Enforceability of Restrictive Clauses in an Employment Agreement
Non-Compete Clause-
The clauses restraining employees from joining competitors after the cessation of employment or preventing a former employee from starting a competing business or advising a family member or relative who is in a similar line of business are a few of the common clauses employer mention in the employment contract. However, it is essential to understand here that the Indian courts prioritize the protection of the rights of an employee seeking employment overprotecting the interests of the employer seeking to protect itself from the competition.
In view of the Constitution of India and the provisions of the Indian Contract Act, 1872, (“Contract Act”) courts have generally held that the right to livelihood of the employees must prevail over the interest of the employer, in spite of an existing agreement between the employer and the employee.
As per Section 27 of the Indian Contract Act, 1872 Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception-
- Section 27 states that all agreements in restraint of any profession, are void, so long as an employee does not have the motive to cheat, mistrust or cause irreparable loss to the company, trade or business. Hence, reasonable restraints are permitted and they do not render the contract void.
- Also, this section does not apply during the continuance of the contract of employment and it applies only when the contract comes to end.
Non-Solicitation Clause-
It is basically a clause in a contract according to which if an employee stops working at the company or starts working for, let’s say a competitor, such a contract refrains the employee from soliciting or poaching any other employee or business clients or using any confidential information that was obtained by virtue of working at the respective company.
The enforceability of non-solicitation agreements depends upon the facts and case-to-case basis. It is to be noted that non-solicitation agreements tend to consider the best interest of the employees.
Training Bond-
The employer in order to protect and safeguard its interest often executes a training bond with its employees for training imparted and/or provided during the course of their employment or specifically provided prior to their joining, to ensure that they work for a particular duration. These bonds specify the minimum period for which the employee shall serve the employer, though such clauses may not be enforceable in the Indian context. If the employee acts in breach of such an agreement, the employer can seek compensation, at times which are limited to the expenses incurred for training the employees. However, the compensation demanded should be reasonable and not imposed by way of a penalty. The employer is entitled only to reasonable compensation based on the facts and circumstances of the case.
Non-Poaching Agreements-
The non-poaching agreement is a restrictive agreement which is often signed by the parties is the non-poaching agreement which is executed between two employers. This type of agreement essentially considers the case wherein two organizations/companies agree not to solicit or ‘poach’ the employees of their direct competitors. Non-poaching agreement per se does not contravene Section 27 of the Contract Act as it does not restrain an employee from seeking and/or applying for any job/employment. Hence valid in India.
Possible Ways to Enforce Restrictive Covenants
- The restrictive clauses can have a “prior approval” condition so that it will make the restrictive clause a partial restrictive.
- Clauses related to confidentiality and IRPs should clearly mention that all the IPRs belong to the Company only and there should be a reasonable restriction on the using the confidential information of the former employer or with the prospective employer.
- Each and every employment contract and company policy should be agreed upon by the employee hence countersign is essential as an acknowledgement.
- The Service Contract with the customer should have an explicit clause related to non-poaching and include affiliates, subsidiaries and group companies.
- From time to time training the employees on ethical working, resignation, and policies is a must to change the mindset of the employees.
- Strict compliance with the notice period can be helpful as the new employer would not like to hire an employee with a higher notice period that is non-negotiable. If a notice period is agreed upon by the employee at the time of employment agreement, then leaving the organisation without serving a notice period will be a breach of contract.
Employment laws are tricky and mostly decided in the favour of the employee. Hence it is essential to take all steps carefully to lead by the right example.
If you are looking for strong and legally enforceable employment contracts or policies for your business, please reach out to Businezexcellence.com.
Happy Reading!
Shilpi Kulshrestha
