What are Non-Solicitation Clauses? Are They Enforceable in Singapore?
For business owners aiming to protect their business, non-solicitation clauses may be a useful tool to include in their employees’ employment contracts to prevent the solicitation of the businesses’ clients, employees or even confidential information.
What are Non-Solicitation Clauses?
A non-solicitation clause is a covenant commonly found in employment contracts aimed to prevent former employees of a business from taking away clients or current employees of the business (i.e solicitation).
How are non-solicitation clauses different from non-compete clauses?
Non-solicitation clauses are part of a larger group of clauses known as restraint of trade clauses, which restrict the liberty of employees to carry on trade with parties in the future.
Another example of a restraint of trade clause is the non-compete clause. A non-compete clause is however distinct from a non-solicitation clause.
Non-compete clauses aim to prevent former employees from competing against their former company, usually by prohibiting them from plying their trade or skill or engaging in businesses in certain markets and geographies for a certain limited period of time.
This is unlike non-solicitation clauses, which aim to prevent former employees from soliciting clients or employees of their previous company instead.
What are Non-Solicitation Clauses Used For and When are they Enforceable?
Non-solicitation clauses may be used for different purposes.
To prevent solicitation of employees
For one, a non-solicitation clause could be signed by a company and an employee, where the company seeks to prevent such former employees from soliciting current employees away from the business.
Such a clause is only enforceable where it is:
- Aimed at protecting the legitimate proprietary interest of the company; and is
- Reasonable with reference to the interests of the company, former employee and the public.
For example, where the company has a legitimate interest in maintaining a stable and trained workforce, it may be that the clause can only be enforced against senior staff, but not junior staff. This is because the senior staff are likely to have significant influence over former subordinates.
For example, the employer’s need for protection may arise where a senior staff member is in a position to manage employees and had established personal relationships with them. This is because the senior staff member may seek to exploit such relationships, and entice the employees to leave the company as well.
A non-solicitation clause may also be more likely to be reasonable in the interests of the company and the former employee if:
- It has been extensively negotiated over by both parties (such that they had sufficient say in what the final clause should be provide for); or
- The former employee is being compensated well in return for accepting the non-solicitation clause.
To prevent solicitation of another company’s employees
Instead of being signed by a company and an employee, a non-solicitation clause could also be signed by two companies which seek to prevent the other business from employing their employees. Such a clause is enforceable only if it is reasonably necessary to fulfil a legitimate business purpose.
An example would be when such a clause is necessary during mergers and acquisitions where the companies wish to prevent the movement of employees between the two entities during the implementation of the merger.
If there is no legitimate commercial purpose, such a clause may be deemed as a violation of section 34 of the Singapore Competition Act which prohibits all agreements with the:
“object or effect of preventing, restricting or distorting competition within Singapore.”
This is because the clause may unreasonably affect the companies’ ability to compete in the hiring of new employees from the talent pool.
An infringement of this Competition Act prohibition could subject the companies involved to financial penalties and possibly a private action for damages.
To protect trade secrets and trade connections
A non-solicitation clause can also seek to protect confidential information and trade secrets by restricting unauthorised disclosure of such information.
For instance, such a clause can seek to prevent former employees from soliciting customers/suppliers who are considered trade connections of a business. Such trade connections have been traditionally recognised as a legitimate proprietary interest.
However, where there is another clause in the employment agreement such as a non-disclosure clause which also prevents the use or disclosure of confidential information, a non-solicitation clause is unlikely to be enforceable.
A non-solicitation clause seeking to protect the same information is only enforceable if, the company can demonstrate that the non-solicitation clause covers a legitimate proprietary interest relating to the confidential information, where this interest goes over and beyond the protection already provided by the non-disclosure clause.
What Happens If a Non-Solicitation Clause is Found to be Unenforceable?
The parts of a non-solicitation clause that are found to be unreasonable, because they go beyond what is necessary to protect a particular legitimate proprietary interest, will be unenforceable.
Depending on the situation, the court may either sever just the unenforceable portions of the clause or strike down the entire clause.
The court may apply a “blue pencil test” to delete the parts of the non-solicitation clause that are unreasonable. However, this can only be done if the remaining words still make grammatical sense and retain their original meaning.
2. Strike down
If nothing can be cancelled out to make the clause reasonable, this could mean that the non-solicitation clause is entirely unenforceable. If so, the court may strike down the entire non-solicitation clause.
What Can a Business Owner Do If a Non-Solicitation Clause has been Breached?
If a former employee is in breach of an enforceable non-solicitation clause, the employer may apply for an injunction to stop the employee from doing so. The employer may also claim damages for any losses.
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