Introduction
Indian economy is growing at a rapid pace. India’s GDP grew 8.15% over fiscal year 2023 to fiscal year 2024, and is expected to keep growing in the range of 6.5% to 7% according to estimates of different agencies. Along with the rapid pace of the growth economy, the India Inc is facing the challenges pertaining to talent retention on account of rising attrition rate of employees because of the competition amongst the employers to get talented work force for fuelling their growth. According to the estimates by independent agencies, the attrition rate for India Inc as in March 2024 was at 18.3% and the IT/ITES sector had the attrition rate of 19.7% in 2023.
There is a mismatch in the demand & supply of the talented work force which in different sectors ranging from Banking & Finance, EPC contracts, E-commerce, IT/ITES to manufacturing. The employers offering higher salaries to have talented work force join them and employees switching for higher salaries result in a high attrition rate. As the employers are both willing to retain the employees and simultaneously not to increase the costing of the bill of the salaries to workforce, the HR departments have come up with the solution of having a non-poaching Agreement with the competitor.
While these agreements have come in vogue now, there have been reports even from 2000s about the organization entering into non-poaching agreements. There have been reports in the news from 2010 about the HR teams of different IT companies located in Hinjewadi park, Pune getting together to have a pact for reducing the attrition rate of the employees, and these companies including the Infosys, TCS, Cognizant & Wipro which once ruthlessly poached the talent from each other did agree to work collectively to reduce attrition. While they, at the relevant point of time found that the non-poaching agreement was unviable, they did a seal a pact for hiring from the rivals only after the employees have duly served the notice period and upon employees furnishing the relieving letter from previous employer.
Recently, we have come across different agreements providing for non-poaching agreements as well as non-solicitation agreements, in absolute terms as well as limited to pacts for code of conduct for hiring and in this article, we seek to analyse the enforceability of non-poaching pacts from the perspective of the Indian Contract Act, 1872 as well as from the perspective of Competition Act, 2002.
Position of Law on Restrictive Covenants
We have, in our article title as “Are Restrictive Covenants – Non compete clauses commonly put in contract enforceable?” to be found at https://rdlawchambers.com/research-articles/, concluded that the restrictive covenants in the employment contracts are enforceable during the subsistence of the term the contract, but they are not enforceable to the extent they seek to prescribe any post-termination or post-expiry restraints in terms of Section 27 of the Indian Contract Act.
We have further pointed out that Section 27 does not expressly permit such restrictive covenants even in commercial contracts and while generally, all restrictive covenants will run contrary to Section 27 of the Indian Contract Act, the courts have taken much stricter view as regards the restrictive covenants in an employment contract to apply after completion of the service period as against such covenants in other contracts.
Apart from the judgments referred to in said article, the Madras High Court in the case of M/s FL Smidth Pvt. Ltd. V/s M/s. Secan Invescast (India) Pvt. Ltd.; (2013) 1 CTC 886, summarizing the position of different judicial pronouncements held that the reasonable restraint is normally permitted and does not render the contract void ab initio and the reasonable restrictions could be placed in different ways, including: –
- Distance: Suitable restrictions can be placed on employee not to practice the same profession within a stipulated distance, the stipulation being reasonable.
- Time Limit: If there is a reasonable time provided in this clause then it will fall under reasonable restrictions.
- Trade Secrets: The employer can put reasonable restrictions on letting out of trade secrets.
- Goodwill: There is an exception to Section 27 of the Indian Contract Act on distribution of the goodwill.
Generally, the courts have determined as to whether the restraint is a reasonable restraint or not, on the principle that the restraint will be considered to be valid normally, if it is reasonably necessary to protect the legitimate interests of the promisee or if it appears to be intended for furtherance of the trade and business.
Non-Poaching Agreements with Absolute restrictions against Solicitation of other’s employees or against employment without consent
Looking at the above analysis, we conclude that the non-poaching agreements between the two employers containing the agreement not to employ each other’s employees through solicitation without permission or consent of the other will not be valid as the same will be hit by Section 27 of the Indian Contract Act.
Also such agreement might run in violation of the provisions of Section 3 or Section 4 of the Competition Act and maybe termed as an anti-competitive agreement. While, the Competition Act does not specifically deal with the issues pertaining to labour markets, the regulator might, through expansive interpretation of the provisions of the Competition Act, consider such agreements to be amounting to formation of cartel resulting in directly or indirectly controlling the provision of services.
Non-Poaching Pacts seeking to bring in effect a broader understanding about hiring practice
While absolute restrictions as above may be contrary to provisions of Indian Contract Act and may also run afoul of the provisions of the Competition Act and invite scrutiny from the Competition Commission, we see no issues relating to the enforceability of the non-poaching pacts which seek to device code of ethics or broader understanding about the hiring practice and providing for not engaging an employee of the competitor without employees having completed the notice period with the previous employer and having obtained the relieving letter, etc.
Such pacts are not anti-competitive and they can as such be termed to be in furtherance of the needs of the business containing the reasonable restrictions in the interest of both the parties to the contract.
Our recommendation
To avoid issues relating to enforceability and a possibility of scrutiny from the competition commission of India, it is recommended that rather than having non-poaching agreements containing restrictions in absolute terms, the corporations could seek to have the non-poaching pacts containing code of ethics for hiring the employees of the competitor and could also device other suitable strategies for retention of the employees through having good work environment and other appropriate policies including relating to paid leaves, promotions, ESOP Plans and other incentives for retaining the employees. A study by the world’s biggest employment agency – Randstad found that 57% of the workers would not accept a job that would negatively affect their work life balance, including flexibility like working from home.
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