This blog is written by Jagyansh Kumar, Student, NLIU, Bhopal
The Indian IT industry is confronted with a novel emerging challenge, among other obstacles. Executive employees of Infosys were recently required to sign severance agreements, wherein they consented to reasonable obligations, including the prohibition of soliciting customers or disclosing confidential information. The lack of development and debate in the Indian courts regarding these agreements has resulted in ambiguity concerning their interpretation. These agreements are currently in their early stages of development within the ever-evolving Indian IT industry. The purpose of this blog is to elucidate the validity, enforceability, and significance of such agreements within the Indian IT industry.
What are Employment Separation Agreements?
Severance agreements, often known as employment separation agreements, are negotiated arrangements that define precise terms and circumstances for departing employees. Employment separation agreements, also known as severance agreements, are freely negotiated contracts that govern the terms and conditions for an outgoing employee. Such agreements trump earlier agreements signed between the company and the exiting employee with the company. These terms and conditions are imposed to add restrictive covenants and protect the personal information of the company such as confidential information of the company’s customers, private revenue records, etc. Such agreements impose confidentiality, non-compete, non-solicit, and non-disclosure clauses. These clauses entail restrictions in engaging in trade with a competitor, soliciting clients or employees, divulging business secrets, or transferring important private data. The subject matter of such agreements covers that after the termination, the employee waives off his/her to bring a legal action against the company. Moreover, it may also mandate the outgoing employee to take permission from the company to carry out another trade, or profession in a similar field. The current position of such agreements is discussed in the next section.
Position of Employment Separation Agreements in India:
Currently, in India, labor laws govern the termination of an employee. However, there is no specific law or regulation covering such negotiated agreements. Due to this, there is a lot of ambiguity around the enforcement of such agreements. These agreements, therefore, are guided by the custom of trade, which refers to practices that have been adapted through time. One of the clauses under such agreements deals with the waiver of one’s statutory rights to bring action against the company. This clause is, however, void under Section 28 of the Indian Contract Act. The exceptions under this act apply only when the company specifies a time period to bring legal action against the company and when the employee brings it after that time period, then the particular clause cannot be said to be void.
The Indian Contract Act also necessitates the existence of a legitimate consideration for a legally enforceable contract. Like every other agreement, employment separation agreements also needs payment to be given by the company to the exiting employee to sign the agreement. Besides this consideration, such agreements also involve ex gratia payments. The compensation for retrenchment provided in Section 25F of the Industrial Disputes Act, 1947 is not applicable to mutually negotiated arrangements. This clause is specific to circumstances where an employer terminates an employee. In mutually agreed agreements, termination is a collaborative decision, approximating a resignation rather than an employer-driven termination. The ex-gratia payment offered under such agreements is similar to the sum given under the Industrial Disputes Act, of 1947. Moreover, the outgoing employee also benefits from the gratuity amount provisioned under the Payment of Gratuity Act, 1972, and other contractual bonuses and arrears.
Points of Contention:
Apart from such provisions, two major clauses are invoked. One is the non-compete clause which states that the employee must not acquire a position that puts him/her in direct competition with the company. Employers generally initiate standard form contracts under which the weaker party has less or no room for negotiation with his employer and the employer exercises a dominant position to control the will of the other party. In a recent situation, Ravi Kumar and Mohit Joshi, former Infosys presidents have crossed over to other companies, acquiring similar positions. Nevertheless, non-compete clauses are unenforceable in India, declared void under Section 27 of the Indian Contract Act, 1872, which addresses agreements that restrain trade. A point to note is that non-compete clauses, during the course of employment of the employee is valid but after the termination, the given clause becomes void. In Percept D’Mark (India) Pvt. Ltd. v Zaheer Khan & Anr., the Supreme Court reiterated this principle. Similarly, in Madhub Chunder Poramanick v. Rajcoomar Doss and Ors, the Calcutta court observed that restricting one or more persons from engaging in trade, business or other professions will be void under the act. The Calcutta High Court also held that any partial restraint to do the same will also be void under the mentioned act. Furthermore, it was held in Pepsi Foods Ltd. and Ors. v. Bharat Coca-Cola Holding Pvt. Ltd and Ors by the Delhi High Court that after the termination of employment, the non-compete clauses imposing the restriction are void and not enforceable.
The Constitution of India under Article 19(1)(g) provides the individual the right to practice any trade, business, profession, etc. Another provision is the confidentiality clause, which aims to stop employees from sharing sensitive personal information with rival competitors. It was observed by the Bombay High Court in Zee Telefilms Limited v. Sundial Communications Private Limited that restrictions imposed to maintain privacy and confidentiality come under the ambit of public policy and Article 21 of the Indian Constitution. In Electrosteel Castings, Ltd. V. Saw Pipes Ltd., And Others, the court held that the Section 27 of the Indian Contract Act, 1872 applies to all agreements, including employment contracts, making restraints of trade void to a certain extent. Despite this, the Supreme Court can grant injunctions to enforce such clauses, but cannot compel an employee to complete their employment term. In Anindya Mukherjee v. Clean Coats Private Limited, the Bombay High Court held that the actual transfer of confidential information to the competitor is not necessary, the possibility of such transfer can be sufficient if the company suffers after the employee’s termination. However, in the subsequent case of Stellar Information Tech Private Ltd v. Rakesh Kumar, the Delhi High Court held that the petitioner must establish the breach of confidentiality. Since, the later judgement was given before the former, the ratio laid down in Stellar Information case will prevail. Additionally, the court also held that the company cannot bar the outgoing employee from using his skill or knowledge in the competitor’s company. Regarding non-solicit clauses, it was held in FL Smidth Pvt. Ltd. v. M/s. Secan Invescast (India) Pvt. Ltd by the Madras High Court that this clause might be valid provided that such clauses are reasonable.
Comparative Analysis with Various Jurisdictions:
In the US, such agreements are not even required. The National Labour Relations Board holds jurisdiction over the workforce. The employers are barred from mandating that terminated employees preserve private information regarding their severance agreement as well as the terms and conditions of their employment. This shows that confidentiality terms have been eliminated from these agreements in the US. In the European Union, countries include Latvia, Hungary, and Estonia, non-compete provisions are legitimate and enforceable. Hungary imposes this condition just for three years. However, Slovakia doesn’t allow to conclude such agreements. The Constitutional Court stressed in one of its cases that while non-competition agreements are not intrinsically unlawful, they must offer enough pay for the employee in order to be judged valid. In the United Kingdom, there’s no statutory framework relating to severance agreements. However, they rely on the notion of “restraint of trade”. Unless a judge believes that the non-compete clause defends a "legitimate business interest" and is not unreasonably broad, they may not be enforceable. Coming to the East, in China, the confidentiality and non-compete provisions are only applicable to personnel achieving senior management position in the corporate ladder who have access to company’s secret information. However, such personnel are adequately compensated to not join other organizations after their departure. Regular employees are free from the purview of such stipulations.
Conclusion and Suggestions:
The clauses given under such agreements are void, but they are not void ab initio. Based on different cases and authorities given, it can be clearly inferred that while clauses related to waiver of statutory rights face limitations under Section 28 of the Indian Contract Act, the validity of non-compete clauses is nullified post-employment under Section 27 of the same Act. Recent cases, such as those involving former Infosys executives, highlight instances where individuals have moved to rival companies, challenging the enforceability of non-compete clauses. The government should consider formulating specific legislation or regulations addressing employment separation agreements to provide a comprehensive legal framework. US’s model should not be implemented in India as it will lead to unfair trade practices in the Indian industrial sector. Clauses such as non-compete and non-solicit must be imposed but only for a reasonable time period. Moreover, the parting employee must be compensated fairly during this period. Industry associations and stakeholders should collaborate to develop standardized templates for employment separation agreements, ensuring clarity and fairness in the terms presented to employees. There should be use of plain and easily understandable language in separation agreements to enhance transparency, and discourage the inclusion of overly complex legal jargon.
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