Departing IT staff getting tied up with non-compete clauses

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Shortage of tech talent across all industries is taking a particularly huge toll on information technology companies as digital ecosystems evolve and adapt to repercussions of the pandemic – with many IT employees offered huge salary hikes and perks from competing firms amid soaring global demand for IT services.

As technology companies endure high double-digit attrition rates, many are sparing no effort to retain talent, whether in the form of increasing salaries and higher bonuses or as in the Infosys case, threatening to invoke non-compete clauses in employment contracts.

According to fine print in Infosys contracts, employees cannot join rival companies including TCS, Wipro and HCL Technologies within six months of their resignation, should their new role involve working with a customer they had worked with in the preceding 12 months at Infosys.

But this move seems to have backfired as the Ministry of Labour and Employment issued a notice to the Bengaluru-based IT major for “joint discussion after receiving complaints from a Pune-based IT union that Infosys was enforcing the “unethical and illegal” clause.

The labour union Nascent Information Technology Employees Senate (NITES) urged the Department of Labour to have the non-compete clause removed from employment contracts – and furthermore requested Labour Minister Bhupender Yadav to introduce a mechanism to control such arbitrary clauses in the interest of IT employees across India.

Having received as many as 75 to 80 complaints from Infosys employees alone, NITES president Harpreet Singh Saluja describes Infosys’ offer letter as “handcuffing” employees as “bonded labourers”.

“The illegal and unconstitutional clauses mentioned in employment letters of major IT companies are purposely included to exploit employees,” he tells India Business Law Journal.

As a means of slowing the attrition rate, he suggests IT companies should consider variable pay, ESOPs (employee stock ownership) and promotions bringing employees skin in the game to dissuade them from leaving.

According to publicly available information as of 31 March 2022, TCS and Wipro saw attrition rates rise to 20%, while higher at Infosys at 27.7%..

In its defence, Infosys, which is India’s second-largest IT company, insists the no-compete clause is “common and standard business practice” in the IT sector.

Departing IT staff getting tied up with non-compete clauses

But the legal fraternity says it’s a case of ‘much ado about nothing’. Anshul Prakash, a partner in the Employment Labour & Benefits practice at Khaitan & Co in Mumbai, says: “The law is clear. Non-compete covenants intended to operate post-employment are not enforceable.”

He specifically notes section 27 of the Indian Contract Act, stating that agreements restraining anyone from exercising a lawful profession, trade or business are “void”.

However, past cases indicate that despite being unenforceable, non-compete covenants continue to be included in employment contracts across industries.

“It is a universal market practice to include non-compete covenants, which act as a moral deterrent and also a means to accommodate any future change in the legal position” says Prakash.

But on a cautionary note, he tells India Business Law Journal that if the matter does not entail any “industrial dispute”, any attempts by relevant stakeholders – including trade unions – to project such a perception should be avoided.

“Governmental agencies in the know of things should also exercise caution when issuing notices based on a grievance that does not bring up any instance of a dispute, but mere presence of a provision in employment contracts,” he adds.

It is not yet clear what will happen next – as joint discussion between the chief labour commissioner and Infosys continues this month.

Infosys alleges non-compete clauses aim to protect “critical and sensitive” customer information for a limited period.

Associate VP for human resources Santhosh Nair says employees in the IT sector are core to the business and a company’s reputation as they handle “critical and sensitive customer projects– and the disputed non-compete clause intends to ensure business and client confidentiality.

But Infosys may need to elaborate reasoning to support inclusion of these restrictions, says Ashima Obhan, senior partner at Obhan & Associates in New Delhi.

Departing IT staff getting tied up with non-compete clauses

“Indian courts have in the past upheld that a non-compete clause post-termination of employee contracts is not valid,” says Obhan. Citing the Indian Contract Act, she points out that a person cannot be restrained from practicing their trade. Non-compete clauses post-termination of contracts have thus been difficult to enforce.

“Often companies put senior management on garden leave of three to six months to protect the information they would have access to,” she says.

The gardening leave clause is enforceable, binding the employee to fulfill non-compete obligations to not work for the employer or anyone else during this period. However, the employee is entitled to their salary.

Prakash anticipates the current issue is unlikely to reach a conclusive position unless the Supreme Court decides the ever-evolving economic situation requires a “relook at the question of a possible enforcement of such covenant against employees.”

He notes there have been several cases urging labour courts or civil courts to restrain employees from joining a competitor, based on being privy to confidential information and business know-how which, if used in breach of ongoing employment obligations could cause undue favour and advantage for the competitor.

Elsewhere in Asia-Pacific, while many jurisdictions do not accept non-competes in employment contracts, they are acceptable if employers can prove that such restraints are in the interest of public policy, protect the legitimate business interest and are “reasonable”.

Legitimate business interest in non-compete agreements could include confidential information, goodwill, business contacts, and a stable workforce. The restriction is acceptable within a reasonable timeframe, territorial scope, or restricted activity.

In Hong Kong, this ‘reasonable timeframe’ cannot exceed six months, while Japan allows non-competes for a maximum of two years. In Australia, non-competes cannot exceed 12 months – and courts can delete or modify provisions to ensure that non-compete clauses are reasonable and enforceable.

China’s labour law allows non-competes for a maximum of two years for senior managers, senior technical employees, or anyone having access to confidential information of a company. Employment agreements, however, need to address compensation. Otherwise, Chinese courts can set compensation either at the minimum wage or 30% of the former employee’s salary over the last 12 months, whichever is higher.

Similar to China, Taiwan’s labour laws require “reasonable compensation”, ideally equivalent to at least 50% of the former employee’s average salary before termination. It should suffice to support the former employee during the restricted period, which cannot exceed two years.


The Briefing is written by Freny Patel