India: Reasonable Lock-in Period Restrictions During Employment Tenure do not Violate the Fundamental Rights of Employees

Authors: Avik Biswas, Ivana Chatterjee, Animay Singh

In the case of Lily Packers Private Limited v. Vaishnavi Vijay Umak, the Delhi High Court (“Delhi HC”), on 11 July 2024, three petitions filed by an organization named Lily Packers Private Limited (“LP”) were examined, seeking the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, regarding certain disputes that arose between LP and 3 of its employees – Vaishnavi Vijay Umak, Meetkumar Patel, and Rahul Sharma (collectively the “Employees”).

Upon joining the services of LP, the Employees had executed employment contracts with LP which had a lock-in period clause wherein the Employees were required to remain in the services of LP for a minimum period of 3 years from the respective dates on which they joined the organisation (“Lock-In Restriction”). However, the Employees had resigned from their services prior to completion of the lock-in period in violation of the Lock-In Restriction under their employment contracts. Further, LP also suspected that the Employees had violated other provisions of their employment contracts pertaining to confidentiality, data protection, and protection of intellectual property.

LP issued notices to the Employees in respect of the above non-compliance and sought to invoke the arbitration clauses under their employment contracts. However, of the three employees, only one formally responded to the notice and refused to submit to arbitration. Given this, LP filed the present petitions before the Delhi HC seeking the appointment of an arbitrator.

The Employees contended before the Delhi HC that the Lock-In Restriction violated their fundamental rights under Article 19 and Article 21 of the Constitution of India, 1950. In furtherance of this contention, the Employees also argued that disputes involving fundamental rights violations were not arbitrable and sought dismissal of the petitions filed by LP.

LP contended that the organization had made substantial investments in training the Employees during their employment and argued that the Lock-In Restrictions in their employment contracts had clearly been violated. Accordingly, LP argued that the dispute relating to the Lock-In Restrictions must be referred to arbitration in accordance with the dispute resolution clause under the Employees’ employment contracts.

Given the above submissions of the parties, the main considerations before the Delhi HC were as follows:

• Whether the Lock-In Restrictions under the Employees’ employment contracts are valid in law, or do they violate the Employees’ fundamental rights under the Indian Constitution
• Whether disputes pertaining to the Lock-In Restrictions are arbitrable

 

Lock-In Restriction

The Delhi HC stated that principles with regard to the validity of such restrictive covenants (such as the Lock-In Restriction) have been discussed by various Indian courts in the past, and such courts have held such restrictive covenants to be valid and enforceable. The Delhi HC held that any reasonable covenant operating during the term of an employee’s employment would be valid, lawful, and would not be in violation of the employee’s fundamental right to carry on a trade or profession as it merely prescribes that an employee will serve under an employer for a certain period and does not operate post-employment. Further, the Delhi HC also made the following observations:

• Employees voluntarily agree to such restrictive covenants under their employment agreements, and such restrictions may be necessary for employers to maintain organizational stability and reduce employee attrition levels.
• Courts do not need to examine the reasons behind a Lock-In Restriction in an employment agreement, as they could be fact specific and are dependent on the nature of employment, the position held by an employee, investment by an employer in imparting training, etc.
• There may be certain employment terms which could be considered an unreasonable curtailment of an employee’s right to employment; however, the Lock-In Restriction of 3 years in the present instance cannot be considered such a condition.

 

Arbitrability of such disputes

With respect to referring the dispute regarding the Lock-In Restriction to arbitration, the Court held as follows:

• Since reasonable Lock-In Restrictions are not violative of an employee’s fundamental rights, disputes relating to them cannot be considered non-arbitrable on such grounds.
• Breaches of Lock-In Restrictions must be distinguished from cases where employers are seeking to restrain employees from seeking employment with their competitors following the termination of their employment contract. Since LP was not seeking to do so and was merely seeking reference of the dispute to arbitration, the Delhi HC held the present dispute to be arbitrable.

 

The Delhi HC concluded that the dispute related to the Lock-In Restrictions can be subject to arbitration as per the provisions of the Arbitration and Conciliation Act, 1996. The Delhi HC also stated that arbitration proceedings shall take place under the aegis of the Delhi International Arbitration Centre (DIAC) and shall be conducted in accordance with DIAC’s rules.

Key Action Points for Human Resources and In-House Counsel

While the Delhi High Court has held that restricting an employee from leaving the services of an organization for a reasonable period of time is valid and does not violate their fundamental rights, there is no objective clarity on what constitutes a reasonable time frame for which such restrictions can be imposed. In the absence of the above, employers may take guidance from this judgment to fix and negotiate such lock in restrictions with their employees. It is crucial for employers to bear in mind that the lock in restrictions should be reasonable and should not impose excessive restrictions on an employee’s right to employment.