- Commercial Law Advisors
Non-Compete Agreements in a Nutshell
A Non-compete Agreement (NCA) is a contract where the employee makes a promise to the employer, that he/she will not enter into any professional competition with the employer after the period of employment is over. The contractual terms on this subject are clearly defined and entered into at the beginning of the business relationship.
Why is the NCA important?
Companies recruit employees seeking to capitalize upon their talent and intellectual resources. The employee is compensated with pay and other incentives, the employer profits from the employees’ efforts to bring in new business that add to the profits. In this process, the employee, however, is allowed access to the company’s vast resources and is also provided exposure to the companies’ inner workings.
In the event of this relationship terminating, not only does the employer lose valuable talent they also stand to suffer the risk of their trade secrets and clientele empowering an employee to steal business from the company. Thus, NCAs prevent possibility by including certain clauses in the employment contract.
How are NCAs structured?
The clauses on non-compete are usually incorporated under post-termination events. There are a variety of ways in which NCAs can be structured. For instance:
● Barring the employee from working in the similar sector wherein they worked for the current employer, for a certain period of time.
● Requiring the clients which the employees brought in with them into the company by their own efforts, to stay with the company rather than exit with the employer.
● Express forbiddance from disclosing proprietary information to the former employer’s competitors, either in exchange of remuneration, or otherwise.
Usually, the enforcing power of the NCAs comes from the amount set as penalty that the employee is bound to pay the employer in cases of violation. The amount set is usually set so high that it acts as a motivating deterrence against non-compliance.
Are NCAs legally maintainable?
NCAs are very powerful instruments against anti-competitive practices in the West. In India, however, owing to the nascent development in trade and manufacturing enterprises, application of NCAs is heavily hampered. The courts have famously refrained from ruling against the working classes to protect them from corporate hegemony. However, cases wherein NCAs have been held as sustainable are also seen, though sporadic in nature.
The twin legal concerns against application of NCAs are the Section 27 of Indian Contract Act, 1972 and Article 19(1)(g) of the Constitution. Section 27 of the Contract Act prohibits agreements in restraint of trade, Article 19(1)(g) provides citizens the fundamental right to carry out any trade or profession, subject to reasonable restrictions. The effective premise of NCAs is with regard to curtailing the spheres where the employee can seek employment post termination. This necessitates an aggravation of the employee’s rights to find a job which is crucial to their livelihood and maintenance. Therefore, securing their rights is given primacy over preserving corporate interests.
How to Strike a Balance?
The trick lies in drafting the NCA clause in a manner so as to preserve the company’s interests without jeopardizing the employer’s right to practice trade or his right to livelihood. This is done by liberalizing the instruments to an extent where the resulting penalty provisions can be triggered when the violation is fundamental in nature. For instance,
● Do not bar the employee from working in a similar sector, as long as they sign a non- disclosure agreement extinguishing their right to divulge secrets to a competing firm.
● Do not bar employment in the same sector for a period lasting more than a year.
● Prevent them from taking their clients with them, but do not restrict their power to approach them post termination and solicit them, if the clients have credible grievances.
● In case there is a provision in the NCA to enable to employee from approaching his clients post termination, ensure a mandatory notice requirement is in place, before the clients are approached.
Employment contracts must be designed carefully considering both service rules as well as worker’s rights. This is why, it is ideal to carve out a combination agreement incorporating provisions of both non-disclosure as well as non-competes so as to avoid judicial scrutiny on the premise of being overly restrictive in trade practice.