The Delhi High Court recently provided answers to two intriguing questions regarding employment contracts. Is a lock-in period, which restricts employees from leaving a company, legally valid, and can arbitration resolve disputes over such lock-in periods?
The case involved Lily Packers Pvt. suing three employees who left before completing the required three-year lock-in period stated in their contracts.
The High Court noted historical legal precedents dating back to 1885 that discussed the enforceability of employment covenants. Section 27 of the Indian Contract Act, 1872, deems some restrictions, like exclusive service obligations during the contract term, void, while others, like post-employment restraints like those seen in the tea cultivation case, are lawful.
Regarding the current dispute, the High Court, led by Justice Prathiba M. Singh, determined that a lock-in period in employment contracts does not infringe upon fundamental rights. The court explained that such clauses are typically agreed upon voluntarily and play a crucial role in ensuring stability and continuity within organisations, particularly at executive levels. The court emphasised that these clauses are necessary for reducing employee turnover and maintaining organisational health.
Ultimately, the High Court concluded that reasonable lock-in periods specified in employment contracts, which apply during the employment term, are lawful and do not violate constitutional rights.
Therefore, the court determined that arbitration, in accordance with the provisions of the Arbitration and Conciliation Act, 1996, can indeed settle disputes pertaining to lock-in periods during employment contracts.
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