The Complexities of Employer-Employee Relationship

Introduction:

The complexities of the employment contract are ever-changing, with the advent of new economic policy posed in 1991 the globalized economy gave away to a plethora of disputes too. Prior to 1991, India was a labor-intensive economy that had laws to safeguard the rights of poor but now India is indeed a Human Resource intensive country but is changing its face to a technological and more awakened economy.

Primarily the disputes in India were predominantly trade union disputes where enacted laws were the only way to come to a common ground, also the laws were about safeguarding the weaker section but with liberalization and globalization in place, the employer-employee relationship started the complexity arena this happened because of many reasons but at one side employees became more aware of their rights and privileges and how they have to act as an employee and on the other hand, the incoming of MNC’s brought with them a competitive market where hiding key operational information gave rise to a restrictive employment contract. The article will run through the new clauses in the employment contract and liberalized interpretation, the new breed of disputes arising out of these changing times with the comparison of older times also will conclude with the need of such edifying contracts.

Key Elements of Employment Contract

The employment contract is an agreement between employer and employee which is legally enforceable. The contract has in place information regarding the work ethics and responsibilities which both parties must follow. i.e. the employer and worker.

Essentials for an Employment Contract to be Formed

1. Offer/Proposal: The term “proposal” has been defined in section 2(a) of the Indian Contract act, 1872 as follows-“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”[1]
2. Acceptance:
   • Section 2(b) of the Indian Contract Act 1872, defines the term “acceptance” as follows-“When the person to whom the proposal is made signifies his assent to the person making the offer, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”[2]
   • The acceptance legally binds both parties to fulfill the work.
3. Consideration: Section 2(d) of the Indian Contract Act, 1872 defines “consideration” as follows-“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promise to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”[3]
4. Competent Parties: According to section 11 of the Indian Contract Act, 1872: “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”[4]
5. Legal Object: According to section 23 of the Indian Contract Act, 1872: The consideration or object of an agreement is lawful unless:
   • It is forbidden by law,
   • or Is of such a nature that, if permitted, it would defeat the provisions of law;
   •  or Is fraudulent;
   • or Involves or implies injury to the person or property of another,
   • Or the Court regards it as immoral or opposed to public policy.
6. Free consent: According to section 14 of the Indian Contract Act, 1872, consent is said to be free when it is not caused by:
   • Coercion, as defined under section 15,
   • Or Undue Influence, as defined under section 16,
   • or Fraud, as defined under section 17,
   • or misrepresentation, as defined under section 18,
   • or Mistake, subject to the provisions of sections 20, 21, and 22.

Disputes arising of Employment Contract

We are today an economy with a strong judicial system which can safeguard rights of employees and employers and does not favor one, we are now a knowledge-based economy, which demands a coherent, well-formed employment contract which caters to delicate and important touchpoints, the laws today are somewhat ambiguous so it is needed that employment contracts are to the points and cater to remedies of all type of disputes which may arise.

1. Pre-Hire Disputes:
   • Instances have been in place when prospective employees pose a threat to the company, with a competitive economy in place every company is concerned about their confidential information, and every time an employee leaves an organization they leave with some vital information.
   • To maintain the competitive edge non- disclosure clauses are present in the Employment contract. There have been cases when a new employee hasn’t duly terminated the employment contract with the previous employer, or the employee has breached the clauses of the employment contract, and due to this, speculation arises as to potential employer in encouraging the employee to do the same.
   • Further, it is seen that there is a pre-screening policy as to assess the employee and know him/her better, it is also checked whether the employee has a criminal background and has done some suspicious work in the past.
   • A company has to look out for itself. But this has led to a breach of privacy disputes from the employee side as vital information is accessed with hook and crook. In the case of Justice K.S Puttaswamy (Retd.) v. Union of India and Ors[5] the right to privacy was declared as a fundamental right under Article 21, and one of the privacy was “Informational Privacy” where every person has a right to give limited access for their personal information and do not give access at all.
   • The disputes arising can be of the nature where the employer has retracted offer before joining or employee either misrepresents or the background check is unsatisfactory. So it is commonly advised that the important clauses about obligation and misrepresentation are already included.
2. During Employment:
   • The disputes arising during employment are the most common ones as the employee comes under the array of the employer and is both are posed to work according to the employment contract.
   • One type of dispute is related to ethics or direct employment, where indiscipline, misconduct, ill performance, breach of code and conduct, indulgence in criminal activity may give rise to disputes. The other types of disputes which may arise are disputes relating to restrictive covenants in place during employment.
   • The non- compete covenant is when an employee is restricted to indulge in business similar to that of the organization during the perusal of employment also a non- disclosure covenant which restricts the employee to pass vital information to other parties during the employment. Breach of these will surely lead to a rise in disputes.
3. Termination:
   • Either the employee is terminated by the company or he/she leaves the organization by choice, in the latter case there rarely any dispute arise but the type of disputes which arise are only when any employment contract clause is breached. In the first type of termination, the company and the employee materialize in a standoff and brawl as mostly the employee is not happy.
   • The company has to follow a very tedious process of firing an employee as if the employee is terminated due to professional misconduct then an internal discipline committee is to be set up which would look into the matter uniformly and without bias, also a notice of 30 day is to be given to the employee. It must also be checked to wither the employee has any added benefit under Indian Dispute Act, 1947 for being a workmen, or has any protection under state specified labor laws and other legislations.
4. Post-Termination:
   • The covenants restraining the work often come into place in Post-termination disputes. The covenants restraining employees to join competitor organization, or starting a business in a similar line of work, or advising someone in a similar line of work, etc. These types of covenants are often seen as a breach of rights of employees as the employee is stopped from using the skill set in a similar organization or apply the learning to use from the previous organization.
   • In the case of Affle Holdings Pte Limited vs. Saurabh Singh,[6] it was held that such negative covenants in the employment contract which restrains to work for a tenure mentioned in an employment contract are void in nature and not enforceable, this prohibition is in accordance with Section 27 of Indian Contract Act,1872. 
   • These covenants restrict an employee’s mobility to work and personal freedom of choosing work/livelihood.  The covenant always has an underlying feature of breaching the choice of work and employees would always be at the suffering side as he/she won’t be able to excel in a career.

Restrictive Covenants in India

As we are entering the new age, information and its access is becoming a priced commodity. Every organization wants a market share and the only way they can have a competitive edge is when they have trade secrets that remain secrets. For this Restrictive covenants came into use and since then it has always been in contradiction with Section 27 of Indian Contract Act, 1872.

1. Non Competitive Restriction:
   • This covenant is “one in which a party agrees with any other party to restrict his liberty in the future to carry on trade with other persons who are not parties to the contract in such a manner as he chooses”[7] there is a provision of exception to this rule when one party sells goodwill to other while carrying the contractual liability to not conduct business in specified local limits is valid.
   • Article 19(g) of the Indian Constitution which provides to freely practice the profession with some reasonable restriction and Section  27 of Indian Contract Act, 1872 which makes any agreement in restraint of practicing legal profession is void are always in contradictions which each other. Hence, The courts have always given due credit to the facts of the case and reasonableness of both the parties. In the case of Niranjan Shankar Golikari v. Century Spg & Mfg Co. Ltd,[8] it was held that the restrictive clause of the employment agreement will only level up to the time when an employee is working under the organization, not after the termination of employment, also the employee can use the skill set he/she hones and knowledge gain for future use. Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr[9]. It was held that the restrictive covenant also comes to an end when the employment contract is terminated,.
   • Though it is pointed out any many cases about arbitrary nature of covenants but this must be kept in mind that The Indian contract Act which provides for Section 27 also provides that such agreements are valid which are in accordance with selling goodwill and in restraint of business in certain local limit, erstwhile the court always depends on facts and circumstances. Section 27 of the Contract Act has been applied in the context of (1) employer-employee contracts, (2) contracts with partners, (3) dealer contracts, and (4) miscellaneous cases.
2. Non-Solicitation of Employees and Customers:
   • This covenant makes sure that the employee or any other former employee does not indulge in soliciting the working employees of the company and its customers. In the case of Desiccant Rotors International Pvt. Ltd v Bappaditya Sarkar & Anr[10] The Delhi High Court upheld the covenant of Non- solicitation on the manager and upheld the injunction put by the company for soliciting its customer and suppliers. Also in the case of FL Smidth Pvt. Ltd. v M/s. Secan Invescast (India) Pvt. Ltd.[11] it was held that merely approaching customers of the former employer does not amount to soliciting if an order is placed then the clause can come into place.
   • In the above case, an important contention to look at is the idea of globalization and prospects to sell to anyone, The courts must look into the fact that when a buyer pose to buy the product he/she has done it in his/her full capacity and there lies a choice so it is in the ambit of the trade when such proposal is made and acceptance is received. Though such clauses may be valid when they are reasonable, time-bound, non-usage of trade secrets, goodwill sold, with a reasonable distance, etc.
3. Non-Disclosure of Confidential Information: The employee should take all the necessary steps to prevent disclosure of sensitive information in front of potential threats to the company. The company should also take all the necessary steps to prevent such disclosure and before providing vital information must have all the belief in the employee. In Hi-Tech Systems and Services Ltd. v. Suprabhat Ray[12], the Supreme Court restrained the respondents from acting as sales agents of other companies, saying that they had acted in breach and they were in the process of utilizing trade secrets and confidential information.

These are the three types of covenants that arise out of Employer-Employee relation the Fourth type of covenant is “Non-Poaching Covenant” which is between two employers under which they sign an agreement which stops them to steal each other’s employees.  These Covenants can be enforced by serving a legal notice to employees or seeking remedies or enforcement under contract or seeking an injunction for specific performance not non- performance according to contract, etc.

Conclusion

These are the times of cut-throat competition when companies face large employment turnover rate, companies do everything in their capacity to save the trade secrets and confidential information but this cannot be done entirely, Section 27 of Indian Contract Act, 1872 poses many questions and give rise to many disputes though the courts have always analyzed the situation with the facts and reasonability some general guidelines can be added to section 27 and it can be amended, with the precedence in place we can see that after the termination of employment the restrictive covenant is rarely upheld though they are upheld when facts vary. The restrictive covenant of non- disclosure is the only one that can be posed at a former employee.

Restrictive covenants have to be analyzed on case to case basis but it is also important that these must be included in the employment contract as they help in safeguarding the interest of the organization or employer. An employment contract should be made in such a way so that the growth of employer and employee is not hampered also either party is not at a greater loss. With time these disputes will grow and hence the contract act and various legislations needs amendments that can resolve the dispute or minimize them from arising.

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References:

[1] Indian Contract Act, 1872, sec 2(a)

[2] Indian Contract Act, 1872, Sec 2(b)

[3] Indian Contract Act, 1872 Section 2(d)

[4] Indian Contract Act,1872 section 11

[5] WP (C) 494 of 2012

[6] OMP 1257/2014

[7]https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf

[8] 1967 AIR 1098, 1967 SCR (2) 378

[9] AIR 2006 SC 3426

[10] CS (OS) No. 337/2008

[11] (2013) 1 CTC 886

[12] 2015 SCC Online Cal 1192: AIR 2015 Cal 261