We advise very regularly on employment disputes and act for both employers and employees. In advising on these disputes, we have noticed that most of them could easily have been prevented had the employers used better-written employment contracts or better procedures in handling dismissals.
This is especially so with companies expanding into Singapore for the first time, and who incorrectly assume that Singapore employment law is similar to the laws of their home countries.
This presumption can be perilous for various reasons. For example, US companies, more accustomed to the US at-will doctrine, typically issue only a basic, one-two page offer letter and HR handbook to their employees.
European companies, comfortable with high levels of statutory regulations regarding employment law, might therefore assume that employment contracts for Singapore employees need not be extensive since Singapore’s employment laws should cover most aspects.
Similarly, Japanese companies may presume it is difficult to terminate employees in Singapore, as with Japanese employment law, and therefore use shortened and basic employment contracts for their Singapore subsidiaries.
While Singapore has implemented an Employment Act, it does not apply to employees in managerial or executive positions earning S$4500 or more. This notably applies to many employees in Singapore subsidiaries of foreign companies, and in such circumstances, the employment relationship depends mainly on the specific terms of the written employment contract between the employer and employee.
Consequently, when expanding into Singapore, a local subsidiary of an international company using its standard employment contract template may inadvertently provide excessive benefits and protection to its Singapore employees, lose out on the right to terminate underperforming employees, or mistakenly assume that they can terminate an employee on an at-will basis.
In hiring your workforce in Singapore, whether for startups or new local subsidiaries of global companies, you must be aware of the risks or missed opportunities brought by using standardized templates. These are particularly the templates designed for use in other countries, or ones that aren’t customized for your company’s business model, industry, and value drivers.
In addressing the 3 most significant risks of not customizing your employment contract in Singapore, we focus not only on minimizing legal risks – a common concern for employment lawyers, but also on the employment contract’s role in helping a company preserve its competitive advantage and strategy.
Being sued for wrongful termination or breach of contract
Many employers believe that they can dismiss an under-performing or errant employee at any time. This is a misconception, and in fact, termination of employment always carries potential risk.
This risk is amplified if the employer uses poorly-drafted employment contracts or does not use a well-prepared termination letter. If the employment contract lacks a comprehensive termination clause, or the termination letter does not succinctly state the grounds for termination, the employer may face a lawsuit for wrongful termination or breach of contract.
When terminating an employee, employers need to ensure that the employment contract specifies relevant grounds for termination, and that the employee’s actions justify termination based on these grounds. The employer must also provide the appropriate written notice to the employee and observe the appropriate notice period stipulated by the Singapore Employment Act, the employment contract clauses, or Singapore common law.
Most employment contracts provide that the employer may terminate the employee due to “gross misconduct”, but do not specify what this entails. While it is inevitable that an employer can dismiss an employee for dishonest behavior, such as corruption, leaking confidential information, theft, unauthorized use of company property, or over-inflated expense claims, there are numerous circumstances in which it is unclear if an employee’s behavior constitutes misconduct.
Such circumstances include poor performance, behavior conflicting with the company’s code of conduct/policies, and/or other specific issues that prompt the employer to terminate the employee, yet do not reach the severity of “gross misconduct”.
For instance, if an employee, particularly in sales, consistently fails to meet sales targets, or behaves unprofessionally with customers and colleagues, and the employment contract omits stating that failure to meet sales targets or unprofessional behavior with customers and colleagues represents “gross misconduct” or grounds for immediate termination.
Thus, to avoid the risk and adverse consequences of lawsuits from terminated employees, employers should distinctly state in the employment contract all expected performance standards or situations which would allow them to rightfully terminate the employment contract.
The risk is especially high when terminating a senior employee who was anticipated to receive a significant sum, perhaps as a bonus or reimbursement, prior to the termination.
Losing intellectual property rights and confidential information
In today’s knowledge economy, most companies and businesses heavily rely on the intellectual creations of their employees for their competitive advantage and to increase the company’s valuation.
It is therefore vital for a company’s employment contracts to include well-drafted IP clauses to ensure that the company owns the intellectual property rights (IPR) in the work that its employees create, minimize the risks of employees stealing or leaking confidential information, and reduce the risk of the company being held liable for infringement of third party IPR due to the actions of its employees.
This is especially important for any invention that the employer wants to protect indefinitely by keeping all information on the invention as a trade secret, instead of using patents that require disclosing the invention to the public (e.g., the formula for Coca-Cola or Kentucky Fried Chicken).
While Singapore employment law states that IPR created by an employee in the course of employment is owned by the employer, an employer may still be at risk of not owning an employee’s inventions or work. For example, if an employee deliberately fails to disclose an invention to the employer, accidentally publicizes details of an invention before a patent is filed or includes third-party IPR in the work or invention created for the employer.
An employment contract in Singapore that lacks well-written or appropriate intellectual property clauses may also expose the employer to making extra payments to an employee. This can occur if an employee creates an invention or work outside the course of employment, thus retaining ownership of the IPR. Such a situation may arise when an employee’s job scope or duties change and are not reflected in the employment contract, and the company relies on a standard template that has not been customized or updated to reflect the change in job scope or duties.
It is, therefore, crucial for the employer to specify in the employee’s job description that their role includes inventing or conceiving new products and ideas, as this impacts whether the invention or work created is done within the course of employment.
Beyond the issue of intellectual property ownership, an employment contract without an intellectual property clause would also expose the employer to risks when employees use the company’s confidential information or materials for non-work-related purposes or retain the company’s materials after the termination of employment. This increases the chances of having important confidential information leaked to competitors or losing the quality of confidentiality.
Hence, employers should draft employment contracts with solid and enforceable confidentiality clauses, particularly if the employee’s job scope or role involves access to sensitive IP-related information.
Failing to preserve competitive advantage (restrictive covenants and garden leave clauses)
Employment contracts are very useful and important if an employer wants control over the employee’s ability to leave the company / business, particularly if the employee:
- if the employee is has a very valuable and rare skillset or quality that is difficult to replace,
- has strong knowledge / experience of key markets,
- if the company is dependent on the employee’s business contacts, sales revenue generated by the employee or rapport with the company’s customers,
- is likely to join a competitor and take along valuable knowledge, business contacts and clientele, or
- when much time and money has been invested into training the employee
In such cases, employment contracts can help the employer encourage the employee to stay with the company for a longer period. This can be achieved by requiring the employee to provide sufficient notice so that the company may recruit and train a suitable replacement.
In other cases, the employer may wish to keep the employee out of the marketplace (especially away from competitors) for a sufficient duration to ensure that any valuable information they have becomes outdated. Alternatively, it could be to provide enough time for the employee’s successor to establish themselves, particularly with customers, thus protecting the company’s goodwill.
This may be achieved through the use of restrictive covenants and garden leave provisions. Restrictive covenants stop employees from:
- joining a competitor after the termination of employment or from establishing a competing business,
- poaching customers, suppliers or colleagues, and
- misusing confidential information
Garden leave obligations restrict an employee during their notice period while they continue to receive their salary and contractual benefits. These obligations can include preventing the employee from attending the workplace or having contact with clients. They serve to deter a competitor from poaching key employees and to increase the employer’s bargaining position with any disaffected employees.
Failing to have a written employment contract in Singapore, or one without such restrictive covenants or garden leave rights, would expose the employer to a potential leakage of trade secrets and trade connections. This can lead to considerable damage to the business’ commercial interests in the long run.
Even with an employment contract containing such clauses, an employer should ensure that the restrictive covenants and garden leave clauses are well-written and implemented correctly. These rights are subject to certain conditions and can often be challenging to enforce or rely upon if they are not defined appropriately.
Restrictive covenants are only valid and enforceable if the employer can show that:
- the restrictive covenant is reasonable to protect the employer’s legitimate interests and the public interest, and
- there must also be a legitimate proprietary interest to be protected
Furthermore, the extent of the restrictions in terms of time and geography is important for a valid restrictive covenant, i.e. the restriction cannot be longer or geographically wider than is reasonable or necessary. For example, the Singapore courts have very clearly stated that a restraint of trade that operates for an indefinite period of time is void and unenforceable.
Care must also be taken when implementing garden leave provisions. There is a famous case where an employer intended to put an employee on garden leave once she had resigned, based on a written term of her contract, but sent a letter stating that they did “not wish you to work your month’s notice period but will pay you in lieu of this instead.” Shortly after her resignation, the employer discovered that she had started working for a competitor and refused to pay her for her notice period. The court decided that she was not restricted from having outside interests or taking another job during the notice period, even with a competitor, and that she remained entitled to be paid.