Restrictive covenants remain central to Indian employment law debates, given that the country's persistently high attrition rate - 17.4% in 2024 - marginally improved but remains a significant concern for businesses and corporations. Beyond the statistics, high attrition leads to the loss of valuable talent and may harm an organisation’s external reputation.
In response, many organisations have increasingly begun incorporating such clauses into their agreements to address the rising challenges of employee turnover, moonlighting as well as the loss of expertise, creativity and investment in employee training.
While potentially useful, such clauses are counterproductive if not inadequately worded, considering that their enforceability is subject to judicial scrutiny under Section 27 of the of the Indian Contract Act 1872 (“ICA”), which voids agreements in restraint of trade except in the sale of goodwill.
This underscores the importance of crafting restrictive covenants with careful precision from the outset, not only to enhance their likelihood of being upheld but to also avoid protracted and costly litigation, which has the potential to compound the expenses associated with attrition.
In the prevailing business climate, employers often include restrictive covenants in employment contracts to protect proprietary information, trade secrets, and client relationships. Among the most used are non-compete and non-solicitation clauses.
A non-compete clause prohibits or limits an...
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