Moonlighting — Legal Considerations And Contractual Regulation

Moonlighting is the colloquial term used to refer to the practice of employees working a second job, in addition to their primary job. The last few weeks saw myriad news reports on this practice in start-ups and the information technology/information technology-enabled services industry.

Most companies have released statements opposing the practice and some have even taken action against moonlighting employees. Some companies have, however, indicated that they are open to allowing employees to moonlight within a defined framework.

The discussion on moonlighting has brought to the forefront the question of whether it is permissible under law. In this article, we have attempted to throw light on the labour and employment laws applicable to moonlighting, and the contractual protections that companies should build in to either prevent or regulate such actions.

The concept of ‘double employment’ or ‘dual employment’ has not been expressly defined under Indian laws.

However, the Supreme Court in the case of Manager, Pyarchand Kesarimal Ponwal Bidi Factory vs. Omkar Laxman Thange and Ors. (AIR 1970 SC 823), which dealt with the transfer of an employee from a factory to the head office, observed, “The general rule in respect of relationship of master and servant is that a subsisting contract of service with one master is a bar to service with other master unless the contract otherwise provides or the master consents.”

The Madras High Court in the case of Government of Tamil Nadu vs. Tamil Nadu Race Course General Employees Union (1993 I LLJ 977 Mad), citing the aforementioned Supreme Court judgement held, “If the contract otherwise provides, or the master consents, there may not be any prohibition to have dual employers.”

Therefore, the position under Indian law is that dual employment is permitted, subject to the employment arrangement providing for dual employment or with prior consent of the respective employers.

This position is also reflected through the model standing orders—which are essentially template service rules—prescribed under the Industrial Employment (Standing Orders) Act, 1948 ("IESO Act”)[1].

It is also important to note that there are legislations that recognise and implicitly permit dual employment.

The Factories Act, 1948, and certain state shops and establishments legislations—such as those applicable to Haryana and Delhi—impose restrictions on working hours in the context of dual employment, even though they do not explain the concept of dual employment or otherwise state that dual employment is permissible.

These legislations provide that an employer may not engage an employee to work in excess of the prescribed working hour limits across their employment with different establishments.

For example, if the daily prescribed working hours are nine, and an employee is employed by X company and Y company, X and Y companies must employ the employee such that the total hours worked by the employee on any given day for X and Y companies put together, should not exceed nine hours.

Separately, an employer may also face practical challenges, such as in making provident fund contributions under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”), in respect of employees employed by more than one employer.

Under the current framework, an individual member of the Employees’ Provident Fund Organisation is allotted a Universal Account Number or UAN, which is linked to a code number allotted to an employer covered under the EPF Act, which may make it administratively difficult for more than one employer to make EPF contributions in respect of the same individual at the same time.

A similar difficulty would be encountered in respect of employees’ state insurance contributions under the Employees’ State Insurance Act, 1948.

Do note that the above restrictions and practical difficulties would be relevant only where an individual is employed by more than one person.

Consequently, these matters would not be relevant if there are two distinct relationships at play: (i) an employer-employee relationship and (ii) any different type of relationship—such as consultancy arrangement, project based/ gig-based assignment.

In such scenarios, the permissibility of the second arrangement would be entirely dependent on the contractual terms of the individual’s agreements with the engaging entities.

Contractual terms restricting dual employment and/or second engagements are enforceable under Indian law and the Supreme Court has on multiple occasions upheld non-compete clauses in employment agreements that are operative during the term of an individual’s employment agreement.

Companies looking to prevent employees from moonlighting should specifically prohibit such a practice in their employment contracts by way of an exclusivity provision and state that the breach of the exclusivity provision would amount to misconduct.

The exclusivity clause must be drafted to address two nuances. Firstly, employees should be prohibited from taking up any other work for the duration of their employment with the company and not just during their working hours.

An exclusivity provision that is operational only during working hours would allow employees to accept other engagements during their non-working hours.

Secondly, the prohibition on other engagements should extend to not only employment relationships, but also consultancy and advisory arrangements. Where relevant, the prohibition may be extended to directorships, shareholding, etc.

Prohibitions of this nature would be considered legitimate and are enforceable under applicable laws.

Any form of moonlighting would be a breach of the exclusivity provision described above. Therefore, if an employee is found moonlighting, an employer would have the right to take appropriate action for breach of contract, including up to termination of employment of the concerned individual for cause.

Where employers seek to permit moonlighting, it should be ensured that there is a well-defined policy within the ambit of which employees can enter into other engagements.

Key matters that should be regulated under the policy include the following:

• Applicability: Permitting senior employees or employees working on confidential projects to have second engagements by virtue of their roles and responsibilities within the organisation may make companies apprehensive. Accordingly, it would be important to clarify who within the company (if anyone) may or may not enter into other engagements.

• Process: Transparency is key to ensuring that the permission to moonlight is not abused. Accordingly, companies should clarify the process by which employees can take up second engagements, i.e., if employees are required to obtain prior approval or if they are only required to notify certain persons, etc.

• Nature of engagements: The policy should set out the type of engagements that employees may accept and that there should be no conflict of interest in their obligations to their employers. One of the ways of preventing moonlighting that is detrimental to business, is expressly permitting moonlighting that is not detrimental to business. Accordingly, the contours of the permitted engagements must be clearly defined. On a related note, employers must also clarify the extent of commitment that employees may make in respect of their second engagement, the permissibility of using office resources and the premises for the second engagement, treatment of IP created for another entity if office resources are permitted to be used, etc.

• Protection of proprietary information: A specific restriction should be imposed on employees in relation to the usage and divulging of proprietary information of the employer since this will be the primary area of concern of any employer permitting moonlighting.

• Nature of legal relationship: As highlighted above, if an individual is employed by more than one employer, it may lead to some legal and practical complications. Accordingly, employers should specify the nature of the legal relationship that employees may create in relation to their second engagements (employment, consultancy, etc.).

Exclusive employment arrangements have been the norm in India. It is only recently that the prevalence of moonlighting has increased, spurred in part by the socioeconomic necessities caused by the pandemic.

At this time, employers have acknowledged the prevalence of moonlighting and in some cases, even accepted it as a part of the changing employment landscape.

Apart from the legal considerations, before prohibiting or permitting moonlighting, employers will also have to consider softer aspects such as the impact of moonlighting on company culture, the industry at large, the capacity of employees to perform their primary work at optimum levels if they moonlight outside working hours, the target talent pool, etc.

Given the general push towards dynamic and flexible workplaces during the pandemic years, it will be interesting to see where the industry lands on this practice.

[1] The IESO Act is applicable to factories and commercial establishments in certain states, employing a prescribed number of workmen (the threshold of the number of workmen varies from state to state and is commonly 100).

This article is authored by Bishen Jeswant, partner, and Varsha Sriram, senior associate in the Employment Law Practice of Cyril Amarchand Mangaldas, and was first published on the law firm's blog.

The views expressed here are those of the authors, and do not necessarily represent the views of BQ Prime or its editorial team.