RESTRAINING EMPLOYEES: ANALYSING THE ENFORCEABILITY OF NON-COMPETE CLAUSES OF INFOSYS
The author, Udai Yashvir Singh, is a II year student of B.A. LL.B. (Hons.) at National Law University, Delhi.
In April 2022, Nascent Information Technology Employees Senate (‘NITES’), a Union of IT workers, complained to the Labour Ministry against the alleged “unethical and illegal” non-compete clause that Infosys imposes upon its employees. The clause imposes a negative covenant on the employees that prohibits them from joining specified categories of employers for six months following their termination. In this article, the author examines the enforceability of such a clause and analyses the entire matter in light of relevant judicial decisions.
The non-compete clause imposed by Infosys restricted its employees from joining two kinds of employers for six months post their termination. Firstly, it prohibited them from joining any customer of Infosys with whom they had worked in the twelve months prior to their termination. Secondly, it prohibited them from joining a “named competitor” if, by doing so, they would have the opportunity to deal with a customer with whom they had worked in the twelve months prior to their termination.
Infosys began strictly implementing the term when the attrition rate peaked at 27.7 per cent in the March 2022-ending quarter. In response to the enforcement, approximately 65 employeesfiled complaints with NITES on the matter. Therefore, in April 2022, NITES filed a complaint with the Labour Ministryrequesting that the non-compete clause be removed from the company’s offer letters. The Labour Ministry thereafter issued a notice to the corporation for a collaborative discussion on the subject before the Chief Labour Commissioner; however, Infosys skipped the April 28th, May 16th, and May 26thsessions for joint discussions. Infosys defended its position in a letter dated May 24th to the Chief Labour Commissioner, explaining that the clause’s aim was to preserve confidentiality and that the clause’s applicability is limited in time. It also argued that such provisions are “standard business practice” and that the employees willingly consented to the condition when they joined. The Labour Commissioner then referred the case to the Labour Departments of Karnataka, Haryana, and Maharashtra; in response to which, the Karnataka Labour Department called both sides to a joint meeting on July 4th.
Analyzing the Non-Compete Clause
According to Section 27 of the Indian Contract Act, agreements that restrict trade, business, or profession are void. However, In India, a distinction was created by the Supreme Court in the case of Niranjan Shankar Golikari v. Century Spg & Mfg Co. Ltdbetween restrictive covenants which operate during the period of employment and restrictive covenants which operate after thetermination of employment. The Supreme Court ruled that if reasonable, restrictions placed on an employee throughout the course of their employment are not void under Section 27. However, the ruling remained silent regarding the treatment of post-termination restrictive covenants and merely said that these agreements should be treated differently from those in effect during the employment period. However, the law with respect to post-termination negative covenants solidified in the case of Percept D’Mark Ltd. v. Zaheer Khan in which the Supreme Court authoritatively laid down that “a restrictive covenant extending beyond the term of the contract is void and not enforceable”. In this case, Cricketer Zaheer Khan was prohibited from engaging in a contract with the 3rd party after the termination of a promotion agreement with Percept D’Mark. Further, the Supreme Court in the case of Superintendence Co. v. Krishan Murgai has clearly held that the test of reasonableness does not apply to situations which are governed by Section 27 of the Indian Contract Act.
What can be clearly observed is that clauses which prohibit an employee from joining another employer after termination of the contract have been held to be void by the Supreme Court irrespective of the fact that whether they are reasonable or unreasonable. However, there are certain exceptions to this principle like non-solicitation agreements, confidentiality agreements or garden leave agreements which have been upheld by the court even though they restrict the employees even after the termination of the contract. The courts in such agreements look at the factual matrix of the case and determine whether the restrictions imposed on the employee are reasonable or not.
The Delhi High Court in the case of Desiccant Rotors International Pvt Ltd v. Bappaditya Sarkar & Anr. passed an order of injunction against the manager of Dessiccant Rotors, who joined a competing business three months after resigning from the plaintiff company. The order prohibited the manager from soliciting the suppliers and customers of the plaintiff. Further, In the case of Diljeet Titus v. Mr. Alfred A. Adebare and Others, the Delhi High Court prohibited the use of important business information by an employee who had taken away pertinent confidential data like client lists and proprietary drafts after termination from employment. Even the Bombay high court in the case of M/s Kuoni Travel (India) Private Limited v.Ashish Kishore has upheld the validity of a Garden Leave Agreement which restricted the employee from carrying on work/employment with a competing business for a period of 3 months after termination/resignation in return for full remuneration for 3 months.
The Infosys non-compete clause neither deals with non-solicitation, i.e. an agreement to desist the employee from soliciting the employer’s clients for a specified period of time following the termination of the contract, nor does it deal with confidentiality of certain trade secrets or sensitive information.Further, there is no aspect of remuneration that Infosys has promised to its employees for the period of six months; hence the clause cannot be categorized as a Garden Leave clause.
Thus, applying the principles laid down in the cases of Niranjan Golikari, Krishan Murgai and Zaheer Khan, the clause prima facie appears to be void as it is in contravention to Section 27 of the Indian Contract Act. The clause seems to be unenforceable as Infosys has tried to incorporate a non-compete clause that prohibits employees from joining certain employers for six months after the termination of the contract, and thus the clause is essentially a post-termination restrictive covenant.
The Non-compete clause of Infosys, as it stands, is void as per the law. The Indian courts have consistently been inclined towards the rights of the employee to choose any occupation/employer than the right of the employer to restrict such an employee. Although some relief has been provided to the employers in the form upholding of reasonable Non-Solicitation, Confidentiality and Garden Leave agreementsextending beyond the term of the agreement, the courts have consistently ruled any kind of covenants which restrict an employee from joining another employer post their termination as void.
The law in other jurisdictions, such as the UK permit such post-termination restrictive covenant if they are reasonable and even the 13th Law Commission Report recommended Section 27 of the Indian Contract Act to be amended to allow for the test of reasonableness to be incorporated in it, but no action towards it has been taken by the legislature. Nevertheless, as the law stands today, such non-compete clauses need to be revised by Infosys and other employers so that such unreasonable post-terminationrestrictions can be removed. The purposes of safeguarding trade secrets and business interests by the employers need to be fulfilled by incorporating reasonable non-solicitation, confidentiality and garden leave clauses in an employment agreement which do not unnecessarily infringe upon the rights of the employees to join other employers.
(The views and opinions expressed in this article are the author’s own and do not necessarily reflect the official policy or position of the Legal Aid Society, Campus Law Centre, University of Delhi.)