In Singapore, non-compete clauses are restraint of trade covenants and generally (prima facie) unenforceable. To enforce such a clause, the onus is on the employer to prove that the clause is reasonable toward the employee, the public, and necessary to protect a “legitimate proprietary interest”.
The courts evaluate non-compete clauses on a case-to-case basis. Enforceable clauses are usually carefully tailored to protect the interest of the business within reasonable constraints to the employee and are not against the public interest.
What is a non-compete clause?
Typically, non-compete clauses form part of an employment contract. It restricts an employee’s ability to do business with other parties during employment or thereafter. It usually seeks to prevent an employee from engaging in a specific type of business in specific geographical areas for a specified period. It also aims to prevent an employee from seeking employment in such businesses.
This type of “control” or restriction on employees is generally acceptable whilst the employee is still employed by the employer. However, the courts are less likely to enforce these restrictions once the employment contract is terminated. To be enforceable, non-compete clauses must meet specific criteria.
How enforceable is a non-compete clause in Singapore?
There is a general misconception that all restraints of trade in employment contracts are unenforceable. Many non-competes have been declared invalid and unenforceable. However, the court is open and willing to enforce restraints of trade if all the criteria for enforceability have been met. An example where the High Court was willing to enforce a non-compete clause is Tan Kok Yong Steve v Itochu Singapore Pte Ltd [2018] SGHC 85.
In this case, the court carefully evaluated the reasonableness of the non-compete, the employer’s legitimate interests, and the public’s interest.
Criteria for enforceability
- The non-compete clause must protect a legitimate proprietary interest of the employer.
Examples of legitimate proprietary interests include:
- assets or advantages regarded as the employer’s property; and
- client and trade connections.
The question is whether it would be unjust to allow employees to appropriate such assets, advantages, or connections for their own purposes.
It does not include the skills or know-how the employee acquired during their time in the employment of the employer. It does not count as an asset or advantage “owned” by the employer.
- The scope of the non-compete must be reasonable:
- between the parties; and
- in the interest of the general public.
Many non-competes are declared unenforceable because their commercial, geographical, or duration clauses are too wide or long and, therefore, unreasonable either to the employee or the public in general. The public is entitled to a business environment open to freedom of trade and competition.
Factors the court will consider when evaluating ‘reasonableness’
- Is the clause employee specific?
Clauses covering all employees, regardless of their position or level of access to confidential information or trade secrets, may be considered unreasonable. It can be argued that the purpose of the clause was not to protect the employer’s legitimate interest; but rather to restrain competition illegally.
- What activities are being restrained?
The activities restrained must be necessary to protect the employer’s legitimate interest.
Blanket restraints preventing the employee from working for a rival in any position, or doing any type of work for a competitor, might be unreasonable. Restraints of trade preventing the employee from working in the same industry are also likely to be unenforceable. Similarly, if it prevents the employee from using even minimal experience, which is not critical to the employer, it might be unreasonable.
However, a restraint might be reasonable if it only prevents the employee from performing the same work in a specific area that the employee had been involved in with the employer.
- Duration of restraint
If there is no fixed duration, the court is likely to find the clause unreasonable.
If there is a specified duration, the court will look at several factors to decide if the period is reasonable. Factors include:
- The employee’s position and skills level.
- Access to trade secrets or confidential information.
- Work performed by the employee.
- Contact, interaction, or influence with clients.
- The nature of the industry.
- How long will it take for a new employee to be effective?
- Is the duration necessary to protect client relations?
Generally, the duration must not be longer than necessary to protect the employer’s legitimate interest.
- Geographical scope
The geographical limits within which the former employee cannot conduct business or seek employment will determine whether the non-compete is reasonable.
The court will usually regard no fixed limits as unreasonable.
Reasonableness will depend on many factors, including:
- Is the employee restrained from doing business in specific countries, cities, or a set radius from the employer’s current business?
- Is the restraint necessary and justified given the large geographical area of some countries?
- Did the employee have significant client contact in the area of restraint?
- Is the restraint only to prevent the employee from acquiring potential future business?
- How will the restraint impact competition?
Again, reasonableness will be decided based on what is necessary to protect the employer’s legitimate interest. In this case, the legitimate interest is the actual, current business.
Public interest will also be considered. The restraint must not have a negative impact on competition in those areas.
What happens if the employee “agrees” to the non-compete clause?
There are a few scenarios where employers can argue that the employee agreed to the clause and, therefore, cannot dispute its enforceability.
- The employee suggested the terms of the non-compete
If the employee negotiated the terms of the clause, the court is more likely to find that the clause is enforceable. The employee cannot later turn around and argue that it is unenforceable if the employee suggested the terms. However, it will still depend on the circumstances surrounding the inclusion of the clause into the contract. Ultimately, the court can still evaluate reasonableness.
- The employee and employer agreed to compensation in return for accepting a non-compete clause
Again, it will depend on all the circumstances surrounding the inclusion of the clause. Enforceability depends on the reasonableness and scope of the non-compete clause. Not on the employee agreeing that it is reasonable. The non-compete must still be reasonable and not against the public interest.
- The contract includes a clause stating that the non-compete is “reasonable and necessary”
Such an “agreement” will not affect the enforceability of the clause. The clause cannot “become reasonable” because it is included in the contract, or the employee “agreed” to it. The court will still evaluate the reasonableness of the clause. The court must still protect the employees and the public interest.
What happens if the non-compete is unenforceable?
When the court decides that the non-compete is unreasonable, it is unenforceable. One of two things can happen.
- The entire non-compete is struck from the contract. The rest of the contract remains enforceable.
- The court can strike out the non-enforceable part of the non-compete.
The “blue pencil test” gives the court the authority to “cancel” the unreasonable parts of a non-compete. To apply the blue pencil test, the remaining part of the clause must still make sense and be reasonable (without the unreasonable section). The court cannot rewrite the clause; the court can merely “cancel out” certain parts to make the clause reasonable.
Employer remedies if the employee breaches a valid non-compete
To enforce a non-compete clause, the employer must first prove that the non-compete is enforceable, i.e., reasonable. If the court holds the non-compete enforceable, the employer has the following remedies:
- Employers can apply for an Injunction to stop the employee from breaching a valid non-compete.
- The employer can claim compensation for damages suffered as a result of the breach.
Non-competes and restraints of trade are complex areas of employment law. Before agreeing to any terms, both employers and employees must consider the commercial effect of the non-compete and its impact on the employer, the employee, and the public in general.
When drafted carefully in terms of employee, activity, geography, and duration, it can be very effective and enforceable to protect the employer’s legitimate interest.
To ensure that the non-compete is reasonable and limited to protecting the employer’s legitimate proprietary interests without unreasonably restraining the employee’s prospects, both parties should seek legal advice before drafting a non-compete clause.
Careful drafting can save both parties valuable money and time.