India: Employment Contracts In India - Enforceability Of Restrictive Covenants

1. Introduction

The employer-employee relationship is, and has always been, in a constant state of evolution. As the nature of this relationship evolves and changes, so does the nature of disputes that arise as a result of diverging interests, which the employer and employee seek to protect in their interaction with each other and the society in general. Several laws and legislations have been drafted to create an appropriate framework to address these concerns with an objective to reasonably balance the interests of employers and employees. Such employment laws have a broad ambit and include within their scope all areas of the employer-employee relationship and are not merely restricted to contractual issues and/or workplace discrimination.

Globalization coupled with easy accessibility of advanced technology has had a phenomenal impact on the employer-employee relationship in India. The new economic policy announced in 1991had signaled a decisive shift in economic policies of the government from regulation to liberalization. Further the advent of various multinational companies has substantially changed the relationship between employers and employees and the nature of disputes arising between them. While an increasingly liberalized market has promoted healthy competition between businesses, it has also resulted in accordance of significant importance to protection of innovative ideas, proprietary information, internal workings and mechanisms which lend firms the 'competitive edge' to thrive in the present economic environment. The objective to protect the 'competitive advantage' has in turn resulted in concerns of potential misuse of confidential and proprietary information of employers by employees, especially before hiring, during, and post termination of, their employment.

With a distinctive cross border flavor in contemporary transactions, instances of organizations attempting to protect their trade secrets and confidential information manifest themselves in the use of 'restrictive' agreements between employers and employees, which place limitations and restrictions on the latter pertaining to the manner in which the employees are allowed to use and disseminate the information they become privy to solely, as a consequence of being in the service of the employer.

When contrasted with the employees' constitutional and statutory rights to pursue occupations of their choice and earn a livelihood, by using the full array of knowledge and skill at their disposal, the diverging interests sought to be advanced by employers (for protection of confidential information to retain the 'competitive edge') promise to form a fertile ground for contentious disputes between the employers and employees in the near future. This research publication focuses on the analysis of the legal framework existing in India to address such emerging concerns in the relationship between employers and employees along with developments through various case laws.

The legislations governing several aspects of the employer-employee relationship existing both at National and State level are so numerous, complex and ambiguous, that they tend to promote litigation rather than providing easy solutions to potential problems. However, concerns of employers and employees relating to protection of confidential information, non-disclosure and non-solicitation have not yet been addressed through legislation in India, thus warranting recourse to judicial interpretation and common law. There is profound inconsistency within the judiciary itself when it comes to developing appropriate standards of review for addressing these emerging contentious employment related issues relating to confidentiality and non-solicitation.

This paper seeks to provide an overview of the scenarios in which such disputes may arise between employers and employees, and highlights the need for formulation of a coherent legal framework in order to address such concerns. Further, this paper also assesses the validity of various restrictive covenants which are increasingly being incorporated in employment contracts.

2. Rise of a 'New Breed' of Employment Related Disputes in India

As we are moving towards a knowledge-based economy, the quest for formulation of a coherent and appropriate understanding of the ever-evolving concept of industrial relations has become one of the most delicate and complex challenges. The disputes in the present context are not just applicable to the two classes that are the employees (labour) and the employer (management/owners), but also to a new work force - the "White Collar", a third class that has emerged as a result of adoption of a liberalized economic regime. The term 'whitecollar' worker refers to a person who performs professional, managerial, or administrative work which is in contrast to a blue-collar worker, whose job requires manual labour.

The emergence of this new class has made the system more complex. In the past, the majority of the disputes arose between the workers/ labourers or the unions comprising the working class and the employers, which were sought to be addressed through various enacted laws to protect the interests of the weak. These laws also envisioned resolution of disputes between the trade unions and the management for their rights, which were perpetrated either through strikes, bandhs or hartals.

However, as the complexities in the work field increased, the 'White Collar' workers often found themselves engaged in various matters related to breach of fiduciary responsibilities, corporate defamation, and corporate law non-compliance. They are also engaged in issues regarding payment terms, termination of service, breach of confidentiality, non-compete or non-solicitation clauses adding a new domain to the concept of industrial relations. The legal framework addressing the latter is still at a nascent stage in India. This Part discusses the situations where such disputes may arise between employers and employees at various stages of their relationship.

I. Pre-Hire

It is possible that dispute may arise even before a person is hired as an employee of a company. Cases where a new recruit has joined employment without duly terminating his agreement with the previous employer may pose risk of potential disputes, both for the employee and the new employer. The employers take great effort in creating intellectual property and proprietary information, and in protecting its confidential information. Such situations are also possible in today's age, when a prospective or a newly hired employee has a post-termination obligation (which include non-disclosure of confidential information, non-solicitation, non-compete etc.) with an erstwhile employer which he or she might have breached. Typically, such disputes would arise between the erstwhile employer and employee. However, there have been instances where the prospective employer has also been dragged into litigation, by taking the position that the new employer is encouraging and assisting the employee to breach his obligations towards the previous employer.

Further, many companies have a preemployment screening policy, with an objective of gaining a degree of certainty that the potential employee does not have a criminal record involving dishonesty, or breach of trust involving his/her fiduciary or official capacity, or has not misused his/her official or fiduciary position to engage in a wrongful act including money laundering, fraud, corruption etc. Such a screening policy may raise concerns of violation of the right to privacy of the persons being subjected to such screening, as the mode and manner of gathering such information may violate rights of individuals guaranteed under Article 21 of the Indian Constitution.1

The Nine Judge Bench of the Supreme Court in Justice K.S Puttaswamy (Retd.) v. Union of India and Ors.2 recently held that the right to privacy is protected as an intrinsic part of the right to life and personal liberty under Article 21 and as a part of the freedoms guaranteed by Part III of the Constitution. The judgment has defined nine different kinds of privacy and one of them includes Informational Privacy.3

The following scenario may also give rise to pre-hire employment disputes:-

  1. When the employer withdraws employment offer prior to the employee's joining.
  2. When the employee's background check results are unsatisfactory or the employee provides disclosures or misrepresents to the prospective employer.

But to reduce litigation risk, it is also helpful to obtain a representation from the new employee (whether under the employment contract or otherwise) that the employee has not and will not breach any obligations towards his previous employer, as a result of joining the employment under the new employer. This has been adopted as a standard practice in most multi-national corporations these days to avoid litigation at a later stage.

II. During Employment

During the course of employment, several disputes may arise between the employer and the employee. These can be broadly summed up in 2 categories:

A. Employment Related Disputes

Misconduct or indiscipline of an employee, insider trading, indulging in criminal activities, under-performance, breach of the terms of the employment contract or HR policies/code of conduct etc., are few of the contentious issues which may ultimately lead to a dispute.

B. Disputes Relating to Restrictive Covenants effective During Employment

There are broadly two kinds of restrictive covenants in operation during the term of employment which are non-compete and non- disclosure of confidential information.

If the employee is in breach of a non-compete restriction, prohibiting him from engaging in any kind of business or activity which is similar to the company's business, or making a mandate to not disclose or misuse confidential information or trade secret passed on to the employee, during the course of his employment then such breaches would inevitably lead to a potential dispute.

III. Termination

In cases where the employee voluntarily resigns or retires from employment, it is unlikely to happen that there will occur a dispute (unless there are elements of a breach being committed by the employee).

In contrast, termination of employment by the employer often leads to a stand-off between an employee and employer which has all the ingredients for baking a potential dispute. Termination of employment due to misconduct, breach of the employment agreement including violation of restrictive covenants therein, is often escalated and settled through resort to courts.

Footnote

1. Vikram Shroff & Neha Sinha, Background Checks in India, Society for Human Resource Management (2012) available at http:// www.shrmindia.org/knowledge-center/talent-acquisition/ background-investigations/background-checks-india.

2. WP (C) 494 of 2012.

3. An interest in preventing information about the self from being dissemination, and controlling the extent of access to the information.

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