future employment with the company. Legally, the offer letter is an offer of employment and does not indicate the actual commencement of employment. Hence, one has to prove that the employment relationship has started. Section 5 of the Indian Contract Act, 1872 says ‘A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards’,” explains Verma.

Verma also cites the case of Bhagwandas Goverdhandas Kedia vs M/S Girdharilal Parshottamdas (1966 AIR 543, 1966 SCR (1) 656), where it was noted that “In the case of a contract which consists of mutual promises, the offeror must receive intimation that the offeree has accepted his offer and has signified his willingness to perform his promise.”

“In the event of a candidate not joining after accepting the offer letter, the company can initiate action and claim cost of recruitment, provided such a clause is mentioned in the offer letter. Although difficult to quantify, some companies are known to ask candidates to pay an ad hoc sum of eight per cent of CTC, or some fixed amount.”

Subir Verma, HR head, Tata Power DDL

Is a legal route advisable?

Lalit Kar, senior VP & head-HR, Reliance Digital, says, “There is no specific employment law, which can be invoked to punish such behaviour. It is not likely that there would be any law in the future, as there is no issue of violation of fundamental rights or involvement of a larger public interest. However, some organisations do incorporate a penalty clause in the offer, which states that in the event of the candidate not joining after having signed and accepted the offer, he will have to pay a definite amount.”

“In such cases, the organisation is free to move a civil court in the given jurisdiction, as stated in the offer, under Section 74 of Indian Contract Act, 1872. Normally, however, organisations may not prefer the legal route as getting relief from a civil court can be time consuming and the litigation expenses can far outstrip the loss arising out of the candidate not joining. Again, it is difficult for the organisation to express the notional loss in monetary terms, to make a claim, which is equally refutable,” he adds.

Kar further says, “While a penalty clause can act as a deterrent, its efficacy in preventing ghosting is insignificant. Sensing abilities of a recruiter aided by AI can predict the likelihood of a candidate’s joining. It is more effective to have a panel of candidates to fall back on — the second best — in the event of the first one not joining at the last moment.”

“It is not possible to eliminate dropouts completely, but that doesn’t mean there is a need to introduce a penalty clause. Everyone has the freedom to accept or reject an offer, or join or not join a firm. There is no question of forcing anyone.”

Anil Mohanty, head of people and culture, Medikabazaar

Rely on backup

Personally, Verma believes acceptance of the offer is as good as the candidate promising to join them, just as the company gives the person an offer with a promise. The best way to avoid such situations is to find out the reasons for not joining, addressing those reasons, ensuring transparency and trust, and proactively having a back-up candidate ready.

Most of the dropouts are due to skill gaps. That means, skilled and qualified candidates literally have the power to choose where they want to work. Young techies are drawn towards better salaries, and opportunities to learn from and be mentored by their leaders. Ghosting can happen to any recruiter, irrespective of the process one has in place. Anil Mohanty, head of people and culture, Medikabazaar, however, feels that if an organisation is becoming a regular victim then chances are that it is not keeping pace with the evolving jobseeker mindset and hiring trends.

“It is not possible to eliminate dropouts completely, but that doesn’t mean there is a need to introduce a penalty clause. Everyone has the freedom to accept or reject an offer, or join or not join a firm. There is no question of forcing anyone,” Mohanty adds. He believes that although it is a painful process, the organisations will just have to accept the candidate’s decision and start looking for another suitable person all over again.

3 COMMENTS

  1. I agree that, while a penalty clause can act as a deterrent, its efficacy in preventing ghosting is insignificant. It’s like execution of bond at the time of joining. In several cases companies don’t pursue when a candidate leaves to join another company. Its some sort of moral suasion, like RBI advising a bank not to expose further to a particular line of activity.

  2. Nice article. In my opinion making a defaulting candidate pay up price may not be required. It is common sense to spot the uninterested candidates, there are enough signals they are not joining your firm. Going legally and making a candidate is only going to upset your Organisation brand.

  3. It may to some extent work as deterrent to prospective employee to avoid joining. However, if a candidate is reluctant to join an organization for what ever be the reason, forcing him to join will become the proverbial taking unwilling horse to water.
    As said in the article, it is better to identify the reasons for unwillingness and take a course correction may ensure future drop outs. Going legally also may not prove much as it may create a different image in the employment market.

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