It is very common for a company to issue appointment letters containing clauses that restrict the employee to join a competitor company or rival company for a particular period of time after cessation of employment with the present company. How far this is legally tenable?
This kind of provisions in the appointment letter is absolutely invalid and does not hold any value in the eye of the law. Either this has been drafted by not so legally trained HR managers or simply by disregarding the laws of the land.
In relation to employment, both the parties, i.e. employer as well as employee both enjoy certain rights but at no point of time such rights can be used against the other party in order to restrain him from doing any particular act. If an employee finds a better opportunity (in a rival/ competitor company) he has every right to join the new company and the present employer cannot force the employee not to do so in any manner whatsoever under the present law.
An employer cannot restrict an employee to join another company solely on the ground that the rival or competitor company would make huge monetary benefit from the said employee who has received the training and experiences from the former employee. If the employee is getting a better opportunity for the growth of his career, no employer can restrain him to join the new company. The freedom of changing employment is very important and the employer has no right to curtail it. Even if there are some negative clauses in the appointment letter or service conditions/ contracts restraining the employee, but such clauses cannot be used against an employee under the law. Such kind of contract is also invalid and unenforceable in terms of the Section 27 of the Contract Act, 1872 which states as follows:
“27. Agreement in restraint of trade, void
Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception : Saving of agreement not to carry on business of which good will is sold – One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.”
In the case of American Express Bank Ltd, the bank terminated the service of one of its employee on the ground that the employee disclosed confidential data to the rival company. Thereafter, the bank filed a suit for injunction against the employee restraining her from disclosing any information and to solicit with the customers of the bank. The labour law advocate defending the employee argued that the injunction application was filed only to harass the employee as the so called secret data are only the names, address and phone numbers of the customers which cannot be treated as a trade secret.
The Hon’ble Delhi High Court held that the bank was intentionally trying to restrain the employee on the grab of confidentiality issue. It was held that the bank cannot stop the employee from joining any rival company even if the employee is in possession of any confidential data. If the employee receives a lucrative offer from a new employer, the former cannot withhold the employee in any manner whatsoever. After cessation of employment, the former employer cannot dictate an employee in terms of joining a new company, even if it is of similar nature or rival. After leaving the current job, an employee is entitled to exercise the knowledge, training etc. in the new job. Even such conditions in a contract are illegal u/s 27 of the Contract Act. Even if the employee agrees to such conditions while joining the service, it cannot be used against the employee as it is not permissible under the law. In Star India (Private) Ltd case, the Hon’ble Bombay High Court has decided that since the employer has the right to terminate the service on grounds of misconducts, similarly the employee also has the right to leave the service for better opportunity. The Courts were very particular about the fact that an employee cannot be restrained from joining a rival company in any manner whatsoever.
It is a relief for the employees to know that irrespective of the nature of agreement/ contract they have signed with their employers, the employers under the laws of the land cannot restrain their employees from joining any rival/ competitor company after cessation of the present employment.