Is It Fair for Employers to Stop You from Joining a Competitor for Better Pay?

Hi, is it correct for an employer to restrict an employee from joining a competitor? Is it not against the constitutional law of the individual? If a businessman can start his business based on profitability, or an employer can launch a new product, or an employer can recruit from his competitor, why should an employee not be able to join the competitor based on a higher salary or better work conditions?

Thank you.

Legal Perspective on Non-Compete Agreements

No employer can restrict an employee from joining a competitor. Even if an employee has signed such an agreement with the employer, such a document has no legal standing. Documents with conditions like restricting employees from joining a competitor are voidable in the court of law.

It would be great if you could attach some more information regarding the same. Many people sign such bonds without even knowing their legality. I would request you to mention the Act that specifies such bonds as illegal or any relevant court proceedings or examples. That would be really helpful.

Negative Covenants in Service Agreements

Negative covenants in service agreements are void and against Section 27 of the Contract Act. In the case of Sandhya Organic Chemicals v. United Phosphorous (AIR 1997 Gujarat HC 177), it was held that an employee cannot be prevented from utilizing the knowledge and experience gained during employment. Similarly, the Supreme Court in Superintendence Co. of India v. Krishun Murgai (AIR 1980 SC 1717) ruled that under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. An agreement restricting an employee from joining a competitor is one that accrues only after the termination of the service contract; hence, it is void and not maintainable.

Regards,
Madhu.T.K

Understanding the Legal Implications of Employment Agreements

Hello Kamal Prasoon Sinha, I am not sure how you arrived at the conclusion you mentioned: "...is voidable in the court of law." Before discussing the legal aspect, it is important to understand the actual basis/reason why some companies have such documents signed. Many companies, especially US-based ones, have a genuine need to protect their trade secrets and intellectual property rights (IPRs). This precaution is recognized worldwide, which is different from how it is enforced.

Factuals of the Legal Position on Agreements

Now, it is important to note the factuals of the legal position on any such agreement (this could also apply to employment agreements). The key point is this: Once an individual signs a document (in this case, the bond/agreement not to join a competitor before a specific period), they are willfully binding themselves to that position. If they knew it wasn't valid, why did they sign it? The only way for an individual to escape after signing such a document is to prove to the court (assuming the company will take legal action in case of violation) that they were forced into it. Proving this can be challenging.

It is crucial to remember that if the case goes legal and the individual takes a stand as mentioned above, the company could argue that the individual acted against the company's interests by violating the IPR Act, among other things.

Let's face it: Even if there are court decisions/rulings stating that such agreements/binds are illegal, consulting a good lawyer will reveal various ways to argue in court that those rulings don't apply to this case. This could lead to a prolonged legal battle instead of working peacefully.

In essence, only sign such a document if you intend to honor it. Otherwise, consider finding a job where this won't be an issue.

Regards,
TS

Understanding Employment Bonds in India

Any type of Employment Bonds are nothing but a private agreement between two parties governed by the Indian Contract Act. There is nothing called an Employment Bond Act, etc.

Such bonds are applicable only if the company has spent money on the personal growth and enhancement of the employees, not just on training that helps employees perform better.

i. As per the Indian Contract Act, contracts entered between two parties that are one-sided would be null and void. Most Employment Bonds are one-sided.

ii. Again, as per the Indian Contract Act, no contract can be enforced on any person if the contract being enforced causes harm to that person or violates principles of natural justice.

In India, a bond in relation to employment is illegal since the bonded labor system was long abolished by Indian statute, and no bond can force any person to work against their wishes.

According to Article 19 of the Indian Constitution, the right to work is a fundamental right, and under no circumstance should the Fundamental Rights under Article 19 be infringed, nor should any person be forced to do something that violates the rights mentioned under Article 19.

As per Section 368 of the Indian Penal Code, if any person or institute withholds any document, uses any legal document, or threatens legal action to force a person to act against their wishes or against the law, it constitutes extortion, with a minimum punishment of two years.

The Honorable Supreme Court of India and several High Courts have clearly stated in numerous cases that no employee can be forcefully employed against their will just because they signed a contract with the employer, and the employer cannot withhold any personal documents of the employees as those documents are earned by the employees and the company has no claim on them.

A bond used merely as an employee retention tool is unlawful.

I would like to add certain observations by the Court in Superintendence Co. of India v. Krishun Murgai (AIR 1980 SC 1717):

"Drafting of Negative Covenants in Employment Contracts

The drafting of a negative covenant in a contract of employment is often a matter of great difficulty. In the employment cases so far discussed, the issue has been the validity of the covenant operating after the end of the period of service. Restrictions on competition during that period are normally valid and may indeed be implied by law by virtue of the servant's duty of fidelity. In such cases, the restriction is generally reasonable, having regard to the interest of the employer, and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question. But if the covenant is to operate after the termination of services, or is too widely worded, the Court may refuse to enforce it. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts "tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and oppression."

In the above case, the respondent was employed in the appellant firm. The contract of service contained a negative covenant restricting him from joining a competitor or doing a similar business of his own. He was terminated by the company and thereafter started a business of his own, which was similar in nature to the business done by the Superintendence Company of India P Ltd.

The court also discussed at length the matter of "leaving/resigning and joining a competitor," which should be treated differently from "dismissing/discharging/terminating from service," since in the instant case, the employee did not leave by himself but was terminated from service.

Regards,
Madhu.T.K

Hi, thanks for the replies. It is clear that no employer can legally restrict an employee from joining a competitor unless the employer proves that they have provided specialized training and covered related expenses for the employee, which the employee would not have otherwise received. This restriction should also have a time limit. However, what happens if the employer does not settle the accounts of such an employee in full due to this reasoning?

Regards,
Rajeev Nambiar

Dear Mr. Tajsateesh, your input about the facts of the legal position on any such agreement that "Once he/she signs such a document, he/she can't later say it's not valid—if he/she knew it wasn't valid, then why did he/she sign it at all?" is not correct from a legal point of view.

Clarification on Contract Agreements

First, I would like to clarify your conception about a contract agreement signed between two parties.

There are two types of contract agreements that are bad in law:

1. **Void Contract Agreement** - This means an agreement that is not enforceable by law and which is bad in law right from its origin.

2. **Voidable Contract Agreement** - This means an agreement that is enforceable at the option of one of the parties. Such contract agreements are bad in law if one of the parties raises an objection to it.

Employment contracts fall into the second category of contract agreements. If a party raises an objection against the clauses of the agreement in a court of law, it may be declared void by the court.

Confusion Regarding Court Rulings

Your input that "EVEN IF there are court decisions/rulings saying that such agreements/binds are illegal, just try to talk to any reasonably good lawyer. He/she will show you 'hazaar' ways to argue in the court that THOSE RULINGS DON'T APPLY TO THIS CASE." is confusing.

At one point, you are accepting that there are court rulings saying such agreements are illegal, and at the same time, you are talking about lawyers who say that THOSE RULINGS DON'T APPLY TO THIS CASE.

You should know that the law laid down by the Supreme Court of India is binding upon all courts in the country under Article 141 of the Constitution, and numerous cases all over the country are decided in accordance with the view taken by the Supreme Court. Pleading (argument) and appeal in courts are rights of every Indian citizen; it's a part of the legal procedure. But it doesn't mean that the court will give judgment in your favor.

I don’t understand how a lawyer is going to argue and win a case in any court of India that has already been declared illegal by the Supreme Court.

Regards, Kamal

Thank you, Madhu and Prasoon. I'm sure such references to court rulings will benefit many of our members who sign the bonds without knowing about them in detail. Once they are stuck or find a better opportunity, they look for options to come out of it. Thankful to you both.

Regards,

Non-Compete Clauses in Employment Contracts

Employers include such clauses to prevent their employees from joining their competitors and to reduce the attrition rate. However, while such laws are legal, not many companies enforce them. Some top reputable companies may state that employees are not allowed to work for clients within a specified period, but this clause is not widely practiced.

Regards

Few More Case References

Pepsi Foods Ltd vs Bharat Coca Cola Holding Pvt. Ltd

Pepsi Foods Ltd. filed a suit in the High Court against Bharat Coca Cola Holding Pvt. Ltd., stating that it has strong and well-trained employees who have executed an undertaking not to take up any employment with its competitor within a year of leaving employment for any reason whatsoever. However, Bharat Coca Cola Holding Pvt. Ltd. has been inducing many of its employees to breach their existing employment contracts and other obligations with Pepsi Foods Ltd. Hence, Bharat Coca Cola Holding Pvt. Ltd. should be restrained by the Court from doing so as it has been hindering its business.

Bharat Coca Cola Holding Pvt. Ltd. submitted that it has not committed any actionable wrongs but has acted in furtherance of its legitimate business. It further submitted that to restrain the defendants (employees) from doing so would be to stifle free competition. The defendants, as employers, were entitled to the most meritorious employees, and the employees similarly cannot be legitimately denied the opportunity of bettering their prospects and service conditions. It was further mentioned that Pepsi Foods Ltd has sought to do so contractually by introducing the prohibitory clause, which is void and unenforceable in violation of section 27 of the Contract Act.

The Delhi High Court declined to grant the injunction as prayed for stating that:

i. The injunction, if granted, would certainly have a direct impact of curtailing the freedom of employees to improve their future prospects and service conditions by changing their employment.

ii. Rights of an employee to seek and search for better employment cannot be restricted by an injunction.

iii. 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.’

iv. Freedom of changing employment for improving service conditions is a vital and important right of an employee, which cannot be restricted or curtailed by a Court injunction.

v. Inter-changeability of service is an accepted norm of Service Jurisprudence, which cannot be curtailed by a Court injunction.

vi. Employees' right to terminate their contracts also cannot be curtailed by Court injunction.

vii. An injunction can be granted only for protecting the rights of the plaintiffs but cannot be granted to limit the legal rights of the defendants.

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

ix. Free, fair, and uninterrupted competition is the life of trade and business. This freedom, in a free market economy, has to be zealously protected in the larger interest of free trade and business. No injunction can be granted which is likely to restrict or curtail this freedom.

In one case, the Delhi High Court observed that “you cannot have the cake and eat it too.” But an employer who obtains a temporary injunction against an employee restraining him from joining any firm of his competitors or running a business of his own in similar lines directly and/or indirectly after he leaves the service or when his services are terminated, eats the cake and also preserves it. In this context, the Court has made reference to the provisions of section 27 of the Contract Act, 1872, which reads as under: “Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.”

In Niranjan Shankari v. The Century Spinning and Mfg. Co. Ltd., 1967 (2) SCR 378, the court stated an employer, for instance, is not entitled to protect himself against competition on the part of an employee after the employment has ceased. The Courts, however, have drawn a distinction between restraints applicable during the term of the contract of employment and those that apply after its cessation. A restraint by which a person binds himself during the term of his agreement directly or indirectly not to take service with any other employer or be engaged by a third party has been held not to be void and not against section 27 of the Contract Act.

Hello Kamal Prasoon Sinha and others, Looks like the communication gap between what I meant to convey and what was perceived to be conveyed in my last posting was huge. When I mentioned the various aspects of how things can be argued legally, what I was trying to convey was the various ways employers can handle this issue if it goes legal. However, let me be clear on one thing: I wasn't primarily focusing on the legal aspects—not because there are more qualified members in this forum, but because I am not qualified. I was focusing on the next/subsequent step altogether. Let me explain.

All of us are, by and large, unanimous that this sort of restriction to join a competitor is illegal (maybe unethical too). But what I was trying to point out was how all this exercise will help the person involved now—who is waiting for a way to handle this issue since he/she has to make a decision regarding a job-in-hand.

Now, in general, when a candidate attends the interview and is selected, he/she will be presented with this document to sign before joining. How do you think he/she can/should respond/react? If he/she takes all the court verdicts/rulings/judgments and shows them to the HR person, what is the response likely to emanate? Will the HR exec say, "Oh, we didn't know that what we were doing was illegal. Fine, forget this and you can join tomorrow"? Definitely not. A more likely answer would be, "Our legal department has told us it's legal and they are there to take care of such things. If you want this job, you need to sign this. If not..." in the best-case scenario.

Through this thread, all I can see is building an awareness about this issue. Not that this is wrong or unnecessary—definitely not. But at the same time, nothing else—even though the projected motive seems to be to resolve the issue (please correct me if I am wrong).

An analogy would be this—but before taking it up, let me be very clear that except for the fundamental aspect, nothing else is common between the issue under discussion and the analogy. The scale, length, breadth, depth, etc., between the two are worlds apart.

Despite knowing well where the fault lies for all the corruption we see around us, why did Anna Hazare engage the government? He and others in his team knew very well that no matter the level of awareness among the people of this country about corruption, it's finally the Government of India which has to take the final call/stand if corruption is to be reduced, if not altogether eliminated—because it controls the levers of implementation/practice.

Coming back to our issue, instead of trying to prove that this practice is wrong (where none may be needed, after having so many court rulings) to the individuals/candidates who face the brunt of this practice, maybe it would be better to focus on the HR managers of such companies who actually lay out the policies and finally implement such practices? Since until there's some law forbidding such practices, I can't see any other way out (not that laws can prevent such occurrences, but that's beside the point).

As long as companies don't stop from practicing such measures, all we will keep seeing are more court rulings that this is illegal.

There's another aspect to the whole issue—which I mentioned earlier: "argue in the court that those rulings don't apply to this case" for which Kamal Prasoon Sinha said: how can that happen when the Supreme Court rulings are there?

I am not a legal person, but I can definitely tell this much: if the lawyer can manage, with some level of smart arguments, to get the "matter" (not sure if this is the right legal word) posted and not dismissed at the outset, then the case can go on and on, and the individual/complainant had it—in terms of timeframe, energy, etc. I know this can happen since I have seen it happen.

Maybe the court will finally give a ruling that the company is wrong—but when? And who will pay for the time (maybe years), effort, money (even if the case is "with costs")? Knowing our legal process, is it worth for the individual to first sign such an agreement with the intent to jump later? I know what it entails, again, since I have seen it happen. For the legal professionals, that's their profession, but for the individual, it's not—that's the basic and the whole difference.

That's what I meant when I said: "please sign such a document only if you intend to honor it. Else, look for another job where this won't be an issue." By saying this, my intent was to be practical and realistic rather than any other way—mind you, ethics may be involved, but I didn't even consider that aspect.

I hope I haven't created more confusion :-)

Regards, TS