Non compete clauses are often a feature of employment contracts. They prevent employees from using their skills or engaging in business in specific markets and/or locations for a defined period.
In Singapore, non compete clauses are part of a group of restrictions known as restraint of trade clauses.
Non compete clauses can bite after the termination of the employment contract, or they can be active whilst the employment is ongoing to prevent an employee from working for a competitor simultaneously.
Non compete clauses are not always enforceable; it depends on what they protect and the scope of the restrictions.
Can you legally enforce a non compete clause in Singapore?
There is usually no difficulty enforcing a non compete clause whilst an employment contract is still active; most employers want to restrain employees from working elsewhere when in their employ. This could restrict working for a competitor or in jobs without any connection to the employer’s business.
However, the path narrows if an employer wants to enforce a non compete clause after a contract of employment has ended. In this scenario, the non compete clause is only enforceable if it is deemed reasonable in terms of scope and protects what is defined as the employer’s ‘legitimate proprietary interest’.
Legitimate proprietary interest
For a non compete clause to be valid and enforceable, it must protect something legitimate, described as a legitimate proprietary interest. This could be the employer’s existing clients or trade connections.
Legitimate proprietary interests also include the employer’s tangible assets, rights, and advantages in a business capacity which are regarded as the employer’s property.
A key test is that it should be unjust for the employee to appropriate the interest for their own purposes. An example of a non-tangible asset that would be unjust for a former employee to appropriate could be a secret recipe for a particular cooking product unique to the employer’s business.
However, a legitimate proprietary interest doesn’t include the skills or knowledge that an employee has built up during his time in that employment.
The court will always be interested in determining whether a non compete clause is a back door route to illegally restricting competition. Even if the clause is contained in a contract of employment signed by the employee, it still may not be legally enforceable.
The definition of ‘reasonable’
There is no fixed definition or what reasonable means; each non compete clause is looked at individually and within the context of the broader picture of the employment contract and that business.
Public interest is also a factor in deciding what is reasonable; non compete clauses must not restrict trade in a wider context or prevent normal competition between businesses.
Certain things are more likely to be viewed as unreasonable.
non compete clauses for all employees, regardless of seniority
A clause covering all staff members rather than those sufficiently senior and/or relevant to the restriction will probably be considered unreasonable.
Junior staff members probably don’t have access to confidential information that a non compete clause covers. In this context, it might be viewed as restraining competition rather than protecting an employer’s legitimate interests.
The scope of restricted activity
Most non compete clauses that restrict employment with competitors do so for a finite period or are only relevant to the scope of work the employee is undertaking.
An employee working for a rival in a different capacity may not fall foul of a non compete clause, but a blanket ban which prevents an employee from ever working in the same industry again would potentially be considered unreasonable.
However, a non compete clause which restricts an employee from working in the specific area of business they have been employed in for a competitor may be reasonable.
The period for which employment is restricted
If the non compete clause is open-ended, so there is no fixed period beyond which it won’t apply, then it is likely this will be unreasonable. What is a reasonable time? Every contract and scenario is unique and must be looked at individually.
The factors to consider when establishing a reasonable length of time include the employee’s seniority and skill level relevant to the restriction. The nature of the work is also relevant, plus the employee’s exposure to the clients and their influence. Not all roles have access to confidential or sensitive commercial information. The nature of the business is also important.
Employers mustn’t just pick any date range; the non compete clause can only contain a proportional and relevant timeframe. If an employer must defend the time period in a non compete clause, then it can help to be able to demonstrate some evidence on which this was based rather than just relying on an arbitrary decision.
More extended restrictions can be considered reasonable; it can take time for new employees to establish fresh client connections in the same industry when they switch employment. It all comes down to the context and the nature of that business.
non compete clauses can contain a physical restriction which may be limited to a defined radius around the employer’s business, or it could be wider to include towns and cities some distance away.
It’s common for non compete clauses to contain international restrictions, especially with the global nature of trade in the 21st century.
A court will examine the nature and scope of the employer’s business and reach to determine whether a geographical restriction’s range is reasonable.
The prospect of expanding into new markets is not relevant; only current trade is considered. Client contact must be established and significant. The odd international client amid a business primarily having a national reach would not justify restricting a particular country.
A non compete clause with an unlimited geographical restriction is likely to be considered unreasonable, but it all depends on the nature of the business, and how long the limitation is in place.
What happens if a non compete clause is not enforceable?
Not all non-complete clauses may be unenforceable, so the court will strike out the non-enforceable parts; this is called the ‘blue pencil test’ or, in legal parlance, the doctrine of discretionary severance. What remains must make sense.
The blue pencil test cannot rewrite a non compete clause; it can only cancel out specific elements that make it unreasonable. If the clause is unreasonable due to the absence of specific wording, for instance, how long the employee is restrained, then there is nothing the court can do as it cannot add text.
The other option is to delete or strike down the complete clause from the contract.
Employer remedies for breach of a non compete clause
If an employee breaches a valid non compete clause, the employer has two options. First, they can apply for an injunction to prevent the employee from continuing to breach the clause and claim damages in terms of compensation.
Final thoughts on non compete clauses in Singapore
Employers would be wise to draft any non compete clauses carefully as they could be scrutinised in the future and must be reasonable. Professional legal advice can help in this situation. It can also be helpful for employees worried about signing an employment contract with a non compete clause that’s unreasonable and could restrict them in the future.
Frequently asked questions
What is a non-solicitation clause?
A non-solicitation clause prevents an employee from luring away or soliciting former clients or colleagues from previous employment.
Non-solicitation clauses differ from non-compete clauses as the latter restrict former employees from competing against their previous employer, usually by banning engagement in specific markets, businesses, or within a defined geographical range for a set period.
I negotiated a non-compete clause with my former employer as an incentive to get the job, but I now think it may be unreasonable. Can I challenge it?
It’s harder for an employee to challenge a non-compete clause they have suggested or negotiated; a court is more likely to view this as reasonable even if, in other circumstances, it may not be reasonable.
When I signed my employment contract, I was required to make a declaration stating that I accepted the non-compete clause was reasonable. Is this valid?
Some employment contracts will contain a double layer of protection, so not only is there a non-compete clause, but the employee is also required to sign a statement which agrees this is reasonable and necessary to protect the employer’s interest.
The courts have stated that this type of statement or acknowledgement does not carry any weight when determining if a non-compete clause is reasonable and is irrelevant to the test of enforceability. The scope of the clause is what determines its validity, not the employee’s or employer’s perception of what is reasonable.