Bonded to Work

Visualize an IT firm with crucial investments seeking to hire some new ‘workers’ (read programmers). An entity tired of having to worry about employees leaving for green(er) pastures, maybe even competitors. A recurring and common fact these days. 

Someone comes up with a great idea: why not require all new employees to sign an agreement stating that they will not leave the firm for a certain ‘reasonable’ duration, say the next two years, come what may. They’ll have to sign it, or they will not be hired. This way, the firm will retain its ‘best’ talent for a given constant duration, right? The answer is, no. However, there is good opportunity for the firm to learn about the legal concept of unconscionability, which can cause a contract to be unenforceable. 

Unconscionable contracts involve parties that do not have equal bargaining power. One party, because of its superior bargaining position, is able to force the other party to agree to contract terms that are harsh and one-sided, without any reasonable justification.

One-sided contracts have become the scourge of the industry. The variety of clauses that go into an employment contract makes IT professionals ‘bonded’ and restricts their right to seek employment. Having said this, courts don’t often invoke the doctrine of unconscionability as a reason for not enforcing a contract. The vast majority of agreements between businesses, for instance, would probably not fall within the definition of the term. However, employment law is one area where the doctrine is occasionally applied, because employers have much greater bargaining power than employees or job applicants. For employers to avoid running afoul of the doctrine, agreements with employees should be reasonable and fair, and clearly explained. This is probably just good business in any event. 

Unconscionable 

Most contracts, as a rule of nature, are structured by the party with greater bargaining power. Most contracts are carefully designed by the employer’s legal advisor(s) in a way that fully protects the interests of the employer while purposefully and clinically smothering the legitimate interests of the employee.

Some clauses demand that the employee works for a minimum period of time (early termination agreement), some say that he must not work for competitors and clients for a prescribed period after giving up the current employment (a non-competing agreement) and others demand strict non-disclosure. Courts view circumstances marked by unfairness and unequal bargaining power negatively. Such one-sided contracts are harmful for both parties. If an unsatisfied or aggrieved employee decides to take his employer to court, it could well be embarrassing and cause a
loss of reputation to the company as well.

Fair agreements 

Non-disclosure agreements are the norm in the IT industry because of trade secrets. They are contracts signed by employees to prevent them from sharing proprietary information and their employer’s trade secrets during or subsequent to their employment. However, the application of these ‘standard clauses’, probably stored in the legal advisor’s ‘database’, should be based on the status of the employee, his seniority, his access to business plans and other confidential information, customer database and secrets. In other words, the agreement
has to take into account the individual.

The next is a non-competing agreement/clause, where the employee is not supposed to start working for a competitor (or even client) whose business interests might conflict with that of the present firm. I shudder to think what would happen if lawyers were to sign such agreements with their employers!

The early-termination agreement is the most debated and the most controversial. The period of minimum employment could be anything between six months to five years! The employee is not supposed to seek employment with any other company during this period. Levying steep fines for leaving early is not uncommon in the IT industry. The practice that started-off as just one of the methods to control attrition rates has become the de facto standard for many recruiting companies. The absurd aspect of some of these contracts is that on the one hand the employee is bonded; on the other, the employer can terminate the contract at will with no notice period. It is important for firms to understand that such terms detract from other positive steps taken for the benefit of the employee.

Legal authorities view these unconscionable agreements as restrictive to a person’s choice of employment. Practically, in many instances, courts have found that the position held by the person signing a non-disclosure agreement is not commensurate with the risk of trade secrets violation. For non-competing agreements, at least some limitations are expected, the focus could be narrowed; similarly, if the restriction is excessively lengthy they are struck down too. Early termination agreements have been successfully litigated, both in India and abroad.

We will continue on this topic next month, and will see the dos and don’ts of employee offer letters and contracts that are part of such offers.

Rodney D Ryder 

(Advocate) is a consultant on trade and technology laws