Khaitan & Co., one of India’s most prominent law firms, has recently had to field certain unique requirements from its corporate clients. One such is framing employee contracts to allow a company to exempt departing senior and middle management executives from serving their notice period and placing them on garden leave instead—getting paid but not having to work.
“This is to ensure they (the executives) are not part of any key decision-making process or any strategic know-how,” said Anshul Prakash, partner, employment labour and benefits, at Khaitan & Co. “It is generally assumed that for the senior order, it takes a couple of quarters to close in on a job, and the possibility of data leakage and unauthorised transfers remain high during the 5-6 pre-bonus months.”
Companies are increasingly approaching law firms to rework their employee contracts, particularly exit policies, for specific reasons: to protect their data and intellectual property and to discourage senior executives from hopping to another company, especially to a competitor.
There’s another significant reason: senior executives who might have access to sensitive company information exiting to found a startup.
“As more CXOs launch competing ventures, disputes are shifting from non-compete issues to breaches of confidentiality, IP rights, and business exclusivity provisions,” said Akhoury Winnie Shekhar, partner, IndusLaw. “70% of the cases in the last one year are of employers filing lawsuits against employees who had access to confidential data and are now founders of firms.”
If an employee is found to have transferred confidential data, they could face civil and criminal lawsuits, Prakash said. “(Companies) are retrieving details of any data transmission for the past 5-6 months from company-allotted devices, which are required to be handed over by an exiting employee prior to acceptance of resignation and commencement of exit process.”
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Lawyers Mint spoke with cited several examples of companies tightening exit clauses for senior executives—often triggering clawbacks of shares or employee stock options.
More than a dozen companies in the information technology services, IT-enabled services, and telecom sectors have reworked their exit clauses and contract policies and introduced stringent rules on ownership of data, one of them said.
The lawyers declined to name the companies citing client confidentiality.
Taming of the employees
Wipro Ltd in July settled a nine-month dispute with its former chief financial officer Jatin Dalal after his new employer, Cognizant Technology Solutions Corp., agreed to pay him about half a million dollars ( ₹4.2 crore) as settlement payment and reimbursement of his legal fees.
The IT services company had earlier settled another legal dispute involving its former head of healthcare and medical devices, Mohd Ehteshamul Haque, who joined Cognizant in August 2023 as its chief commercial officer for the Americas region shortly after leaving Wipro in June 2023.
“The reticence hitherto seen among employers is increasingly replaced by a proactive intent to enforce terms of the contract,” said Abe Abraham, partner at law firm Cyril Amarchand Mangaldas. “Even courts are willing to award damages once the employer has proved the fact that the individual has deliberately failed to serve their resignation notice and has jumped ship with utter disregard to their contractual obligations.”
Legal heads expect lawsuits and the quantum of damages awarded in India to rise as skills become more specialized. “… That would further disincentivize employees from breaking their contracts with impunity,” Abraham said.
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Other companies are resorting to tighter exit clauses with a more basic purpose: to curb attrition.
“We had been approached by a consultancy firm to review their employment contracts and policies to deal with attrition and employees not working after resigning (during the notice period),” said Adil Ladha, partner at Saraf and Partners, adding that companies are increasing the cooling-off period for resigning employees and tightening non-compete clauses.
To be sure, Section 27 of the Indian Contract Act, 1872 forbids any agreement that restrains anyone from practising a lawful profession or trade, and non-compete clauses in employment contracts are not legally enforceable.
However, firms are including such clauses in their contract, making it difficult for employees to join rival companies, lawyers said.
Some companies are also including a service bond, which requires employees leaving withing a specific period to reimburse the company for its ‘training expenses’. “This has been held to be enforceable by Indian courts subject to the facts at hand,” Ladha said.
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