INTRODUCTION
The term ‘Employment Contract’ has not been specifically defined under Indian law. However, as discussed in our previous blog (Part 1: Overview of Employment Contracts), it can be understood as an agreement crystallizing the terms and conditions of employment agreed upon between the parties.
In India, the general practice is that the Letter of Appointment is treated as an Employment Contract. There are certain disputes that may arise from an Employment Contract, pertaining to certain clauses in the Contract or restrictive covenants which are added in order to safeguard the rights of the parties. The potential disputes that may arise in the Employment Contract shall be discussed in this article.
DISPUTES IN EMPLOYMENT CONTRACTS
Over the years, the Industrial Sector has seen a lot of changes, which has necessitated the formulation of a consistent legislative framework governing issues pertaining to employment in India. This need is further underscored by the sheer number of disputes and conflicts witnessed by the Industrial Sector on a regular basis.
The labor employed by the Industrial Sector can be broadly categorized into White Collar and Blue-Collar Employees. Both the classes enter into different forms of Employment Contracts. The conflicts primarily arise on the grounds that either part has breached the terms and conditions mentioned in their respective Contracts.
Broadly speaking, Employment-related disputes can be classified as Pre-Hire, Post Hire and other miscellaneous disputes.
- Pre-Hire Disputes
A conflict between an Employer and an Employee may occur even before the Employee begins working for the company. These conflicts typically occur when an Employee has not fully terminated his/her Contract with the previous Employer before starting the new job and owes the former Employer some kind of discharge of earlier responsibilities.
The other issues that can arise can be because of the new/prospective Employee having breached the Post-Termination Arrangement, such as a Non-Solicit or Non-Disclosure of Information Agreement, with his/her former Employer. In such cases, the prospective Employer is often drawn into litigation by claiming that he/she is supporting and aiding the new/prospective Employee in doing so.
Pre-Hire Employment Disputes can also arise in the following situations:
- When an Employer withdraws an offer before the Employee accepts it;
- When an Employee’s background check results are unsatisfactory; or
- When the Employee makes false or misleading disclosures to a potential Employer.
Thus, it is beneficial to obtain representation from the prospective Employee, either by an Employment Contract or otherwise, in order to ensure that he or she would not violate any Post-Termination Arrangement or Conditions with their former Employer as a result of the new/prospective employment. Such a move would minimize litigation risk and the costs that come with it.
- During Employment
Several conflicts between the Employer and the Employee can occur during the course of employment. These can further be sub-divided into two categories viz. the Employment Related Disputes and the Disputes in relation to the Restrictive Covenants effective during employment.
- Employment Related Disputes
Employee misbehaviour and/or indiscipline, Insider Trading, engaging in illegal activity, underperformance, violation of the terms of the Employment Contract and/or HR Policies/Codes of Conduct, and so on are only a few of the controversial issues that can contribute to a conflict between the Employer and the Employee(s).
- Disputes in Relation to Restrictive Covenants Effective During Employment
During the term of employment, there are two types of restrictive covenants in effect: Non-Compete and Non-Disclosure of Confidential Information.
In most such cases, an Employee is accused of violating either a Non-Compete Agreement preventing him or her from engaging in some type of business or operation that is comparable to and/or in competition with the company’s business, or a Non-Disclosure Agreement which requires the Employee not to reveal or exploit proprietary information or trade secrets passed on to him/her over the course of his/her job. Such violations almost certainly result in a dispute between the Employer and Employee(s) and may even result in lengthy and costly litigation for both parties.
3. Termination
It is unlikely that a conflict will arise when an Employee voluntarily resigns or retires from employment (unless the Employee has violated the terms of the Employment Contract). In contrast to the voluntary resignation, an Employer’s termination of job(s) often results in a standoff between an Employee and the Employer and, thus, has a high likelihood of escalating to a full-fledged legal dispute. Termination of employment due to wrongdoing, breach of the Employment Contract, including violation of the aforementioned restrictive covenants, etc. is often exacerbated and ultimately resolved by the use of the Courts.
The Courts have usually held, in pursuance of the Indian Constitution and the terms of the Indian Contract Act, 1872 (“the Contract Act”), that the Employee’s right to livelihood must take precedence over the Employer’s interests, commercial or otherwise notwithstanding an established arrangement between the Employer and the Employee.
Furthermore, the Courts condemn any kind of post-employment restrictions being imposed on Employees since such restrictions are thought of as restricting the Employees’ economic mobility as well as their personal freedom of choice of work and livelihood.
The Delhi High Court (Delhi HC), in the case of Affle Holdings Pte Limited vs. Saurabh Singh (OMP 1257/2014), held that, where an Employment Contract contains a negative covenant in prohibiting the Employee from carrying on a competing business beyond the purview of the term of the Employment Contract, such negative covenant is invalid and unenforceable. The Delhi HC further held that the Section 27 of the Contract Act would apply to such a prohibition, whereby the Employment Contract would be void to the extent that it restrains the Employee from carrying on a lawful profession, trade or business.
Thus, by this decision, the Delhi HC constructively held that the negative covenant in the Employment Contract shall not hold good in case of a dispute between the Employer and Employee where the Employment Contract places any restriction on the Employee from exercising his right to livelihood.
RESTRICTIVE COVENANTS
The incorporation and subsequent enforcement of ‘restrictive covenants’ such as Confidentiality, Non-Disclosure, and Non-Solicitation in Employment Contracts, which are intended to prevent Employees from disseminating confidential and other important information exclusively available in the course of employment, are frequently among the most contentious issues in India, since such provisions appear to be in direct conflict with Section 27 of the Contract Act.
1. Non-Compete Restriction
An Agreement in restraint of trade, profession and business is one whereby an individual agrees with some other party to limit his/her potential freedom to do business with other people who aren’t parties to the contract in any way he/she wants. Other reasons for Employers having restrictive covenants in Employment Contracts is to safeguard their sensitive information and trade secrets, as well as their expanding business.
Any restrictive covenant must be in restraint of trade to come within the purview of Section 27 of the Contract Act. In order to decide if a restrictive covenant in an Employment Contract is fair and legal or whether it would fall under the purview of Section 27, the Courts have usually considered each party’s bargaining power, the reasonableness of the covenant’s restrictions, the time, location, and manner of the restriction, among other factors on a case-to-case basis. Section 27 has been applied so far to Employer-Employee Contracts, Contracts with Partners, Dealer Contracts, as well as to other miscellaneous situations.
Although it is a well-established principle that such restrictive arrangements/covenants are legally binding on Employees for the duration of the Employment Contract, the legal position on the validity of such covenants after the Employment Contract has been terminated is, as yet, undecided since a lot of divergent views have been expressed by the Courts.
In the case of Niranjan Shankar Golikari v. Century Spg & Mfg Co. Ltd (1967 AIR 1908), the Supreme Court of India (SC) held that an implicit term in an Employment Contract prohibiting a former employee from using his or her former Employer’s trade secrets still gave the Employee the right to use his/her experience and abilities, subject to this exception.
Further, in the case of Ozone Spa Pvt. Ltd. v. Pure Fitness & Ors. [CS (OS) No. 1815/2015], the Delhi HC restrained the Defendants from establishing, operating, or establishing any rival company within a 4-kilometer radius of the Plaintiff’s premises. The Delhi HC held that, while Section 27 states that all agreements in restraint of trade are void unless an employee has the intent to defraud, mislead, or cause irreparable harm to the corporation, trade, or industry, fair restrictions are still permissible and do not make the contract itself void and/or unenforceable.
2. Non-Solicitation of Employees and Customers
A Non-Solicitation Clause prohibits an Employee or former Employee from doing business with the company’s existing Employees or Customers so as to protect the company’s best interests. This type of arrangement is usually carried out between two employers. It effectively considers the situation in which two organizations/companies agree not to solicit or “poach” Employees from their direct rivals. Since it does not prevent an Employee from finding and/or applying for any job/employment, a Non-Poaching Agreement does not violate Section 27 of the Contract Act.
Instead, this type of Clause clearly states that one competitor must obtain the consent of the other before recruiting the Employee(s) of the other competitor. Agreements that are Anti-Competitive are prohibited under Section 3 of the Competition Act of 2000. As a result, any Anti-Competitive Non-Poaching Agreement will be unenforceable by law.
The discussion of Section 27 of the Contract Act above explicitly specifies that restraints can be imposed only when the Employee is in the active service for the Employer, and that they cannot be enforced after the Employee leaves the Employer’s service whether willingly or as a result of his/her service being terminated. Thus, following such a termination of jobs, the only conditions that would be enforceable in and by an Indian Court would be the Non-Disclosure of sensitive and confidential details and Non-Solicitation of Customers and Employees.
In the case of GEA Energy System India Ltd. v. Germanischer Lloyd Aktiengesellschaft [(2009) 149 Comp Cas 689 (Madras)], the Madras High Court (Madras HC) held that the concerned restrictive covenant only specified that the Defendant could not engage in any business that is detrimental to the Plaintiff’s corporation, and that it did not prohibit the Defendant from engaging in any business at all and, hence, did not attract the applicability of Section 27.
3. Non-Disclosure of Confidential Information and Trade Secrets
Except and to the degree that disclosure is required by law, an Employee is required to take appropriate measures to keep all sensitive information related to the company and its business confidential. The Employee must also acknowledge that he/she will not discuss or reveal any of the company’s confidential information to anyone or any corporation that is not affiliated with the company.
In the case of Hi-Tech Systems and Services Ltd. v. Suprabhat Ray (G.A. 1738 of 2014), the SC barred the Respondents from serving as Sales Agents for other businesses, claiming that they had broken the law and were attempting to use trade secrets and confidential information.
AMLEGALS REMARKS
While Employment Contracts have not been expressly recognized under Indian Laws, they do play an important role in resolving the disputes that may arise between the Employer and Employee. Certain restrictive covenants are included in the Contract, in order to protect the interests of the Employer such as the restraint of trade in order to prevent the former Employee to cause harm by revealing the confidential information to the Employer’s rivals.
However, since the Contract Act clearly states that ‘agreements in restraint of trade’ are void and, moreover, since the Indian Constitution enshrines the Fundamental Right to practice any trade and/or profession, such restrictive covenants have often come under the Court’s scrutiny and have also been held to be violative of Section 27 of the Contract Act as well as the Indian Constitution. This situation of uncertainty is further exacerbated by the fact that the Judicial precedents pertaining to the validity of the restrictive covenant in an Employment Contract are as yet inconsistent. Given such issues arising out of Employment Contracts, certain safeguards must always be provided for the rights of both parties, especially the Employees – this shall be discussed in Part III of the Employment Contracts Series.
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For any query or feedback, please feel free to connect with rohit.lalwani@amlegals.com or vineeta.tekwani@amlegals.com.
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