While non-competes cannot be enforced against an employee post-employment, contracts and policies are being made tighter to make an exit difficult, said top lawyers and company officials.
These include longer notice periods and extended non-poaching contracts. Also, ‘liquidated damages’ provisions are being built in more frequently where a predetermined amount has to be paid by the outgoing executive as damages for failure to perform under a contract.
IT major Wipro recently sought Rs 25 crore damages from former chief financial officer Jatin Dalal for breach of non-compete rule in his employment contract. Infosys reportedly sent written communication to Cognizant after several of its senior executives left to join the rival firm.
“An organisation cannot hold a person back, but the idea is to make an exit more inconvenient,” said Atul Gupta, partner at law firm Trilegal. “Lot of companies are looking at extending the cooling off period in senior management contracts,” he added.
Sumit Mitra, head of human resources at Godrej Consumer Products, said: “Contracts with non-compete clauses legally hold little water, while everyone takes care to protect company confidentiality.”Many employment contracts for CXOs and key personnel now include notice periods of six months to 12 months versus 30 days to 90 days earlier. Duration for non-solicitation — to prevent the outgoing top officials from poaching teams or clients — could be as long as 12 months to two years.“While the restrictive covenant tenure for key executives usually ranged from six months to one year, organisations have considered additional tenure for specific key employees who occupy positions of financial and strategic responsibility,” said Anshul Prakash, partner at law firm Khaitan & Co.
Usually, senior exits are discussed within and when that happens, dialogues and discussions between the executive and the company iron out a lot of issues, said Mitra of Godrej Consumer Products.
However, in his view, legally challenging or threatening an employee never helps because one doesn’t really want an unwilling employee in an organisation. “We should also do our basics and be sure that proper documentation is done in a waterproof way so that business interest is protected and we use the legal route when absolutely needed,” he added.
Companies are becoming more aggressive as they have faced challenging situations due to abrupt exit of key personnel that can be severely debilitating to an organisation and also lead to confidential business plans and information.
The primary objective is also to send out a strict message to the existing employees that any such behaviour will not be tolerated.
“That is largely the principal objective of the establishment’s actions against executive’s breach as well as of the contractual stipulations. Organisations would not want any compromise on their stance against breach of employment obligations at all levels and especially at the senior or senior most level across functions so that employees are mindful of potential implications that a breach on their part may entail,” said Prakash.
“The specificity of mentioning what constitutes ‘competing’ companies is now followed to the fault with the list being made exhaustive to include tier-2 companies as well besides direct competition,” said R Suresh, CEO, Insist Consulting.
Lawyers said it is becoming an increasingly common practice for companies – not just in IT but other sectors such as pharma, financial services and manufacturing – to send out legal notices to new employers intimating them when any senior employee has not adhered to a contract. Earlier, such moves would have often been ignored.
A senior counsel at a leading Mumbai-based conglomerate said that usually boards avoid legally challenging or threatening executives as it also hurts the reputation of the company doing so. “So legal threats are hardly ever used and unless there has been some serious charge of breaking or some major evidence of breaking some confidentiality aspect of services or products, boards discourage legal actions,” he said.