The last few weeks have seen a series of high-profile legal battles involving Cognizant and its rivals Wipro and Infosys over allegations that the former is involved in talent poaching and breach of non-compete clauses by hiring top executives from the latter. While Wipro and Infosys are headquartered in India, Cognizant is headquartered in the United States, though the majority of its workforce is based out of India.
Wipro filed a lawsuit against its former Senior Vice President, Mohd Haque, based in the United States, for alleged breach of confidentiality and non-compete contract clauses by joining Cognizant before the expiration of 1-year cooling-off period. It alleges that Haque might be using confidential client information obtained during his Wipro tenure to give Cognizant an unfair advantage. Wipro also claims Haque transferred Wipro files to his email before resigning and misled them about his plans.
It is to be noted that Wipro has also sued their former Chief Financial Officer, Jatin Dalal, also based in the United States, for a similar move to Cognizant. The financial stakes are high, with Wipro seeking a huge sum in damages from both their former top executives, including unpaid remuneration and the value of equity awards.
Infosys, another Indian IT giant, is also feeling the heat. They recently sent Cognizant an official notice accusing them of “unethical poaching techniques” after Cognizant hired more than 20 top executives, four of whom were from Infosys. The notice is likely a warning shot, highlighting the increasing frustration with Cognizant’s aggressive recruitment tactics.
This war for talent has a deeper context. Both Wipro and Infosys have witnessed a significant number of high-level exits in recent years, with many executives landing at Cognizant. This talent drain has undoubtedly impacted their business, prompting them to take legal action.
The legal battles surrounding non-compete clauses and confidential information misuse are becoming increasingly common in the IT industry. This case has the potential to set a precedent for employee mobility and competitive practices within the sector.
What is the non-compete clause and how does it affect ordinary Indian employees?
A non-compete clause is a contractual provision that restricts an employee from working for a competitor or engaging in activities that compete with their former employer’s business for a certain period after their employment ends. In the above case, Wipro had restricted its top executives from joining its competitors for 1 year after the end of the employment contract. The legality and enforceability of a non-compete clause vary from country to country and even between states within the same country.
In India, the non-compete employment clause post-end of the employment contract is prohibited by Section 27 in The Indian Contract Act, 1872 states that ‘Every agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent void’. Various Supreme Court and High Courts judgments have held such contract clauses violate The Indian Contract Act, of 1872 and deprive citizens of their fundamental right to earn a living enshrined in Article 19(g) of the Constitution of India which provides every citizen the right to practice any profession, trade, or business.
In the United States, where Wipro had filed a lawsuit against its former executives, Mohd Haque and Jatin Dalal for joining Cognizant, the enforceability of the non-compete clause varies from state to state. Some states, like California, Colorado, and Maryland, have banned them almost entirely, while others allow them with varying degrees of restrictions. The Federal Trade Commission (FTC), in January 2023, proposed a rule banning non-compete clauses across the US, arguing they harm competition and worker mobility, depressing wages. The proposed rule is currently under the deliberation stage.
Do non-compete clauses constitute a form of modern-day bonded labor?
While the above lawsuits are primarily concerned with the talent war at the top echelons of IT multinationals, any such action will have a cascading effect on ordinary employees lower in the hierarchy.
For an average, mostly first-generation Indian tech employee, getting an employment opportunity to work in one of the IT MNCs is a dream come true to cherish. Often they overlook terms and conditions mentioned in the employment offer riddled with such complex legal terminologies like non-compete clauses. Alarmingly, some of the major MNCs in India often disguise layoffs as voluntary resignations by asking employees to resign while promising them severance benefits as per employment offers. Â Â
In such a scenario, any favorable ruling in the lawsuits will only be detrimental to the interest of employees against such employers with vast resources at their disposal. While employers argue that non-compete clauses are intended to protect their legitimate business interests by safeguarding their trade secrets, confidential information, and customer relationships, many attributes of such non-compete clauses constitute modern-day bonded labor.
Restriction of mobility: Non-compete clauses limit an employee’s ability to freely seek employment within a specific field or industry, potentially hindering their career advancement and earning potential. This can be seen as restricting their economic freedom, similar to bonded labor.
Unequal bargaining power: Employees, especially those in lower-level positions, may feel pressured to accept non-compete clauses due to fear of losing their jobs or not being able to find another one. This unequal bargaining power can resemble the power imbalance often present in bonded labor situations.
Potential for exploitation: In some cases, non-compete clauses can be overly broad or restrictive, effectively preventing an employee from working in their chosen field for an unreasonable period. This can be seen as exploitative, as it limits their ability to earn a living and support themselves.
Hence, it is high time that the executive, legislative, and judicial wings of governments across the globe make note of this developing story and ensure proper protective measures are in place that will restrain deep-pocked corporates from taking their former employees for a ride citing such outdated clauses restricting free movement of labor and stifling competition. Â