Infosys, Wipro's court battles with ex-top management raise questions about job contracts

The recent wave of top management resignations at Infosys and Wipro and the legal action taken against them indicate these IT companies are grappling with the consequences of these departures.

Additionally, it raises complex matters concerning employment contracts and corporate responsibilities.

To begin with, both Infosys and Wipro are experiencing departures among their top-level executives. This trend reflects macroeconomic conditions and changes in the IT industry, such as reductions in discretionary spending and billion-dollar contracts, which are increasingly becoming hard to come by.

Men who quit

Notable exits from Infosys include executives like Mohit Joshi, who left to become CEO and MD of Tech Mahindra; Ravi Kumar, who transitioned from President to CEO of Cognizant; and Rajeev Ranjan, who joined Ness Digital after leaving his position at Infosys.

Similarly, Wipro has witnessed departures such as Jatin Dalal (CFO), now serving as CFO for Cognizant, Mohd Haque, former Senior Vice-President of Wipro and now President of Cognizant, and Ashish Saxena (former senior Vice-President), now President at Innova Solutions.

Employment contracts

Companies like Infosys have introduced competitive clauses in their employment contracts, which generally restrict employees from joining competitors or clients they have previously worked with for a specific period after resignation.

For example, the Infosys non-compete agreement prohibits employees from joining any customer or named competitor (such as TCS or Accenture).

These corporates have occasionally gone after their former top management personnel for violating contractual obligations.

Claiming damages

In the case of former CFO Jatin Dalal, Wipro has even claimed damages worth ₹25.15 crore with an interest payment of 18 per cent for the delay in paying up. The case has now been referred to arbitration.

What is interesting about these cases is that these gentlemen knew about the existence of stiff non-competing clauses. Hence, did they believe that having worked for several years, their former employees would ignore non-competing clauses, or perhaps they knew they cannot stand in a court of law?

Contracts Act

Critics argue that these clauses are restrictive and violate trade laws in certain jurisdictions, such as the Contract Act. They believe these clauses heavily favour employers and infringe upon employees' right to seek employment opportunities freely. The enforceability of these clauses often depends on their extent, duration and geographical limitations. In some cases, they may be challenged in court for being overly broad or harsh towards employees.

Determining culpability in this matter is complex. While companies have concerns about protecting their business secrets and client relationships, stringent employment contracts can exploit the power imbalance between employers and employees, potentially hindering career prospects and livelihoods.

Striking balance

Industry leaders and legal experts suggest that while non-compete clauses are standard in employment contracts in highly competitive fields like IT, their development and implementation should strike a careful balance between safeguarding both company interests and employee rights.

Therefore, companies like Infosys and Wipro may have legal grounds to include non-compete clauses.

However, the enforceability and fairness of these agreements can be questioned significantly when they unreasonably limit a person's employment opportunities without justification. The ongoing developments in these instances could establish standards for employment contract norms within the IT industry and beyond.

Legal action

There are numerous instances where companies have pursued legal action against former employees for alleged violations of their employment contracts, which may involve non-disclosure agreements (NDAs) and non-compete clauses. These cases often revolve around safeguarding trade secrets and confidential information and preventing competition.

In a particular case, a company was awarded nominal damages due to a former employee's breach of an NDA. The court acknowledged that even if actual damages couldn't be proven, violating an NDA constituted an offence that warranted nominal damages.

Legal remedies

This underscored the significance of NDAs in safeguarding information while indicating the court's readiness to uphold such agreements despite the absence of quantifiable harm.

Another common scenario involves employees who join companies or establish competing businesses. In some situations, former employers can pursue various legal remedies.

One such remedy is an injunction—an order from the court that prohibits the employee from engaging in activities that violate their contractual obligations. This can include restrictions on working for competitors or contacting clients. The main aim is to stop any ongoing harm to the previous employer's business interests.

Why NDAs

These instances highlight the importance of competitive agreements and NDAs in business. Employers utilise these tools to protect their business interests, like trade secrets and client relationships. The court's willingness to enforce these agreements with minimal damages or injunctions demonstrates the legal acknowledgement of the significance of these contractual obligations.

The enforceability of competitive clauses, particularly when an employee is terminated without cause, can be disputed. The "employee choice" doctrine suggests that an employee who voluntarily resigns and then works for a competitor cannot question the reasonableness of a competition clause.

Transparent contracts

However, if an employee is terminated without cause, they may have the right to challenge the clause's reasonableness. Whether or not such restrictions are enforceable often depends on whether they're considered reasonable under specific circumstances.

Different jurisdictions have varying rules regarding the enforceability of competing agreements, and courts often scrutinise them to ensure they are not overly broad or unfair towards employees. The focus is assessing whether such contracts are reasonable regarding duration, geographical limitations, and employee restrictions.

The cases by Infosys and Wipro against their former top management personnel may lead to better, transparent written contracts that consider the rights of the employees and the employers.