Definition and Types of Restrictive Covenants
Companies in the ‘knowledge industry’ place high value on their intellectual and human capital. Therefore, companies look to protect their business interests by prescribing certain restrictions for their employees – these clauses in employment contracts which place restrictions on certain activities of employees, either during or after their employment, are ordinarily referred to as ‘restrictive covenants’.
The following restrictive covenants are recognised and may be enforceable under the law:
- Non-compete clauses;
- Non-solicitation of customers / suppliers;
- Non-solicitation of employees.
Enforcement of Restrictive Covenants—process and remedies
Any restrictive covenant that extends beyond the tenure of employment will not be looked upon favourably by Indian courts (but are, in any case, incorporated in employment contracts as a deterrent measure). The courts are generally guided by the presumption that the employer is in a stronger bargaining position in comparison to the employee, and the employee has no choice but to typically accept the employer’s terms.
Use and Limitations of Garden Leave
Indian courts have held while it is not possible to stop an employee from leaving, he can be restricted from joining a competitor during the term of employment (i.e. during the ‘garden leave’ period). The aim of garden leave is to keep the employee out of the market long enough for any confidential information that they have to go out of date, or to enable that employee’s successor to establish themselves particularly with customers, so as to protect the company’s goodwill. However, the garden leave provision should not be unreasonable and should typically not extend to a period after the employment comes to an end – i.e., if the effect of the ‘garden leave clause’ is to prohibit the employee from taking up any employment during a certain period after the cessation of the employment, then it is unlikely that such clauses will be upheld by Indian courts.