Non-Compete Clauses in Singapore Employment Contracts
What are Non-Compete Clauses?
Non-compete clauses are commonly found in employment contracts.
Typically, a non-compete clause prevents employees from plying their trade or skill or engaging in businesses in certain markets and geographies for a certain period of time.
It may purport to exert control over an employee’s actions during the employment period and/or after the termination of the employment contract.
Non-compete clauses are part of a bigger group of clauses known as restraint of trade clauses. Restraint of trade clauses restrict the liberty of the employee to carry on trade with parties in the future.
Another example of a restraint of trade clause is the non-solicitation clause, which prevents a former employee from soliciting clients or employees away from the prior employer.
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Swipe 👉 to learn when your employer can validly restrain you from working for someone else! 🤪 – If the non-compete clause is found to be unenforceable, the court can either cancel the non-applicable parts of the non-compete clause, or strike down the clause entirely. 🚫 However, if a former employee breaches an enforceable non-compete clause, the employer can apply for an injunction (to prevent the employee from doing so) or claim for damages! 😱 – Given that being sued is a c(l)ause for concern, take note of the non-compete clause in your contract when looking for a new job. 👀 Also, seek legal advice if the clause seems unreasonable! 💁♂️ #SingaporeLegalAdvice
Are Non-Compete Clauses Legally Enforceable?
Employers are entitled to restrain their employees from working for another organisation during their period of employment with them (i.e. “moonlighting“).
However, non-compete clauses that apply after the termination of the employment contract have to face up to greater scrutiny. A non-compete clause is unenforceable unless:
- It is protecting a “legitimate proprietary interest” of the employer
- The scope of the non-compete clause is reasonable
1. What can be a legitimate proprietary interest?
For a non-compete clause to be legally enforceable, it has to be protecting a proprietary interest of the employer that is legitimate.
Such proprietary interests can be an advantage or asset which can be regarded as the employer’s property, and which it would be unjust to allow the former employee to appropriate this for his own purposes. However, this advantage or asset should not be the skill or know-how that the employee acquires as part of his job during his employment.
The Singapore court has also recognised client and trade connections as a legitimate proprietary interest.
Clauses that do not protect a legitimate proprietary interest, but instead seek to illegitimately restrain competition, may not be enforceable in court.
2. Is the scope of the non-compete clause reasonable?
Various factors can affect the reasonableness of the scope of a non-compete clause. For each factor, the reasonableness of the clause will be determined based on whether it is reasonable:
- As between the parties themselves; and
- In the interests of the public (e.g. securing an environment in which freedom of trade and competition can flourish).
Examples of factors that determine the reasonableness of the scope of a non-compete clause include:
(a) Scope of employees being restrained
Non-compete clauses that are drafted to cover all employees regardless of their seniority, nature of work or level of access to confidential information may be considered unreasonable.
This is because the clause’s indiscriminate application to all employees would suggest that the true purpose of the non-compete clause was for restraining competition, instead of protecting any of the employer’s legitimate interests.
(b) Scope of activity being restrained
The activities being restrained by the non-compete clause must be those that will help the employer protect their legitimate proprietary interest.
For example, a clause may be reasonable if it restricts the employee from the specific area of business that they had been involved with,
On the other hand, it may not be reasonable for a clause to:
- Include a “blanket prohibition” preventing the employee from working in the same industry entirely;
- Entirely preventing the employee from working for a rival, regardless of the employee’s scope of work with the new employer; or
- Cover activities that entail minimal expertise and are not integral to the company’s operations.
(c) Duration that the employee is being restrained for
Whether the duration of restriction is reasonable would depend on factors such as the particular employee’s:
- Nature of the work performed
- Seniority level, his skill level
- Level of influence with clients
- Access to confidential information
- Particular industry
The duration should not have been arbitrarily chosen. It must also not be longer than that needed to protect the employer’s interest. For example, one measure is the time needed for a new employee to have a reasonable opportunity to demonstrate their effectiveness to clients.
Restraining the employee for a longer period of time may also be reasonable if the employer is looking to protect their client connections, and it would take some time for a newcomer to build their own such connections in the employer’s particular industry.
Non-compete clauses will no fixed duration of operation may be found to be unreasonable.
(d) Geographical scope of restraint
The geographical area(s) which the former employee is being restrained from will also affect the reasonableness of a non-compete clause.
Depending on the wording of the non-compete clause, it may restrain the former employee from carrying out business:
- In certain countries
- In only certain cities in a country (especially very big countries spanning across large geographical areas)
- Within a certain radius around the employer’s current areas of practice
However, the geographical scope of the non-compete clause should be necessary to protect the employer’s actual and existing business. This is as opposed to protecting the possibility of acquiring future business. There generally has to be a geographical limit to where the former employee had actual and significant client contact.
In order to be reasonable in the public interest, the geographic restriction on the employee in certain markets also cannot adversely affect competition in those markets.
Non-compete clauses with no geographical limitations at all (i.e. they apply worldwide) may potentially be unreasonable.
Special circumstances that are taken into account in determining the reasonableness of a non-compete clause could involve the employer giving something extra in exchange for the employee’s acceptance of the clause.
This could be a side agreement that provides for payment for the duration of the non-competition.
If such “side payment” exists, the court may be more likely to find that the non-compete clause is reasonable. This is because the employee has been compensated extra for it.
What Happens If a Non-Compete Clause is Found to be Unenforceable?
If the scope of the non-compete clause is too wide, the Court will generally do one of 2 things:
1. Strike down just the non-enforceable parts of the non-compete clause
The court may apply a “blue pencil test” to “cancel out” (as if using a blue pen) the parts of the non-compete clause that are unreasonable and hence non-enforceable. This is also known as the doctrine of discretionary severance.
The court can only do this “cancelling” to the extent that the remaining words in the clause still make grammatical sense and retain their original meaning.
However, the “blue pencil test” cannot be used to fix an unreasonable non-compete clause if there is nothing can be cancelled out to make the clause reasonable.
For example, if a non-compete clause is unreasonable because it does not state how long it is to restrain the employee for, then there is nothing in the clause that can be cancelled out to make the clause reasonable with respect to its duration of operation.
2. Strike down the entire non-compete clause
The court can also strike down the entire non-compete clause from the contract.
What Can an Employer Do if a Former Employee has Breached an Enforceable Non-Compete Clause?
If a former employee is in breach of an enforceable non-compete clause, the employer can apply for an injunction to stop the employee from doing so.
The employer can also claim damages for the former employee’s breach of the clause.
If you need legal advice on whether a non-compete clause is enforceable, or assistance with drafting an enforceable non-compete clause, please consult an employment lawyer.
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