Does ‘non-compete’ clause REALLY help in retaining best employees?

An industry story featuring Rajiv Naithani, which appeared in ETHRWorld on 2 May 2022. Follow this link to read the original article.

Non-compete clauses, according to experts, are important for protecting corporate interests but have nothing to do with the retention strategy. An IT company has again made the headlines, this time it’s not for any disruptive practices. Pune-based labour union raised a complaint against IT major Infosys with the Ministry of Labour & Employment and sought the removal of a “non-compete agreement” clause in offer letters given by the country’s second-largest software firm.

But the debate isn't just about the legality or enforceability of the clauses; it's about how well the strategy is in place to control the most volatile phenomenon in $227 billion worth of industry: Attrition?

The Background

On April 18, Nascent Information Technology Employees Senate (NITES), an NGO working for the welfare and rights of IT, ITES, BPO and KPO employees, made a complaint to the Union Ministry of Labour & Employment after it received “multiple complaints” from employees of Infosys that the employer “unethically” included a non-compete agreement clause, as per a copy of the complaint shared with ETHRWorld.

The company’s employment agreement stated that an employee shall not accept for six months an employment offer from “named competitors” such as Tata Consultancy Services (TCS), Wipro and HCL Technologies among others if the new job involves working with a customer with whom the employee has previously worked within the preceding 12 months during their stint at Infosys.

NITES President Harpreet Singh Saluja told ETHRWorld that Section 27 of the Indian Contract Act, 1872 states that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

“The courts in India have already held that the right to livelihood of the employee must prevail over the interests of the employer, despite the existing agreement between the employer and the employee,” he explains.

Saluja highlights that Article 21 of the Indian Constitution includes the right to life and the right to livelihood and Article 39(a) suggests that citizens (men and women) shall have the right to an adequate means of livelihood.

The courts in India have already held that the right to livelihood of the employee must prevail over the interests of the employer, despite the existing agreement between the employer and the employee.Harpreet Singh Saluja, President , NITES

“The employee's covenants should be carefully scrutinised because there is inequality of bargaining power between the employer and the employee; indeed no bargaining power may occur because the employee is presented with a standard form of employment contract to accept or reject,” he adds.

Infosys’ take

Around 2.6 lakh employees-strong Infosys says that a “non-compete agreement” is a standard business practice in many parts of the world for employment contracts to include controls of reasonable scope and duration to protect the confidentiality of information, customer connection and other legitimate business interests.

“These are fully disclosed to all job aspirants before they decide to join Infosys, and do not have the effect of preventing employees from joining other organisations for career growth and aspirations,” according to a statement by Infosys.

After a notice was sent to Infosys executives, they did not appear before the Chief Labour Commissioner in New Delhi for a joint discussion with NITES. Nevertheless, the next hearing date given is 16th May 2022.

The Debate

Various cases including Niranjan Shankar Golikari vs. The Century Spinning And Mfg Co; and Percept D'Mark (India) Pvt Ltd vs. Zaheer Khan and Ors, have shown how courts have consistently refused to enforce non-compete clauses beyond the term of employment until there are exceptions that would need “reasonable” justifications.

Karl Marx said, “Reason has always existed, but not always in a reasonable form.” And attrition may be one of them.

Going by the accusation that some companies are taking such measures to tackle the high employee churn brings us back to the debate: The relation between the 'non-compete' clause and employee retention.

HR Leaders’ Take

Non-compete clauses, according to experts, are important for protecting corporate interests but have nothing to do with the retention strategy.

“Any company that considers non-compete agreements as a retention strategy is making the fundamental error of not addressing the retention problem in the first place,” says Rajiv Naithani, who is EVP and Chief People Officer of IT major Infogain.

Naithani explains that when a person with significant exposure to a client's work and client environment wants to join another company that is working for the same client or aspiring to work for the same client and has offered the candidate to bring project and client environment know-how, non-compete clauses come into play.

Any company that considers non-compete agreements as a retention strategy is making the fundamental error of not addressing the retention problem in the first place. Rajiv Naithani, EVP and Chief People Officer, Infogain

However, “I don't see why non-compete agreements should be considered for other reasons,” he adds.

Industry leaders emphasise that the clause is just like nuclear bombs – countries have it to instil deterrence rather than actual use.

Rajesh Rai, VP - People Team and Head of Human Resources - India of IT firm GlobalLogic, feels the impact is psychological since enforcement has riders associated with it.

“How successful it is, only data can tell, and I don’t think there is enough of that since over the past many years, strict enforcement hasn’t really taken place,” Rai says, adding, “It acts as a deterrent to some extent since employees usually feel that at a later date it can impact them, which it may if enforced effectively.”

Rai further says that non-competes are not new and have existed for many years. “It’s just that enforcement now is making news,” he adds.

It acts as a deterrent to some extent since employees usually feel that at a later date it can impact them, which it may if enforced effectively.Rajesh Rai, VP - People Team and Head of Human Resources - India, GlobalLogic

The Impact: What trends show?

Many large companies have “non-compete” agreements, including IBM, Microsoft and Amazon. However, as mentioned by Rai, there is very little data to show the impact of the clauses on maintaining the attrition rate and enforcement rate, at least in India.

But one would argue that even if there is a slight possibility of supporting retention, why has the IT industry been witnessing year-on-year increase in its attrition? As per UnearthInsight, the industry continues to witness an uptrend in attrition with 22.3 per cent in Q3, which stood at 19.5 per cent in the last quarter and in Q4, it’s expected to be between 22 per cent and 24 per cent.

Against this backdrop, freshers hiring of 3.5 lakh - 3.6 lakh people in the IT Services industry in FY22 accounted for 14-18 per cent of the freshers in total headcount. It can be argued that freshers are easy to hire as they incur less cost and time, including completing the fundamental HR processes – may be notice period and non-compete clauses.

Apparently, the conversation again goes into the first argument!

The Impact: On The Ground

In today’s talent war, Prithveesh Madhavarao Muralidhar, who is Talent Acquisition Leader of IT behemoth Tata Consultancy Services (TCS), believes companies are well aware of being reasonable in the non-compete and its enforceability after employment.

“Focus is more on sensitising its employees through development programmes at regular intervals,” Muralidhar says, adding his views are personal.

Though, any agreement, as per the laid regulations, is binding on the signing parties, Amit Kataria, CHRO of Hanu Software, feels executing them is a very tedious and difficult task.

Focus is more on sensitising its employees through development programmes at regular intervals.Prithveesh Madhavarao Muralidhar, Talent Acquisition Leader, Tata Consultancy Services (TCS)

“Many companies that sign non-compete or service agreements don't actually pursue it in a court of law due to the hassles it involves unless there is a severe breach threatening client-company relations or data security matters,” he says.

So, in Kataria’s point of view, it won't be a much more effective tool to prevent employees from joining competitors.

Rai of GlobalLogic also thinks that barring the senior leadership who have access to highly sensitive and confidential information, companies haven’t enforced non-compete agreements strictly.

“Across other levels, I haven’t seen much enforcement, probably because its process is legally exhausting,” he agrees.

Taking a deep dive, Naithani of Infogain explains the clause is effective as long as the individual has a significant influence on the present business and can negatively impact the business interests of the previous company the person served if he or she joins another competitor.

However, he adds that for junior employees, determining to what extent the person has that kind of role can be difficult for organisations.

“In countries like India, this phrase serves as a strong barrier, limiting people's willingness to take risks,” Naithani says.

But here’s a catch!

The HR leader highlights that this clause must be viewed through the lens of the fundamental right to equal opportunity. “And in the event of a conflict, courts will always uphold an individual's fundamental rights,” he adds.

The Potential Dent

Companies enforcing non-compete policy never remain hidden from the talents’ hawkish eye, more so in the age of “The Great Resignation”. Does that mean these companies will bear the brunt of becoming the “Bad Employers”?

Those who follow non-compete, it will be difficult to attract talent as samaritans will shy away from joining them and look for more open-minded firms.Amit Kataria, CHRO, Hanu Software

Calling non-compete policy a temporary adherence to talent, Kataria of Hanu Software says, “Those who follow non-compete, it will be difficult to attract talent as samaritans will shy away from joining them and look for more open-minded firms.” In open and service-oriented sectors like IT, he feels, the whole ecosystem is based on the free flow of talent.

On the contrary, Rai of GlobalLogic is of the opinion that companies haven’t enforced this to an extent where it starts acting as a barrier to attracting talent.

However, he does agree that if enforcement is legally taken forward, it may become a constraint in drawing talent to compete in the future.

“The law supports non-disclosure of confidential information, so there is a possibility of non-competes acting as a stumbling block, which may limit growth opportunities for workers/talent and impede the talent ecosystem,” Rai adds.

The Future: Unrealistic To Ban

Having observed talent behaviour in India for over 20 years, Naithani has rarely come across any individual, or a small number of individuals, who have gone over these agreements in-depth and raised objections or queries about such clauses/agreements.

On the other hand, he says that in practice, firms do not emphasise this condition, therefore it has no direct influence on the issue of attracting talent for the time being.

Naithani asserts that removing these clauses is unrealistic, given that in industries such as IT, people work on source code and directly with the customers of the companies they work for, and if they join a competition, they will have the opportunity to influence the customer and jeopardise the business interests of previously served organisations.

“This clause can be interpreted differently for very junior roles, as they may not have the same level of influence and impact on customers,” he says.

The Future: Reassessment Needed

Continuing on Naithani’s point, Kataria of Hanu Software mentions that the agreement should only be there to protect client-company obligations under their Master Service Agreement (MSA) so concerns on Data and IP are legitimately addressed.

In a non-compete agreement, Kataria says the firm should only prevent a few, where employees’ work has considerable investment like in the field of R&D, Emerging Tech, Innovation etc.

Rather than working on modifying the non-competes, Rai of GlobalLogic says it’s important that the industry comes together and unanimously tackles the issue of stability that the organisations face.

“Can we together institutionalise and have rigorous protocols around absconding or job-hopping candidates?” he wonders.

Today, Rai says India Inc is experiencing a boom in demand so it is taking these imperative measures. “But tomorrow, if and when there may be a slump, what will we do – again change non-competes?” he says, concluding, “It does NOT sound like a long-term solution to the issue at hand.”