Can an employer prohibit an employee from joining a competitor?

Of late, we find most of the employers insert a clause in their appointment order restraining an employee from joining any competitor firm or running a business of his/her own in similar lines directly and/ or indirectly for a certain period after he leaves the services.

The question is whether such action of an employer is legally valid or not?

In the case of R.Babu and Another Vs TTK LIG Limited, Formerly London Rubber Company (I) Limited, recently published in Labour Law Reporter (Jan-05; 71-73) the Division Bench of Madras High Court has refused to grant injunction against an employee restraining him from carrying on a competitive trade after the termination of his employment. The court stated that an agreement whereby an employee agrees not to join another competitive company for a specific period after cessation of his employment will be violative of public policy as stipulated in Section 27 of the Indian Contract Act, 1872. The referred Section says, “ Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”.

While giving its judgment, the Madras High Court has referred to the cases of N.S.Golikari Vs Century Spinning & Manufacturing Co. Limited (AIR 1967 sc 1098); Rajan G.R.V. Vs Tube Investment of India Limited (1995 (1) LW 274) and Superintendence Company of India (P) Limited Vs Krishna Murgai (AIR 1980 SC 1717).

Explaining the same in detail, learned advocate Shri. H.L. Kumar has stated in the journal section of the Labour Law Reporter (Feb-05; 38-42) that such clause is legally impracticable and unrealistic.

In his article he has referred to the case of Pepsi Foods Limited & Others Vs. Bharat Coca-Cola Holdings Pvt. Limited & Others (LLR, 1999, 1027) wherein the Delhi High Court has said, “injunction cannot be granted to create a situation such as “Once a Pepsi employee, always a Pepsi employee”. It would almost be a situation of economic terrorism or a situation creating conditions of bonded labour”. It has also said that inter-changeability of service is an accepted norm of Service Jurisprudence that cannot be curtailed by a court injunction.

It is interesting to note that, the Court said that, in a free market economy, everyone concerned, must learn that the only way to retain employees is to provided them attractive salaries and better service conditions. The employees cannot be retained in the employment perpetually or by a Court injunction.

Special issue of May,2005

From India, New Delhi
Hi, Hari,
Interesting to note that the courts have taken a liberal view on this.
How would this affect the stand that organisations take when they mention that they have a no-poach agreement with another organisation, in most cases a competitor?
This has become rampant in most industries and began with the telecom industry.
Would such a no-poach agreement between organisations not affect the employees chances of moving into another organisaton of his choice?
A thought I am throwing open to discussion.........

From India, Mumbai
What options are available for an Organization to safegaurd its IP and investments in innovation from not being poarched by the competition ??

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