New Delhi: The Delhi High Court has decided that companies cannot stop former employees from finding new employment, including with their customers or colleagues, in a landmark decision intended to stop the abuse of restrictive employment contracts.
According to the verdict, the law prohibits any stipulation that requires them to choose between remaining unemployed or returning to their previous employer.
“An employee cannot be confronted with the situation where he has to either work for the previous employer or remain idle,” said Justice Tejas Karia. “Freedom of changing employment for improving service conditions is a vital and important right of an employee.”
Post-employment non-compete agreements, which are frequently seen in contracts across industries, are declared “void” by the court in its 25 June ruling in accordance with Section 27 of the Indian Contract Act. Any agreement that prevents someone from engaging in a legitimate trade, company, or profession is nullified by this clause.
The Delhi High court also issued a wider critique of employment contracts that restrict worker mobility. “In employer-employee contracts, the restrictive or negative covenants are viewed strictly as the employer has an advantage over the employee and it is quite often the case that the employee has to sign a standard form contract or not be employed at all.”
The lawsuit concerned Varun Tyagi, a software developer who had worked for Daffodil Software on the government’s POSHAN Tracker project. The Digital India Corporation (DIC) owns the project, which is a major national effort to enhance child nutrition. Tyagi joined DIC directly after his notice period ended in April.
Citing a provision in his contract that prohibited him from joining any “business associate” for three years following his departure, Daffodil Software filed a lawsuit against him. Tyagi had to go to the high court after a district judge agreed and barred him from collaborating with DIC.
The Delhi high court issued strong remarks regarding employment rights in addition to permitting Tyagi to assume his new position by overriding the district court’s judgment. It stated that businesses cannot use general, catch-all provisions to bar former workers from finding other employment, particularly if they weren’t employed to create any proprietary technology.
Given that Tyagi had not produced any proprietary software or sensitive intellectual property, Justice Karia determined that Daffodil lacked the authority to stop him from joining DIC. The court pointed out that the government, not the private contractor, owned the rights to the POSHAN Tracker project.
“Freedom of employment cannot be restricted merely because someone worked on a sensitive project, particularly when that project was not owned by the employer,” the court said. It added that such freedom cannot be restricted just because someone once worked on sensitive projects.
Crucially, the court clarified that Indian law makes it clear that an agreement that prevents someone from carrying out their duties is unenforceable, unless it deals with selling a company’s goodwill. Justice Karia emphasised how Indian jurisprudence is very different from English law, which allows for the justifiable upholding of certain post-employment restrictions.
Such limitations are only allowed under Indian law in the extremely uncommon instance of a business goodwill sale, which is specifically excluded as an exemption in Section 27. Contracts that prevent future employment without safeguarding legitimate proprietary interests are null and unenforceable, the court said.
The court also rejected the argument that such clauses were justified to prevent the misuse of confidential information. “Negative covenants after termination can be granted only to protect genuinely proprietary information or prevent client solicitation. But none of the cases cited by Daffodil support restraining employment per se,” the judgment read.
Even if an employer believes there has been a breach of the contract, the Delhi High Court said, they can seek monetary damages, but cannot stop someone from working.
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