Non-Compete Clauses in Employment Contracts
Are you deliberating whether to accept an employment offer but are unsure if you would be in breach of a non-compete clause in your previous employment contract?
Or are you an employer who is currently facing issues with an ex-employee who appears to have breached the non-compete clause?
This article seeks to provide you with a brief introduction to non-compete clauses in Singapore and their enforceability.
Non-compete clauses are commonly found in employment contracts. They typically prohibit an employee from being employed in and engaged in specific trades and geographies for a specific duration after the termination of their current employment.
Given that a non-compete clause concerns restrictions imposed onto an individual's liberty to participate in trade freely, the Singapore courts have held that non-compete clauses are generally void and unenforceable.
However, non-compete clauses may be enforceable if:
- The non-compete clause protects a legitimate proprietary interest of the employer;
- The non-compete clause and restrictions imposed on the employee are reasonable between the parties; and
- The non-compete clause and/or restrictions imposed on the employee are reasonable vis-a-vis public interest.
Legitimate Proprietary Interest
Generally, the courts will first look at the restraint of trade clause to determine the legitimate interest sought to be protected.
Legitimate proprietary interests would include:
- The protection of trade secrets: Factors to consider would be whether the employee's job scope involved him/her being routinely exposed to and/or requires him/her to handle confidential information. Skills and knowledge acquired during the course of the employment are generally not considered trade secrets.
- The protection of trade connections (clientele and customer base): Factors to consider would be whether the employee has personal knowledge of, and influence over, the employer's customers (e.g. senior employee in the sales department and rapport to customer base).
- The maintenance of a stable, trained workforce: The non-solicitation of employees would be enforceable.
If the non-compete clause does not state what the proprietary interest sought to be protected. In that case, the court will then look at the wording of the clause and consider surrounding circumstances to determine the same.
Surrounding circumstances will generally include matters such as the nature of the employer's business, the employee's role in the industry, access and privity to confidential information, and the seniority of the employee's position in the company.
Reasonableness of the non-compete clause
The onus on proving that the non-compete clause is reasonable is on the employer. The reasonableness will also be judged based on the circumstances at the time of the making of the contract.
Certain factors are relevant in determining whether a non-compete clause is reasonable as between parties:
- The period of restraint: It should not be longer than required to protect the employer's legitimate interests. If the non-compete clause does not state the period of restraint or provides for it to continue indefinitely. In that case, it will likely be deemed as too broad and unenforceable.
- Geographical scope: If the non-compete clause does not provide a geographical limitation, it will generally be deemed too wide and unenforceable. Although the same may be reasonable in certain circumstances where the business engaged in is global in nature.
- Scope of activity prohibited: The restriction should also generally be limited to trades/industries to which the employee has had exposure to in the course of work. Similarly, the non-compete may be unenforceable for being too wide if the restriction is not limited to what is required to protect the employer's legitimate interests.
The restrictions imposed are not against the public interest
The burden of proof lies on the employee to show that the restrictions imposed are not reasonable when seen from the perspective of public interest.
What if of note is that the Singapore courts have held that a non-compete clause was unenforceable and not in the public interest as it would create a monopoly for the employer.
What employers should take note of when incorporating non-compete clauses in employment contracts:
- The scope of the non-compete clause should be limited as much as possible (whether in terms of duration and geographic) and be necessary to protect the employer's legitimate proprietary interests.
- The non-compete clause should be modified and adapted based on a case-to-case basis to fit the role and seniority of the prospective employee.
- As an employer bears the burden of proof in showing that the non-compete clause meets the requirements stated above before it can be enforceable, the employer should review the non-compete clause and seek legal advice to ensure that it would be enforceable.
What prospective employees should take note of when signing employment contracts with non-compete clauses:
- The seniority and job scope of your prospective role in the company would be a factor to consider whether to negotiate for the non-compete clause to be excluded.
- In order to ascertain your potential rights and liabilities, it would be prudent to seek legal advice before signing an employment contract with a non-compete clause.