A look at key provisions of employment contracts

By Anuradha Iyer, I&S Associates
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Traditionally, in India, few senior management employees had management contracts. Today, executing a bilateral employment agreement is highly recommended for all employees to outline the expectations and obligations on them during and after employment.

Anuradha Iyer Partner I&S Associates
Anuradha Iyer
Partner
I&S Associates

The contract can address many other aspects of the employment relationship, such as: duration of the job (fixed or indefinite); the employee’s responsibilities; what benefits the employee will receive (generally structured for tax efficiency); grounds for termination; limitations on the employee’s ability to compete post employment; protection of trade secrets and client lists; ownership of the employee’s work product; non-compete and non-solicitation of customers and suppliers.

A well drafted and enforceable employment contract makes sure that an employee’s hiring and firing doesn’t disrupt operations and functioning. With the increase in cross-border trade and an enhanced competitive climate in India, negative covenants are becoming increasingly necessary. This article highlights some important provisions in any employment contract and any limitations on their enforceability.

Confidentiality

Highly confidential information which employees are required to use during their employment forms part of a company’s proprietary interest. Confidential information basically means special knowledge that is owned, acquired or developed by a company which is not generally known in the relevant trade or industry, the use or possession of which confers competitive advantage over those that do not possess it.

Employees owe a duty to the employer to not disclose to others or use to their own advantage the trade secrets or confidential information to which they had access during their employment and they can be restrained from or sued for divulging or using any such information in their new employment, although they cannot be prevented from taking up the employment.

The courts remain sensitive to the possibility that employers may try to use these covenants as a back-door means of restraining employees from exercising their trade and will place an extremely high burden of proof on employers seeking to enforce such provisions. Confidentiality obligations, post termination of employment, will be enforced in limited circumstances so long as they remain reasonable and limited in time and scope and the employer can show that the information is confidential and proprietary to it.

IP created

All ideas, writings, inventions, products, methods, techniques, discoveries, improvements and technical or business innovations that an employee makes or conceives during the course of employment belong exclusively to the company and a contract should state this. In this pro-employee era, courts generally validate such negative covenants only to the extent of protection that the proprietary interest requires.

Non-compete provisions

A non-compete clause or a covenant not to compete is a term used in contracts under which the employee agrees to not pursue a similar profession, trade or business in competition against the employer, both during the course of and after termination of the employment. An employee agrees not, directly or indirectly, for themself or on behalf of another, to solicit for employment or hire any employee in order to influence or induce such a person to decrease or cease doing business with the employer.

Courts almost always hold that employers have no legitimate interest in preventing employees who leave their service from entering the service of a competitor merely on the ground that it is a competitor. Covenants that restrict the future conduct of employees raise several issues regarding the freedom of contract and the right to work, as well as constitutional questions.

Non-compete covenants given by employees that operate during the tenure of the employment are generally not regarded as restraint of trade within the scope of section 27 of the Indian Contract Act, unless the contract is unconscionable or excessively harsh or unreasonable or one-sided. After termination of employment, however, many such provisions will be struck out and deemed unenforceable by Indian courts.

Generally, courts have been reluctant to enforce restrictive covenants post termination of employment because they regard them as: (1) limiting the ability of an employee to earn a living; (2) anti-competitive and against public policy; (3) arising out of an unequal bargaining position between the employer and the employee. The courts have therefore interpreted narrowly and zealously guarded the provisions of section 27, particularly post termination.

A company seeking protection of its proprietary interests vis-à-vis its employees must show that any restraint is reasonably necessary.

Anuradha Iyer is the founding partner of I&S Associates. The views expressed are the author’s views and are not a substitute for specific advice.

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