The legislations
governing several aspects of the employer-employee relationship are so
complicated and ambiguous, that they yield in litigation rather than to provide
clear way out. Moreover, the most important bone of contention w.r.t.
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.
In
an attempt to protect their interests, trade secrets, confidential information,
every employer execute employment agreement and impose post employment restrictive
covenants pertaining to manner in which the employees are required to serve the
notice period, comply with the exit formality, non-solicitation, non-compete
and others before finally exit from the employer.
However,
to enforce post employment restrictive covenants had become a challenging task
for the employers. In our this article- “ Post Employment Restrictive Covenants- How
Much Enforceable?” we seek to provide an overview of the steps to be
adopted by the employer and how to address a conflict situation with its
employees and to enforce post employment covenants.
The legal recourse for employer and future course
of action are discussed as below:
1.
Pre-
Conflict/Litigation- Course of Action:
At
this stage, following documentation and course of action to be adopted to
prevent/reduce any future conflict or issue with the present/future employees:
a.
Execution
of Employment Letter which includes but not limited to exit
mechanism; post-employment restriction and covenants; non-compete;
non-solicitation; confidentiality obligation, IP protection. The post
employment restrictive clause need to be draft with a balance keeping in view of
Section 27 of Indian Contract Act and recent judicial approach. As Section 27
of the Indian Contract Act, prohibits any kind of unreasonable restraint on
trade, employment and profession.
b.
Non-Circumvention
& Non-Disclosure Agreement- An Additional protection layer
for securing the interest of the Company including confidentiality,
non-solicitation, IP and data protection.
c.
Service
Bond-
To include additional penalty clause for violation of IP; non-compete;
non-solicitation; confidentiality; data; trade secret; client details.; post
employment covenants; to join/engage any company or indulge in any competitive
business only after no dues clearance and formal exit from the employer.
d.
Employee
Handbook- Beside general employment conditions it shall include
but not limited to exit mechanism; imposing garden leave; post employment
covenants; clearance of any investigation prior to exit from the Company.
2.
Upon
Breach of Terms of Employment: Separate Legal Notice to employee
& new employer for breach of terms of conditions including but not limited
to non-compete & non-solicitation. Also, a Cease & Desist Letter for tortious interference in business to new
employer for “using the ex-employee” for violation of breach of terms
including but not limited to non-compete; non-solicitation, data & IP.
3.
Litigation: On
the event of failure of the above-mentioned course of actions, the employer should
initiate a litigation with keeping mind of the following points:
a.
File a criminal/civil suit against the
ex-employee depending upon the breach of terms and violations along with filing
a police complaint depending upon the facts of the conflict;
b.
File a criminal/civil suit against the new
employer of ex-employee:
In
general, a question is always raised by the
companies/employers that- whether a suit or any action can be initiated against
the new employer of the ex-employee of the Company, who had breached the terms
of his employment & post employment covenant with the Company.
On review
of past decisions made by Supreme Court and other High Courts, in several adjudicated
matters, new employer had been successfully sued in Court of Law, where the new
employer is aware of the breach of terms & violations by its new employee
(ex-employee of the Company). The new employer can be sued for tempting, luring
and assisting ex-employee to breach a contractual obligation and shall be held
liable for interference of contractual relationship between ex-employee &
the Company.
Enforceability of Notice Period
For
serving notice period, in one of the case, Chairman
and Managing Director, India Airlines vs. Binod Kumar Sinha and ors[1]
hon’ble Supreme Court has held that – “An employee when joins
service is subject to certain terms and conditions of service and he cannot
quit the employment without giving requisite notice to the employer. But what
should be the duration of a reasonable notice in such circumstances is a matter
to be decided in each case depending upon the exigencies, needs or necessities
and the essentiality of the service concerned.”
Other decisions by hon’ble Supreme Court:
1. Thus, if an employee
does not serve the notice period by working for the duration of the notice
period, the employer may not have a decree from the court asking specific performance
of the covenant to the effect that the employee would have to work for the
notice period duration. But instead as a remedy to the employer, the court may
grant damages for breach of contract.[2]
2. Since enforceability
of the notice period is not an option available with the employers, and they
may only claim damages in case of illegal termination of employment contract by
the employee, it is pertinent to understand the extent of damages that can be
claimed.[3]
Compensation for not
serving Notice Period
1.
In relation to employee abruptly leaving the
Company (without serving the notice period), Andhra Pradesh High Court[4] held
that- “such action by the employee did not cause any damage or loss to the
Company and it would be unreasonable to acquire ₹
2,00,000/- from employee. An amount of ₹
1,00,000/- was fixed by the Court as reasonable damages taking into
consideration the period of work and the fact that no actual loss was caused to
the Company.”
2.
In one of the leading case, Union
of India and Anr. vs. Tulsiram Patel and Ors.[5]
w.r.t. compensation & enforceability of notice period, the hon’ble Supreme
Court has held that- “Whether the contract of service is for a
fixed period or not, if it contains a provision for its termination by notice,
it can be so terminated. If there is no provision for giving a notice and the
contract is not for a fixed period, the law implies an obligation to give a
reasonable notice. Where no notice in the first case or no reasonable notice in
the second case is given, the contract is wrongfully terminated and such
wrongful termination will give rise to a claim for damages.”
To
prove tortious interference against the new employer, following points need to
prove:
a.
A valid non-compete exists between former
employer and employee;
b.
The hiring employer had knowledge of the
non-compete;
c.
The hiring employer caused a breach of the
non-compete by hiring the employee;
d.
The hiring employer has no legal
justification for causing the breach;
e.
The former employer has realized the damages
In one of the
landmark cases[6], the accused, an
ex-employee of Company A had resigned & joined Company B after final
clearance from Company A. During his course of exit interview, he had
continuously maintained that he would not be joining any company which was in
direct competition with Company A. He also agreed that all the confidential
information acquired by him during his tenure of work shall be kept
confidential at all times. However, two weeks later, it came to the knowledge
of Company A that he had joined Company B, which was its direct competitor.
Later it was also discovered that the accused had transferred or downloaded
various confidential information of Company A into his personal email id.
Screenshots of the email id of the accused was produced by Company A which
showed that such information was passed on to Company B. Thus, the Court was of
the view that such act amounted to hacking under S.66 of the IT Act along with
cheating, dishonestly inducing of property & breach of trust under penal provisions.
Moreover, in some
of the earlier cases adjudicated at High Courts & Supreme Court, it has
been held by the learned Courts that- “A reasonable restriction on
non-solicitation for carrying on business or employment with new employer by
utilizing the list of clients/customer is valid.”
In addition to the above options,
what steps can employer take in advance to protect against a breach by an
employee?
Review your standard contractual documentation to ensure that it
operates as effectively as it can to protect your business.
Consider amending restrictive covenants to be sure (i) that they
apply both during and after the employment and (ii) that they go no further
than is reasonably necessary to protect your legitimate business interests. If
they go further than is reasonably necessary, employer will not be able to
enforce them.
Review confidentiality restrictions to ensure that they
specifically protect the types of confidential information which are key to
your business.
Consider whether to include within the contracts of employment
of your senior employees an express duty of disclosure of matters which are
adverse to your interests. An express duty tends to be easier to enforce and
will act as more of a deterrent to employees.
Check that your standard contracts of employment include a
garden leave provision. A garden leave clause can give the employer the right
to put an employee who is on notice of termination on garden leave and to
prevent him from attending premises, contacting clients or undertaking any
business activity.
Ensure that the contract makes clear that the length of any
post-termination restrictive
covenants inclusive of garden leave clause.
For any further details and other legal aspects of enforcement of restrictive
post employment covenants and to get your employees to serve the notice period
along with compliance of non-compete & non-solicitation or any
clarifications, please feel
free to connect with us at admin@equicorplegal.com
/ 08448824659.
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