What is a non-compete agreement? All you need to know

A non-compete agreement or a non-compete clause is a legal agreement wherein an employee agrees to not work with an employer’s competition after their current employment is over.

Today, a non-compete agreement is a common addition to most employment contracts. These legal agreements between the employer and employee are signed at the start of the working relationship.

What does these contracts contain?

These contracts contain specific provisions which state that an employee cannot work for a company or organisation that directly competes with the employer or operates within the same industry or product and services line.

Some non-compete agreements are more restrictive and prevent an employee from working for any other company in the same industry and geographical range within a specific time period.

What is the rationale behind such contracts?

Ostensibly, the non-compete agreement is there to prevent an employee from revealing trade secrets and confidential information to a competitor. However, oftentimes non-compete agreements are entered into even when an employee doesn’t possess any confidential information and would have no trade secrets to reveal.

Some more stringent non-compete agreements also state that an employee will not use the information learned during their course of work to set up their own competing business once they terminate their current employment.

While they are almost ubiquitous today, most legal experts agree that most of these agreements are unenforceable. Under the Indian Contract Act, 1872, the piece of legislation that governs all contract laws within the country, Section 27 bars any agreements that ‘restrict trade’.

Extent of applicability

As a result, most courts have only upheld the validity of the non-compete agreements in India only when there has been a reasonable threat to the trade secrets and confidential and privileged information of an employer.

However, while Indian courts have mostly sided against stringent and excessively wide non-compete agreements, people looking to work with companies from the US in particular need to be more careful.

US courts, apart from those in certain states like California, are much more strict towards the enforcement of non-compete agreements on employees.

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