Legal effect of Moonlighting clause in Employment Agreeement

This article is written by Ravindra Bhardwaj, a student of Institute of Law, Nirma University.

The employer-employee relationship is a very important relationship. It has always been in the constant state of evolution and now The New Economic Policy, 1991 has made a sharp change. It has changed the situation between their relationship as well as added altogether a  new domain to the concept of the “industrial relation”  regarding the disputes on the payment terms, termination  of services, non-compete or non-solicitation clauses etc.

These disputes may arise at various stages of relationship as:

Pre-Hire:

The dispute may arise before the person is hired because issue of violation of rights may arise because of the screening policy.[1]

During The Employment:

There are various chances that disputes might araise during the course of employment due to Misconduct or indiscipline of the employee or relation to restrictive covenants which can also be termed as ‘Moonlighting Clause’.

Post Termination:

After the termination of the employees, the employee may be restricted from joining the competitors.[2]

WHAT IS MOONLIGHT CLAUSE

In this modern era moonlighting clause can also be termed as ‘Negative Covenants’, ‘Restrictive covenants’ etc. Moonlighting clause is a clause in the agreement of service which contains negative covenants restricting the employee from working elsewhere during/after the period covered by the agreement. Moonlighting term means to hold another job outside of normal working hours. Both the job may be identical or may not. Moonlighting clause is the clause which is added as a clause in the employment agreement with the consent of the employee when he joins the company/business. It is added by the consent of both the parties.

The term ‘Moonlighting’ is most commonly used in the U.S.A. where tendency to work at two places is higher in comparison to India. In India this clause is mostly used as ‘Negative Covenants.’ A negative covenant is that the employee would not engage himself in a trade or business or would not get employment under any other employer for whom the employee would perform similar or substantially similar duties, is not a restraint of trade unless the contract is harsh or unreasonable. In India this clause is enforceable and it can be enforced wherever necessary.

Moonlighting clause can be categorised into in two types :-

1. Term covenants
2. Post term covenants.

Term Covenants

The term covenants are the covenants which restraints the employee to work elsewhere during the period covered by the agreement. An employee owes a duty to the employer to not disclose trade secrets or confidential information to others or for his own benefits and the employee could be restrained from or sued for divulging or utilizing any such information in his new employment.

Post term covenants.

Post term covenants are as Non Compete covenants, Non solicitation covenants, training bonds etc. In Indian scenario both these covenants are enforceable and can be enforced but the reasonability must be there to enforce.

Common moonlighting policy points are:

No Second Job At All:

The basic moonlighting clause is that no employee should work for any other company until he is in the employment of the first company. The reason behind this clause is to carve out more efficiency out of the employee.

Not To Work For The Competitor:

Another clause may be that the employee should not work for the competitor of the former employer after the termination of his employment from the former company. This clause is added to protect their confidential information and trade secrets.

Permission From The Existing Employer For The Second Job:

This clause is added if the employee is allowed to do the second job than the prior approval from the first employer must be there.

All these are the common points of the moonlighting clause. The benefit of this clause will be to the employer only because the employer can carve out more efficiency out of the employee.

Consequences Of Two Jobs At A Time

• The efficiency of the employee will go down because he may be too tired by handling two jobs at a time.
• The second job may interfere with the first job or first with the second.
• There may be chances of breach of confidentiality.
• There may be conflict of interest.
• Various issues as Fatigue, poor attentiveness etc may arise.

All these may be the consequences of handling two jobs at a time so in the agreement the moonlighting clause is added so that the employee works efficiently and does not work at any other company. This clause must be added with the consent of both the party and there must not be coercion, undue influence, misrepresentation etc.

NON-COMPETE AND NON DISCLOSURE OF CONFIDENTIAL INFORMATION CLAUSE

There may be a clause in the employment agreement which restricts the employee to engage himself in a trade or business by any manner with the competitor in term or post term employment. The reason behind adding the clause is that the employer can carve out more efficiency out of the employee and the employee should not disclose the secrets of the company. In India this clause is enforceable and an employee can be sued by the employer if the employee breaches the agreement. On the breach of the agreement by the employee, the employer can claim the damages.

According to Section 27 of Indian Contract Act, 1872 all agreement which are in restraint of the trade are void except when there is sale of goodwill or if the agreement is governed by the partnership act. Although the section states that all agreements in restraint of any profession, trade or business are void, the current trend as per various judicial pronouncements leads to the conclusion that reasonable restraints are permitted and do not render the contract void ab initio. A contract which is in restraint of trade cannot be enforced unless it is reasonable as between parties and it is consistent with the interest of the public.

In case of the public sector one can claim the right enshrined under Article 19 of the Constitution of India but in case of private sector one can not claim this right. Article 19 (g) of the Constitution of India clearly provides every citizen the right to practice any profession, trade or business. This right is not an absolute right and reasonable restrictions can be imposed on this right in the interest of the public so the courts interpreted the section and adopted an interpretation favourable to the employees. It is a settled position of law that restrictive agreements bind current employees in lawful employment of the employer throughout the duration of the contract. Unlike the law of the United Kingdom, the Indian Contract Act, 1872 does not distinguish between partial and total restraint of trade, if the clause amounts to restraint the employee after the post termination of the agreement, then the same is void otherwise not.

In India it is the settled position that agreement restraining the employee to work elsewhere during the period covered by the agreement is valid agreement and it can be enforced but sometimes even after the termination of the employment the employee can be restrained from working at the competitor of the former company.

In the case, V.N. Deshpande vs. Arvind Mills Company Limited,[3] the Bombay High Court held that if a man who works for a particular wage and for certain period he agrees to work then the agreement is not void. In this case the defendant was employed as a weaving master in a mill with the condition that he will not serve in that capacity for three years for anyone else in any part of India. The court granted an injunction to restrain him in terms of the agreement that he can not employ himself as a weaving master or as an employee under any title discharging substantially the same duties as a weaving master. The court granted the injunction on the view that the agreement was signed by the employee and the agreement was for the particular time period of three years hence reasonable term. The agreement and negative covenants were made enforceable on the basis that the terms of the agreement were reasonable.

Supreme Court of India in the case, Niranjan Shanker’s case,[4] observed that if the negative covenants are reasonable than the agreement is valid and these negative covenants must be necessary for the purpose of trade. In this case a foreign producer collaborated with a company manufacturing tyre cord yarn by an agreement which stated that the company would maintain secrecy of all technical information and would obtain corresponding secrecy arrangements from its employees. The defendant was appointed for a period of five years with the condition that he shall not serve at anywhere else even after he left the service. Court held it a valid agreement that the agreement is restricted as to time and nature of employment so it is a reasonable and the court restrained the defendant from serving at anywhere else during the currency of the agreement. The court held that there is an implied term in the contract not to use trade secrets of the previous employer.

In the case, Superintendence Company of India Ltd vs. K. Murgai,[5] it was held that an employee can not be restrained from joining the competitor but he can be restricted from the disclosing of the trade secrets of the former employer. In this case the employee agreed that he will not engage himself in any of the competitors during the employment and post employment. But the employee joined the other competitor after the termination from the first employment. Supreme Court held that the employee can not be restrained to join the competitor but court held that the clause to maintain the secrecy or not to disclose the trade secrets is enforceable.

In the case, Gopal Paper Mills Ltd vs. Surendra K. Ganesh Das Malhotra, (AIR 1962 Cal 61), it was held by the court that where the agreement is for the time period of 20 years and the contract gives the arbitrary power to the employer to terminate the service without the notice then it is void agreement.

But in the case, Percept D’Markr India Pvt. Ltd vs. Zaheer Khan & Anr.,[6] it was held by the Supreme Court that if a restriction is unreasonable, it can be null and void under section 27 of Indian Contract Act, 1872. In this case, an agreement was made with the cricketer for the period of three years with the condition that the player could not accept for any endorsement or promotion and before accepting this offer he would provide in writing all the terms and conditions of such third party. After that the cricketer informed the company that he is not interested in the extending or the renewal of the previous agreement and thereafter he entered into an agreement with the third party. The court held that under section 27 of the Indian Contract Act, a restrictive covenant extending beyond the term of the contract is void and unenforceable.

Delhi High Court in the case, Desiccant Rotors International Pvt. Ltd vs. Bappaditya Sarkar & Anr.,[7] held that restrictions, which interfere with the right of an employee, can not be said valid. Such negative covenants can not be said valid. In this case the employee signed an agreement under which he agreed to the conditions of the agreement. The conditions were that after the termination of the employment he will not in any capacity compete against the company and he would not disclose the trade secrets and the confidential information of the former company to any third party. In addition to this he also signed two declarations declaring that if he failed to comply with these two requirements, he would take full liability and responsibility for the same. After the three months of the leaving the employment the employee joined one of the competitors of the former company. The court held that such negative covenants are invalid because he was the marketing manager who could not be deemed to possess confidential information so there is no need of the claim to enforce injunction. The court observed that such type of clauses violate his right to livelihood hence such restriction could not allowed.

NON SOLICITATION CLAUSE

A non-solicitation clause is the covenant which prevents a former employee from indulging in business with the company’s employees or customers against the interest of the company. In India, Non solicitation clause has been enforced by the courts and they relied on the circumstances. All the High Courts have enforced non solicitation clause differently.

Delhi High court in the Dessicant Rotors case[8] held that the manager could not have deemed to possess confidential information so no question of solicitation arises. In the case, Wipro Ltd. v. Beckman Coulter International SA,[9] held that there are certain non solicitation clause which can not be said to be in violation of the section 27 of Indian Contract Act, 1872.

Court gave some guidelines:

“Negative covenants tied up with positive covenants during the subsistence of a contract would not normally be regarded as being in restraint of trade, business of profession unless the same are unconscionable or wholly one-sided; Negative covenants between employer and employee contracts pertaining to the period post termination and restricting an employee’s right to seek employment and/or to do business in the same field as the employer would be in restraint of trade and, therefore, a stipulation to this effect in the contract would be void; While construing a restrictive or negative covenant and for determining whether such covenant is in restraint of trade, business or profession or not, the courts take a stricter view in employer-employee contracts than in other contracts, such as partnership contracts, collaboration contracts, franchise contracts, agency/distributorship contracts, commercial contracts. The reason being that in the latter kind of contracts, the parties are expected to have dealt with each other on more or less an equal footing whereas in employer-employee contracts, the norm is that the employer has an advantage over the employee and it is quite often the case that employees have to sign standard form of contracts or not be employed at all; The question of reasonableness as also the question of whether the restraint is partial or complete is not required to be considered at all whenever an issue arises as to whether a particular term of a contract is or is not in restraint of trade, business or profession.”

Madras High Court in a case observed “the restrictive clause only stated that Defendant may not carry on a business which is prejudicial to the Plaintiff Company and as such clause did not restrict the Defendant in absolute terms from carrying on any business. The Madras High Court further noted that the agreement was entered into with the free will of both the parties and had equal bargaining power hence the term can not be said as unreasonable.”[10]

CONCLUSION

The relevance of inserting Moonlighting clause in the agreements has been evolved over a period and gained significant importance due to employee-employer relationship. Restrictive covenants can not be enforced directly but they must be analysed on a case-to-case basis. Whether the restrictive covenant is violative or not is a question of fact which only a court of law can examine and arrive at an appropriate conclusion based on facts and circumstances and all the High Courts have observed differently from the case to case. In India the Moonlighting clause is enforceable to the extent of reasonability and the reasonability is a question of fact which has been decided by the Court of law.

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[1] Vikram Shroff & Neha Sinha, Background checks in India, Society for HRM (2012).

[2] Niranjan Shanker Golikari vs. Century Spinning & Manufacturing Company Limited, AIR 1967 SC 1098.

[3] (1946) 48 BOMLR 90.

[4] Ibid.

[5] AIR 1980 SC 1717.

[6] (2006) 4 SCC 227.

[7] Desiccant Rotors International Pvt. Ltd vs. Bappaditya Sarkar & Anr. Delhi HC, CS (OS) No. 337/2008 (decided on July 14, 2009).

[8] Ibid.

[9] 2006 (3) ARBLR 118.

[10] GEA Energy System India Ltd. v. Germanischer Lloyd Aktiengesellschaf, [2009]149 CompCas 689.