MUMBAI
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Recent weeks have seen the Indian IT services industry raking up no-poach clauses when it came to senior employee exits. Legal claims have been made. What explains this sort of a reaction? Are these clauses even legally enforceable? Mint explores:
Which companies have raised this issue?
Wipro and Infosys. The two leading IT services exporters alleged breach of contract when their senior talent joined rival company Cognizant. Wipro took the legal route against Mohd Haque, a former senior vice president and a sector head, as well as Jatin Dalal, its former chief financial officer. Wipro alleged that the two joined the rival firm before a ‘cooling off’ period. Infosys sent a missive to Cognizant against poaching senior talent from the company. The reminders and lawsuits come at a difficult time for both the companies—they have struggled to retain senior talent of late.
Are such agreements legally valid?
The non-compete clause, mainly signed in promoter-led companies, is typically restricted to senior talent. But these clauses are more of a gentleman’s agreement. This is because Section 27 of the Indian Contract Act, 1872, forbids any agreement that restrains anyone from practising a lawful profession or trade, and such clauses in employment contracts are not legally enforceable. According to recruiters who are working on similar contracts, companies may hold back phantom stocks or restricted stocks if these agreements are broken but cannot withhold full and final settlements.
Apart from IT, which sectors enforce these clauses?
Business houses do enter into informal pacts that prevent key managers from joining rivals. These “agreements” are brought in when businesses are in final stages of mergers and acquisitions, and do not want critical talent poached. Some profiles in retail, telecom and pharma companies—those who work on sensitive information—have no-poach weaved in.
How do global firms view such clauses?
Globally, no-poach agreements are prevalent. However, increasingly, they are attracting scrutiny from regulators because such agreements can restrict competition. The rise in demand for niche talent and those behind patented technologies are the ones whose loyalties are scrutinized the most. According to a search firm head, foreign courts, in some cases, have passed restraining orders on senior executives who join a rival firm—they are restrained from hiring from their former employer.
What can you expect in contracts in future?
Some companies may clearly state the rival firms to be avoided as a future employer in employment contracts. Again, this will not be legally enforceable but more of a fear tactic. “Companies are now mentioning the list of rivals and clients in contracts and getting the employees to sign on it. At the time of exit, they will check if there’s a breach,” said Priyanka Sinha, partner at A&P Partners, a legal advisory company. Senior employees, in turn, can demand a high severance package whenever such contracts are inked.