Storm in a teacup – what is behind non-compete provisions
The last few days set out various perspectives regarding the action recently taken by the Nascent Information Technology Employees Senate (‘NITES’), an organization working for the benefit of IT employees in India filing a complaint to the Ministry of Labour & Employment. In its complaint, NITES has stated that an IT company has been trying to enforce a non-compete clause of their employment contracts and that it has multiple complaints from employees regarding the same.
The offending provision seems to suggest restrictions being imposed by employers on (ex) employees, such as that for a period of 6 (six) months from the termination of their employment. Such provision also prohibits the employee from joining any of the competitors enumerated in the contract, if the employee has to work with a customer that the employee worked with in the preceding 12 (twelve) months at the company before the termination of their employment. The provision also prohibits such employees from joining any customer that the employee worked with in the preceding 12 (twelve) months before the termination of their employment.
The philosophy behind the provision itself is fairly common and one comes across such similar provisions in most employment contracts of major IT companies. While much has been written about the fairness of such provisions, the question is whether such ‘non-compete’ provisions in employment contracts will stand the test of law.
What does the Indian Contract Act imply?
In this respect, Section 27 of the Indian Contract Act, 1872 (‘Contract Act’) is very clear in prohibiting any agreement which restrains anyone from practicing a lawful profession, trade or business of any kind and voids any agreement to that extent.
The jurisprudential landscape regarding negative covenants restricting an employee from working with any other employer has remained largely unchanged in the last few years. The Supreme Court has dealt with this in the context of different scenarios. While the Supreme Court in the case of Niranjan Shankar Golikari vs. The Century Spinning and Mfg. Co. Ltd. has upheld such a restriction that was sought to be enforced during the term of the employment contract, it has repeatedly and consistently held, especially in cases of Superintendence Company of India (P) Ltd. vs. Krishan Murgai and more recently in the case of Percept D'Mark (India) Pvt. Ltd. vs. Zaheer Khan and Ors. that the provisions of an employment contract which prohibit the employee from practicing a lawful profession, trade or business of any kind after the termination of the employment contract are illegal and unenforceable under Section 27 of the Contract Act.
Restrictions should be ‘reasonable’
The repeated arguments in support of such negative covenants are that their coverage in their employment contracts is very narrow in its application since the employer does not prohibit its employees from joining all its competitors, but only a select few. Further, the coverage is also circumscribed since the restriction is applicable only if the (ex) employee was working for a specific client during his previous employment. In other words, the restriction is sought to be couched as a reasonable restriction.
Interestingly enough, the Indian Contract Act departs from the English common law doctrine of restraint of trade in this aspect. In India (unlike in the case of English Law), the Contract Act does not differentiate between complete restraint of profession, trade or business and a limited restraint of the same. It would therefore be quite rare for a judicial forum to endorse the ‘reasonable’ nature of any restriction unless there were specific and unique circumstances in a particular matter. This, in turn, gives rise to another question. When non-compete provisions are not enforceable, why do Indian employers still elect to include them in their employment contracts? A simple explanation to this question may be that, while the Indian employers understand the enforcement of non-compete provisions is unlikely to occur, perhaps they want to use the advantage of their size and heft to influence their employees in order to ensure compliance with the employment contract fearing possible litigation and in turn reduce the employee turnover rate.
The way forward
With the global focus of corporations shifting towards increasing ‘workplace happiness’, maybe it is time for HR teams to evaluate whether provisions like this actually help matters.