Non-Compete Clauses in Singapore

Non-Compete Clauses in Singapore

In many employment contracts, an employee will be prevented from engaging in certain activities that compete with those carried out by their employer. This term is known as a non-compete clause and is designed to protect an employer’s business interests both during and after the duration of employment.

One of the main issues with non-compete clauses is striking the appropriate balance between the protection of the business and an employee’s right to work. In Singapore, there is no statute governing the regulation of non-compete clauses. This means that every dispute brought before the court must be decided on a case-by-case basis, with reference to previous case law.

The labour regulation bodies in Singapore are soon to release some much-needed guidance on using non-compete clauses. In the meantime, various factors need to be considered by any business or employee entering such a contract.

What can non-compete clauses restrict?

It is standard for a non-compete clause to restrict how and where an employee does business during and after their employment. The scope of a non-compete clause depends upon the type of industry. A few examples of what can be restricted are as follows:

  • Working for a competing business
  • Starting a competing business
  • Soliciting clients from a former employer
  • Soliciting colleagues from a former employer
  • Working within a geographical area

A non-compete clause will also come with a set duration, which states how long the employee will be bound by the restriction following the end of their employment.

Are non-compete clauses enforceable in Singapore?

In short, it depends. Due to the lack of a legislative framework, the enforceability of non-compete clauses is guided by the court’s decisions in previous cases. Over time, a two-part criterion has been established to assist the court in determining whether such clauses should be enforced, as follows:

  1. Does the clause protect a legitimate proprietary interest of the employer?
  2. Is the scope of the non-compete clause reasonable?

These are examined in more detail below.

Legitimate proprietary interest of the employer

This generally refers to an interest of the business that it would be reasonable to protect. The courts have stated three types of proprietary interests will be considered legitimate for the purposes of a non-compete clause. They are:

  • Trade secrets;
  • Trade connections; and
  • Maintaining a stable, trained workforce.

However, the employer must go one step further and show the interest they rely on is relevant to that employee. For example, a less senior employee is unlikely to have access to confidential information constituting trade secrets. Therefore, a non-compete clause in this context is unlikely to be enforceable.

The court will consider whether it is fair for an employee to use the business’s information or connections for their personal benefit. It is important to note the skills developed by an employee during their employment will not fall within this definition and cannot be restricted.

Reasonableness

The court will then consider whether the non-compete clause is reasonable, both in respect of the interests of the parties and those of the public. The law has been developed to avoid overly restrictive clauses, but whether it is reasonable will depend on the type of employment and industry.

Regarding the employee’s interests, a person’s future employment may be significantly hindered if their non-compete clause prevents them from working within a wide geographical area for an indefinite duration. Conversely, a non-compete clause that only applies to a small geographical area and lasts, say, 12 months, is more likely to be reasonable.

In terms of the interests of the public, overly restrictive non-compete clauses will impact freedom of trade and competition, which is a fundamental aspect of business, giving the public the ability to choose. The court will, therefore, want to avoid a situation where one business monopolises a particular industry.

In assessing reasonableness, the court will look at several factors, including:

  • Whether the clause is specific to the employee; if so, it is more likely to be considered reasonable.
  • What the employee is restricted from doing. A general restriction preventing an employee from working for any competitor in any geographical area is more likely to be unreasonable.
  • Duration of the clause. It is more likely to be reasonable if the restriction only lasts for a set duration. A longer period will usually be reasonable for an employee who works at a more senior level.
  • Geographical limitations. Depending on the type of business, it may be reasonable for an employee to be restricted from carrying out business in a specific country, region, or city. However, any geographical restraints must be necessary and justified and should not disproportionately impact competition.

Unenforceable non-compete clauses

If the court finds the two criterions above are not met, the non-compete clause will not be enforceable.

A mechanism known as the “blue pencil test” will allow the court to strike out the unreasonable parts of the clause, meaning the rest of it can stay in force. This avoids the need for the entire clause or contract to be rewritten, which the court could not do in any event. Alternatively, if the entire non-compete clause is found to be unreasonable, it can be struck out, leaving the rest of the contract in force.

Enforcing a non-compete clause

If an employee breaches a non-compete clause that is valid and reasonable, the employer may apply to the court for either of the following:

  1. An injunction to prevent the employee from committing the breach; and/or
  2. Compensation for any financial loss suffered due to the breach.

An injunction usually prevents the employee from being employed with or setting up a competing business. Compensation will be awarded if the employer can show that the loss, they have suffered is a result of the employee breaching the non-compete clause.

It is important to note that the employer will first need to satisfy the court the non-compete clause is reasonable before it will further consider the enforcement application.

Things for the employer to consider

A business that wants to include a non-compete clause in its contracts will want to avoid a situation where the clause is challenged or deemed unenforceable. Seeking the assistance of an employment lawyer to draft the employment contract will ensure the non-compete clause is drafted properly. However, there are also some general guidelines employers can follow:

  1. Ensure any restrictions on the employee are reasonable. The employer should only restrict what is necessary to ensure the business’s legitimate interests are protected.
  2. Make the clause specific to the employee. Blanket restrictions that apply to all employees are unlikely to be enforceable, particularly considering the varying roles and responsibilities in different companies.
  3. Avoid ambiguity. A dispute or unenforceability is much less likely to arise if the clause clarifies which activities the employee is prevented from doing.

Things for the employee to consider

A future employee may be tempted to sign their non-compete agreement without fully understanding its implications. The law will seek to protect employees from unjustified restrictions, as we have seen above. However, they should still take the time to review the contract and obtain clarification on any elements they are unsure of. If presented with a non-compete clause, employees should consider doing the following:

  1. Speak to an employment lawyer. They will be able to advise the employee on the terms of the agreement and whether it is reasonable and capable of enforcement.
  2. Speak to the employer. After reviewing the agreement and taking advice from a lawyer, the employee may be concerned that parts of the non-compete clause are overly restrictive. The employee is wholly entitled to negotiate these terms with the employer or, at the very least, seek clarification from them.
  3. Keep a note of any changes. The employment contract will be the final version, including any amendments, as signed by both parties. The employee should keep a copy of the contract and note any subsequent amendments, just in case of any dispute. It is also sensible to keep a record of any discussions had with the employer about the terms of the non-compete agreement, as these may need to be referred to if the matter ends up in court.

Conclusion on non-compete clauses in Singapore

Non-compete clauses are an effective mechanism for providing businesses with confidence when hiring employees at all levels of their business. It is reasonable for employees’ activities to be restricted to a degree so that standard business interests can be protected.

However, non-compete clauses used as an attempt to disproportionately restrict trade and employment will not be recognised by the court and will be deemed unenforceable.

It is expected that the guidance due to be released in the latter half of 2024 will shed further light on the effective use of such clauses, thereby providing further clarity on this complex area of the law.

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