What Is A Non-Compete Clause In An Employment Contract?
A non-compete clause is a provision in an employment contract whereby the employee agrees to the fact that he would not enter into any competition with the employer during the term of his employment or even after the employment period is over. Typically, a fixed period of time is agreed upon for restrictions that extend beyond the term of employment. Non-compete clauses are common in IT Departments, Media, Financial Industry, Corporate World.
Enforceability of Non-Compete Clauses
The non-compete clause in an employment contract is governed by certain provisions of the Indian Contract Act, 1872. Section 27, of the Contracts Act, makes agreements that are in restraint of trade void.
A vast number of judicial decisions have emerged on the question of enforceability of non-compete clauses. These decisions are divergent, and hence, no clear answer to the enforceability of non-competes has emerged till now. We have discussed some of these case laws below:
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In Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, a question was raised as to whether a non-compete clause in an employment contract is valid. The court held that a contract, with the objective of restraining trade, was void.
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A similar case came up in Delhi High Court, wherein, the court observed that any law which restricts an employee from working after the termination of his job is in violation of the Indian Contract Act,
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In Arvinder Singh and Anr. v. Lal Pathlabs Pvt. Ltd. & Ors, the court observed that any agreement which restricts the person from carrying any professional activity is contrary to law.
For fixed-term employment contracts, the restriction can be enforced under specific conditions. If an employee has resigned before the expiry of the term, then the restriction can be enforced for the rest. Non-competes may also be enforced against senior-level employees under certain conditions. If there is suspicion that a senior- level employee possesses proprietary information about the company, such an employee may be prohibited from joining a competing company by enforcing a non-compete clause.
Thus, a non-compete clause in an employment contract is not completely unenforceable and may be enforced in some circumstances. However, it should be drafted carefully and properly.
Non-compete Clause v/s Non Disclosure Agreement
A non-compete agreement is different from a non-disclosure agreement. In a non-compete clause, an employee promises to not enter into any kind of competition with the employer after leaving the job. Whereas a non-disclosure agreement restricts an employee from revealing any confidential information of his previous employer to the current employer or anyone else in the future. While the enforceability of non-compete clauses is still not a settled issue, non-disclosure agreements may be enforced under the law.
Conclusion
In India, any clause which restricts an employee from practicing any professional activity through a contract or an agreement is considered void under the law. The topic of whether a non-compete clause is harsh and extreme and whether it includes consultant is a debatable topic that will continue. However, whether such a clause imposed on an employee is harsh or not depends upon the circumstances of the situation, and the final call can be taken by the courts.
Frequently asked questions
Is the Non-Compete Clause Legal in India?
Is the Non-Compete Clause Legal in India?
In India, non-compete clauses in employment contracts are generally viewed with skepticism by courts. According to Section 27 of the Indian Contract Act, 1872, any agreement that restrains someone from practicing a lawful profession, trade, or business is void to that extent. This includes non-compete clauses, which are seen as a restraint on trade and therefore, typically not enforceable.
Key Points:
- During Employment: Non-compete clauses that restrict an employee from engaging in competing activities during the term of their employment are generally considered enforceable.
- Post-Employment: Non-compete clauses that restrict an employee from working with competitors after the termination of employment are usually not enforceable.
How to Get Around a Non-Compete Clause?
How to Get Around a Non-Compete Clause?
If you find yourself bound by a non-compete clause, here are some potential strategies to navigate around it:
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Negotiation: Discuss with your employer the possibility of modifying or waiving the non-compete clause. Employers may be willing to negotiate terms, especially if you have a strong bargaining position.
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Review the Clause: Analyze the non-compete clause for any ambiguities or overly broad restrictions. Clauses that are too vague or unreasonable in scope, duration, or geographical extent may be deemed unenforceable by courts.
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Seek Legal Advice: Consult with an employment lawyer to understand your rights and explore potential loopholes or defenses based on the specific circumstances of your case.
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Check for Consideration: Ensure that the non-compete clause is supported by valid consideration. In some cases, if the clause was introduced after the start of employment without additional benefits, it might be challengeable.
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Explore Different Roles: Consider taking up a role that does not directly compete with your former employer’s business. For example, a different geographic area or a distinct industry segment may not fall under the non-compete restrictions.
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Document Evidence: Gather evidence that the non-compete clause is causing undue hardship or is not in the public interest. Courts may consider these factors when determining the enforceability of the clause.
What is a Non-Compete Clause After Termination of Employment?
What is a Non-Compete Clause After Termination of Employment?
A non-compete clause after termination of employment is a contractual provision that restricts an employee from working with competitors or engaging in similar business activities for a specified period and within a specified geographical area after leaving their current employer.
Key Elements of a Post-Employment Non-Compete Clause:
- Duration: Specifies the time period during which the employee is restricted from competing. This is typically a few months to a couple of years.
- Geographical Scope: Defines the geographic area within which the employee is restricted from working with competitors. It can range from a specific city to an entire country.
- Scope of Activities: Details the types of activities or roles the employee is restricted from undertaking. This can include working with direct competitors, starting a competing business, or engaging in any similar trade.
Examples of a Non-Compete Clause:
- Example 1: "The Employee agrees that for a period of 12 months following the termination of their employment, they will not engage in any business that directly competes with the Employer within a 50-mile radius of the Employer’s primary place of business."
- Example 2: "The Employee shall not, for a period of 18 months after termination of employment, solicit or accept employment with any business that competes with the Employer’s business in the field of software development."
Enforceability of Non-Compete Clauses
In India, the enforceability of non-compete clauses post-employment is limited. Courts generally consider such clauses void under Section 27 of the Indian Contract Act unless the employer can prove that the clause is reasonable in scope, duration, and geographical extent and is necessary to protect legitimate business interests such as trade secrets or proprietary information.
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Frequently asked questions
Is the Non-Compete Clause Legal in India?
Is the Non-Compete Clause Legal in India?
In India, non-compete clauses in employment contracts are generally viewed with skepticism by courts. According to Section 27 of the Indian Contract Act, 1872, any agreement that restrains someone from practicing a lawful profession, trade, or business is void to that extent. This includes non-compete clauses, which are seen as a restraint on trade and therefore, typically not enforceable.
Key Points:
- During Employment: Non-compete clauses that restrict an employee from engaging in competing activities during the term of their employment are generally considered enforceable.
- Post-Employment: Non-compete clauses that restrict an employee from working with competitors after the termination of employment are usually not enforceable.
How to Get Around a Non-Compete Clause?
How to Get Around a Non-Compete Clause?
If you find yourself bound by a non-compete clause, here are some potential strategies to navigate around it:
-
Negotiation: Discuss with your employer the possibility of modifying or waiving the non-compete clause. Employers may be willing to negotiate terms, especially if you have a strong bargaining position.
-
Review the Clause: Analyze the non-compete clause for any ambiguities or overly broad restrictions. Clauses that are too vague or unreasonable in scope, duration, or geographical extent may be deemed unenforceable by courts.
-
Seek Legal Advice: Consult with an employment lawyer to understand your rights and explore potential loopholes or defenses based on the specific circumstances of your case.
-
Check for Consideration: Ensure that the non-compete clause is supported by valid consideration. In some cases, if the clause was introduced after the start of employment without additional benefits, it might be challengeable.
-
Explore Different Roles: Consider taking up a role that does not directly compete with your former employer’s business. For example, a different geographic area or a distinct industry segment may not fall under the non-compete restrictions.
-
Document Evidence: Gather evidence that the non-compete clause is causing undue hardship or is not in the public interest. Courts may consider these factors when determining the enforceability of the clause.
What is a Non-Compete Clause After Termination of Employment?
What is a Non-Compete Clause After Termination of Employment?
A non-compete clause after termination of employment is a contractual provision that restricts an employee from working with competitors or engaging in similar business activities for a specified period and within a specified geographical area after leaving their current employer.
Key Elements of a Post-Employment Non-Compete Clause:
- Duration: Specifies the time period during which the employee is restricted from competing. This is typically a few months to a couple of years.
- Geographical Scope: Defines the geographic area within which the employee is restricted from working with competitors. It can range from a specific city to an entire country.
- Scope of Activities: Details the types of activities or roles the employee is restricted from undertaking. This can include working with direct competitors, starting a competing business, or engaging in any similar trade.
Examples of a Non-Compete Clause:
- Example 1: "The Employee agrees that for a period of 12 months following the termination of their employment, they will not engage in any business that directly competes with the Employer within a 50-mile radius of the Employer’s primary place of business."
- Example 2: "The Employee shall not, for a period of 18 months after termination of employment, solicit or accept employment with any business that competes with the Employer’s business in the field of software development."
Enforceability of Non-Compete Clauses
In India, the enforceability of non-compete clauses post-employment is limited. Courts generally consider such clauses void under Section 27 of the Indian Contract Act unless the employer can prove that the clause is reasonable in scope, duration, and geographical extent and is necessary to protect legitimate business interests such as trade secrets or proprietary information.
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