IT executive exodus: a primer on breach of contract, lawsuits

Senior C-suite executives moving to rival companies is common. As are non-compete clauses as part of employment contracts by employers while making top management employee appointments. Yet lawsuits against employees for contract violations are not a frequent phenomenon in India.

What happened?

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IT major Wipro has filed at least two legal complaints against its former senior executives including former senior vice president Mohd Haque and former CFO Jatin Dalal, who has already joined Cognizant this month, for breach of his employment contract with Wipro and violation of rules. Meanwhile, Infosys sent an official communication to Cognizant accusing the company of unethical poaching tactics. The US-based Cognizant has been hiring several top executives from its competitors, especially Wipro and Infosys.

What do experts say?

Four legal experts told ET that while several companies have sued even lower-level employees, the enforceability of non-compete agreements is not very strong in India. Such an agreement violates Section 27 of the Indian Contract Act due to the possibility of depriving someone of their fundamental right to earn a living. Further, an employee’s fundamental right to life and personal freedom guaranteed by Article 21 of the Indian Constitution are frequently upheld above the terms of the employment agreement. “Typically, judgements in non-compete clauses are largely in favour of employees. In general, individuals win 70% of the time while employers win about 30%,” said Hyderabad-based lawyer Dishit Bhattacharjee. While in Dalal’s case, it is an alleged breach of non-compete clause that bars him from joining a rival within 12 months of resignation, “Wipro may need to prove the basis for making the employee sign the agreement if it violates the employee contract”, he added.

Another senior recruitment expert says that largely courts have taken a lenient view on employees, but if companies can find a trail and prove violation of confidential information or breach of data or intelligence, it could get unfavourable for the executives.

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Several cases around violation of contracts have been filed, but there are no noteworthy precedents. In one previous instance, Infosys lost an arbitration against its former CFO Rajiv Bansal, who won around 5-year severance pay battle in which Infosys paid only Rs 5 crore suspending a majority of the promised payout of Rs 17.4 crore or 24 months of Bansal’s salary. Historic battles between Pepsi and Coke saw Indian courts held that an employee is well within his right to join a rival company.

Impact on companies and employees?

Industry players point out that this could be a function of desperation for companies which are losing talent to peers at a time when large deals are difficult to come by. Clients’ have paused IT spending and bringing back business growth is tough amid macroeconomic and geopolitical uncertainty. However, as large companies stagnate and smaller peer companies scale up, there is a larger pool of opportunities and IT majors like Infosys and Wipro continue to be the breeding grounds for talent. Hence exits will continue.

“There is pressure for talent in the IT industry and they will have to hire from competition. It’s like the law of the jungle and this is not new. Perhaps, it is a calibrated reaction from Wipro to set an example for poachers and existing employees,” an industry executive said.

What can employees do?

Largely, employees must adhere to the confidentiality clauses and preferably meet conditions around cooling or hands-off period. But the experience, talent and intellectual property of an individual cannot be taken away.