1. Definition of Restrictive Covenants
Companies in the “knowledge industry” place a high value on their intellectual and human capital. Key employees as well as employees who have close interaction with customers, such as sales staff, are critical to the growth and development of the company, and on many occasions, the company may be reliant on the personal attributes and market knowledge of such employees in order to reach its market base. Therefore, companies look to protect their business interests by placing certain restrictive conditions on its employees, such as non-compete and non-solicit clauses. Such clauses which place restrictions on the employees, either during or after their employment with an employer, are referred to as “restrictive covenants”.
2. Types of Restrictive Covenants
a. Non-Compete Clauses
A non-compete clause is typically a personal restriction placed by the employer on the employee so that the employee does not indulge in any activity that would be in competition with the business of the employer. In nearly all employment contracts, such restrictions would be applicable for as long as the employee is employed by the company, whereas some employment contracts may also contain clauses which will prevent the employee from joining a competitor company or start a competing business after leaving his/her employment with the company.
b. Non-solicitation of customers
A non-solicitation clause is intended to ensure that an employee does not induce the company’s customers or clients away from the company, typically after such employee leaves his/her employment with the company. Further, a non-solicitation clause may also prevent an ex-employee from inducing any current employees to resign from the employment of the company and join the company where such ex-employee is currently employed.
c. Non-solicitation of employees
Another form of a restrictive covenant is non-solicitation of employees, which implies a restriction on a former employee from inducing or encouraging any employees of his or her former employer to terminate his or her employment with or to accept employment with any competitor, supplier or customer of the former employer. In other words it is a covenant which essentially prohibits either party from enticing and/or alluring each other’s employees away from their respective employments.
3. Enforcement of Restrictive Covenants—process and remedies
The laws in force in India are not in favor of restrictive covenants. The guiding principle behind such a position is that the law presumes the employer to be in a stronger bargaining position in comparison to the employee, who would typically have to accept the employer’s terms. Therefore, the law offers some protection to the interests of the employees. The Constitution guarantees all citizens of India the fundamental right to practice any profession and carry on any occupation, trade or business, subject to any reasonable restrictions, which may be imposed by law. Further, any contract, which restrains trade, business or profession of any kind, shall be void.
However, the Supreme Court has provided for certain benefits to employers, for example, employers are permitted to contractually restrict their employees from misusing or disclosing the employer’s trade secrets or confidential business information and practices. Similarly, where the employee has a motive to cheat or cause irreparable harm to the employer, a restrictive covenant beyond the term of employment would be enforceable.
4. Use and Limitations of Garden Leave
The uncertainty of the judicial decisions over the non-compete clauses has resulted in the corporate sector developing and taking recourse to a concept called “garden leave”, under which employees are paid their full salary during the period in which they are restrained from competing. To enforce garden leave it is helpful to be able to expressly state certain provisions in the contract.