Key elements of an employment agreement in India. Part 1: Non-disclosure, non-compete and non-solicitation in employment agreements.

An employment agreement is a (binding) bilateral agreement between the employer and the employee. It stipulates the terms and conditions under which an employment relationship has to take place. Some of the important clauses in an employment agreement are term of the employment, duties to be performed, remuneration, sickness and disability, termination, notice period, restrictive obligations, choice of law and jurisdiction in case of dispute resolution. However, in part 1 we will only discuss the restrictive obligations such as non-disclosure, non-compete and non-solicitation.

Oral or in writing

As per the Indian Contract Act 1872, section 2(e), an agreement is defined as "every promise and every set of promises, forming the consideration for each other is an agreement." This would mean that the promise can be made verbally or in writing towards one another. In India, usually a letter of appointment serves as the employment agreement. Even though it is the common intention of the parties to create legal obligations for one another, oral agreements are usually not considered binding but they are.

Therefore, it is not advisable to have an oral agreement with employees, as these agreements do not have the same evidentiary value as the written agreement would have in case of disputes and disagreement with regard to the key elements to be discussed here below. Moreover, how does one ascertain the true nature of facts and terms of the agreement, without the invasion of bias in case of oral agreements? However, one has to keep in mind that oral agreements are legally enforceable in the court of law, or in a dispute. Still, it is highly advisable that agreements be agreed in written form only.

Key elements of an employment agreement in India

While getting an employment agreement drafted in India, it is important to incorporate certain key restrictive clauses. Such clauses contain obligations such as non-disclosure of information such as know-how, trade secrets, but also prevent competition and solicitation, while being employed with the same company or when the employee decides to leave the company.

1. Non-disclosure

Most foreign companies setting up shop in India, bring with them sensitive business information such as know-how, trade secrets and client data etc. that runs the risk of getting disclosed. A well draft employment agreement therefore should include a non-disclosure clause that protects the company’s sensitive information and obligates employees to keep such information confidential from third parties (competitors in the market) without prior permission from the company. By agreeing to such a clause in an employment agreement (or agreeing to a separate non-disclosure agreement), the employee is agreeing that disclosure of any sensitive information will lead to a breach of the agreement, which is not without legal consequences. The Indian Penal Code and the Information Technology Act, 2000 provide for Criminal prosecution and imprisonment or fine (or both) in such cases.

It is also important to note that the information that the company is trying to protect, should be exclusively available to that particular company and should not be general information already available in the public domain.

2. Non-compete during and after the employment

A non-compete clause in an employment agreement is used to restrict ex-employees from trade or profession that would compete with the employer. Such a clause places limitations and restrictions on the employee with regard to the manner in which the employee is allowed to use or disseminate the information he/she has become privy to solely during the course of the employment.

The idea is to protect both the business and the employer during the employee’s employment period. However, some employers want to do this also after the employee is no longer associated with the company. In this case, a non-compete clause will mostly contain a mention of a timeframe within which the employee has to refrain from any kind direct or indirect competition with their ex-employer. Here, the employer has to be mindful about the fact that restraining an employee from joining a competitor after the conclusion of the employment can lead to disputes in the post termination period. Moreover, such breaches by the employee will require detailed legal scrutiny. As per the Indian law, the protection of “rights of an employee seeking employment” is above the protection of “interests of the employer from competition.” The reason being that such a restrictive clause restrains an employee from using the skills and knowledge gained, to advance further in their career.

Thus, to be valid, restrictive clauses imposing post-employment restrictions need to be reasonable as far as the duration and geographical operating area are concerned. It is more likely and reasonable to put a restriction on the senior employees as they are more aware of the company’s sensitive information.

Also, in case of dispute with the employee, the burden of proof will lie with the employer, on the basis of which the Court will determine to what extent it can establish a restraint of trade.

It is important to note that non-compete clauses can be effective during the period of employment and can only be challenged on the ground of breach that can be proven unambiguously.

It is extremely difficult to impost non-compete clauses after the termination of employment as they will be considered to be void under the Indian Contract Act. The law sees such restraint from carrying trade as a way to avoid competition, leading to monopolistic tendencies. This would both be against the individual ex-employee’s interests as well as the society at large.

3. Non-solicitation

Apart from non-disclosure and non-compete during or after the termination of the employment, non-solicitation also aims at protection of the employer’s interests. Non-solicitation would mean that an employee agrees not to solicit or give advice to the clients of the ex-employer. Furthermore, the employee can be prevented from soliciting their ex-colleagues to quit the job to recruit them instead.

Conclusion

A well-drafted employment agreement has to include clauses that prevent disclosure of confidential information, and clauses pertaining to non-competition and non-solicitation by employees. Therefore, it is highly advisable to execute a written agreement of employment between the company and the employee. Oral agreements are not recommended. In practice, the company would issue a letter of appointment with the proposed employee prior to entering into the employment agreement.

Do you have questions about drafting an employment agreement for employees in India? Get in touch with Miss Legal India.