Recently, the Ministry of Labour and Employment notified Infosys that a joint conversation on the implementation of the non-compete provision prohibiting employees from joining a competing technology business within six months of leaving Infosys has been scheduled. These remarks follow a petition to the labour ministry by a Pune-based labour organisation demanding the elimination of Infosys’ non-compete provision. According to the provision, workers are prohibited from directly joining identified rivals or any of Infosys’ clients for six months after leaving their positions.
What is a non-compete clause?
A non-compete provision is a contract in which an employee agrees not to compete with his or her employer in any way once the work term ends. Additionally, these agreements prevent the employee from disclosing proprietary, sensitive, or secret information to any other parties during or after employment. This also applies to agreements between independent parties involved in commercial activities, such as dealers and distributors, and similarly situated relationships.
In terms of the Indian perspective, such agreements have been deemed lawful on very narrow grounds. The Indian Contract Act, 1872 (Act) is the principal law in India governing trade restraint agreements and their legitimacy. Specifically, Section 27 of the Act expressly prohibits such agreements. It declares, “Any agreement that restricts someone from engaging in a legitimate profession, trade, or business of any type is invalid to that degree.” It makes one exemption for agreements that prohibit the continuation of a company in which goodwill is sold. Non-compete agreements are classified into two categories. The first imposes a condition on pre-termination, whereas the second imposes a requirement on post-termination employment.
Pre-Termination Non-Compete Clauses
The pre-termination non-compete provision is only effective throughout the period of the employment contract. On pre-termination violation of a non-compete agreement, the law is established: the enforceability of this condition has been affirmed in several court rulings. In the case of Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr., the court categorically ruled that the notion of restriction of trade does not apply throughout the duration of the employment contract; it only applies after the termination of the contract.
Post-Termination Non-Compete Clauses
Post-termination non-compete clauses, also known as restrictive covenants, are included in contracts to prohibit employees from engaging in a similar business or profession for a specified period of time or within a specified geographic area in order to protect the employers’ business following the termination of employment. Furthermore, it is evident that non-compete provisions benefit employers more and show contempt for the employee’s circumstances by restricting his job options. As a result of this circumstance, the workers said that such terms violate Article 19 (1) (g) of the Constitution and Section 27 of the Act, and hence cannot be enforced.
However, Indian courts have clarified in several instances that negative covenants are enforceable between parties during the duration of employment but cannot be extended beyond that term. Nonetheless, the apex court observed in the case of Niranjan Shankar Golikari that the enforceability of certain post-termination non-compete clauses cannot be completely restricted; it varies by case, and if the intended benefit is not simply unilateral or the clause is not mischievously framed, they can be enforced. There seems to be no agreement among the courts about the applicability of post-termination non-compete clauses, and hence this has remained a moot issue requiring further study.
Furthermore, even the Competition Commission of India (CCI) has stated that a non-compete provision in an employment contract between an employee and a firm, does not violate Sections 3 and 4 of the Competition Act, 2002. Additionally, the CCI noted that an employee who signs an employment contract prohibiting him from offering services to a rival of the employer post-employment negotiates his salary/pay package appropriately, factoring in the time he would be unable to lend his skills to competitors. As a result, the CCI determined that a condition in a service contract prohibiting an employee from working for a rival did not present a competition concern.
The enforceability of a pre-termination non-compete provision is well established in Indian law. However, there is no fixed stance in the Indian legal system on post-termination non-compete clauses. After reviewing all of the judicial pronouncements on the enforceability of post-termination non-compete clauses, it can be concluded that not all negative covenants, such as trade secrets and non-disclosure of confidential agreements, result in restraint of trade because they are designed to protect the employer’s interests. However, a court of law has never upheld covenants relating to unconscionable, overly severe, unjust, or one-sided work conditions since they jeopardise the employees’ interests. Indian courts have never given an injunction to enjoin a violation of a negative provision in a contract for personal services when the result would be to compel the employee to fulfil the contract precisely. It will be interesting to see how the court decides to go forth with the current issue of Infosys at hand and whether these clauses will indeed be held violative of Section 27 of the Act and illegal in nature.
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