Is Your Non-Compete Clause Enforceable in Singapore?
What are Non-Compete Clauses?
Non-compete clauses are commonly found in employment contracts in Singapore.
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 (e.g. to prevent moonlighting) and/or after the termination of the employment contract.
In Singapore, 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.
Are Non-Compete Clauses Legally Enforceable in Singapore?
Singapore employers are generally entitled to restrain their employees from moonlighting, or doing other jobs while working for them.
However, non-compete clauses that apply after the termination of the employment contract are enforceable in Singapore only if:
- The non-compete clause protects a “legitimate proprietary interest” of the employer, and
- The scope of the non-compete clause is reasonable.
These issues on the enforceability of non-compete clauses in Singapore are summarised in the following infographic. You may click on the infographic to download it in a new tab.
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.
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The employee had suggested or negotiated on the non-compete clause included in the agreement
If the scope of the non-compete clause had been suggested or negotiated for by the employee, the court may be more likely to find that the non-compete clause is reasonable.
For example, if an employee had suggested to reduce the non-compete clause’s duration of restraint from 1 year to 7 months and the employer accepts this proposal, the court is less likely to let the employee now turn around and say that the duration of 7 months is unreasonable.
Where the contract requires the employee to acknowledge that the scope of the non-compete clause is reasonable
Some employment contracts may include clauses requiring the employee to:
- Agree that the non-compete clause is “reasonable and necessary” for the protection of the employer’s interest; and/or
- Agree to the non-compete clause in view of how the employee will be paid a certain sum of money under the employment contract.
The court has held that such clauses do not have any effect on the enforceability of the contract’s non-compete clause.
This is because the enforceability of a non-compete clause depends on its scope (as discussed above), instead of whether the employee has acknowledged that the clause is reasonable.
Otherwise, there may be the undesirable situation of a non-compete clause that goes against public policy being enforceable, just because the employee has agreed that the non-compete clause is reasonable.
Pre-emptive attempts to save a potentially unenforceable non-compete clause
Some non-compete clauses may state that if any parts of the clause are found to be unenforceable, then the clause will continue to apply with any deletions or modifications that may be necessary to make it valid and enforceable.
While this may be trying to pre-empt what the court will do to unenforceable non-compete clauses (more below), it is unlikely that the court will find such a non-compete clause enforceable.
This is because such a clause will put employees in an uncertain position if they try to leave their employer later on, as they will not know the extent of the restraint against them.
What Happens If a Non-Compete Clause is Found to be Unenforceable?
If the scope of the non-compete clause is too wide, the Singapore 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 do this “cancelling” only 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 that 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’s duration reasonable.
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?
1. Apply for an injunction
If a former employee appears to have breached an enforceable non-compete clause, the employer can apply for an injunction to stop the employee from breaching it any further.
2. Claim for damages
The employer can also claim damages (i.e. compensation) for the former employee’s breach of the non-compete clause.
If you need legal advice on whether a non-compete clause is enforceable, or need assistance with drafting an enforceable non-compete clause, please consult an employment lawyer.
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