Section 27 and restraint of trade
Section 27 of the Indian Contract Act 1872 makes any agreement that restrains
a person from exercising a lawful profession, trade, or business void, to the
extent of the restraint, with only a narrow exception for the sale of
goodwill of a business. Courts in India have generally held that a clause
preventing an employee from working in the same industry after leaving a job
is unenforceable, because it restrains the former employee’s lawful right to
earn a livelihood. This is a firmer position than in many other countries,
and employers who copy non-compete clauses from foreign templates are often
relying on a clause Indian courts will not enforce.
What remains enforceable
Restrictions that operate during employment, such as an obligation not to
work for a competitor while still employed, are generally enforceable, since
they do not restrain trade after the relationship ends. Confidentiality
obligations and restrictions on soliciting the employer’s clients or
employees after termination are treated more favourably by courts than a
blanket post-employment non-compete, though even non-solicitation clauses are
scrutinised for reasonableness in scope and duration.
POSH Act compliance
Every employer with ten or more employees is required under the POSH Act
2013 to constitute an Internal Committee to receive and inquire into
complaints of sexual harassment, with a specific composition requirement
including an external member. Many smaller and mid-sized employers either
have no Internal Committee or one that exists only on paper. This is both a
compliance failure and a real risk, since a complaint received without a
properly constituted committee cannot be inquired into correctly, and the
company faces penalties for non-compliance.
Termination and full and final settlement
Termination procedure differs depending on whether the employee qualifies as
a workman under the Industrial Disputes Act 1947, which generally requires
notice or pay in lieu, and, for certain categories, government permission
before retrenchment. For employees outside that definition, termination is
generally governed by the employment contract itself. We advise on which
category applies before termination proceeds, since getting this wrong is a
common cause of subsequent litigation. A clear full and final settlement
letter, signed on separation, also reduces the scope for a later dispute
over what was actually paid and why.
