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 especially so with companies expanding into Singapore for the first time, and who assume that Singapore employment law is similar to the laws of their home countries.
This can be dangerous for various reasons. For example, US companies, more familiar with the US at-will doctrine, typically issue only a simple, one-two page offer letter and HR handbook to their employees.
European companies, being used to high levels of statutory dealing with most aspects of employment law, may therefore assume that employment contracts for Singapore employees need not be that comprehensive since Singapore’s laws should already cover most details.
Similarly, Japanese companies may assume that it is difficult to terminate employees in Singapore, as is the case under Japanese law, and use short and simple employment contracts for their Singapore subsidiaries.
While Singapore has in place an Employment Act, it does not apply to employees who are in managerial or executive positions and who earn S$4500 or more. This arguably applies to a large number of the employees in Singapore subsidiaries of foreign companies, and in such circumstances, the employment relationship and terms will depend primarily on the specific terms and conditions of the written employment contract that the employer and employee have entered into.
Therefore, when expanding into Singapore, a local subsidiary of a foreign company using its usual employment contract template, may accidentally or unintentionally provide too much benefits and protection to a Singapore employee, lose out on the right to terminate underperforming employees, or dangerously assume that it 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 need to know of the dangers or missed opportunities that come when you use standardised templates, especially those written for use in other countries, or which are not tailor-made for your company’s business model, industry and value drivers.
In listing the 3 biggest dangers of not customising your employment contract in Singapore, we have focused not just on limiting or managing legal risks, which lawyers traditionally focus on, but also on the employment contract’s role in helping a company protect its competitive advantage and strategy.
Being sued for wrongful termination or breach of contract
Many employers believe that they can fire an under-performing or misbehaving employee at any time. This is not true at all, and in fact, termination of employment is always a potentially risky situation.
This is especially so if the employer uses poorly-written employment contracts or does not use a properly prepared termination letter. If the employment agreement lacks a properly-written termination clause or the termination letter does not clearly state the grounds for termination, the employer may be sued for wrongful termination or breach of contract.
When terminating an employee, employers need to make sure that the employment contract contains the appropriate grounds for termination and the employee has actually acted in a way that justifies termination on those grounds. The employer must also give the appropriate written notice to the employee and to follow the appropriate notice period required under the Singapore Employment Act, the terms of the employment contract or Singapore common law.
Most employment agreements provide that the employer may terminate the employee due to “gross misconduct”, but do not clarify what that means. While it is clear that an employer can dismiss an employee if the employee behaves dishonestly, for example by acting corruptly, leaking confidential information, stealing from the company, using company property for himself, over-declaring expenses when seeking reimbursement, there are many circumstances where it is not so clear if an employee’s behaviour constitutes misconduct.
Such situations include the employee’s poor performance, behaviour which is inconsistent with company’s code of conduct / policies, and/or other specific reasons that make the employer want to terminate the employee but which fall short of “gross misconduct”.
For e.g., if an employee is a sales person who consistently fails to meet sales targets, or behaves unprofessionally with customers and colleagues, and the employment agreement does not state that the failure to meet sales targets or unprofessional behaviour with customers and colleagues constitutes “gross misconduct” or grounds for immediate termination.
Therefore, to avoid the risk and negative consequences of being sued by the terminated employee, employers should state clearly in the employment agreement all expected performance standards or circumstances which would allow the employer to rightfully terminate the employment contract.
The risk is especially high when terminating a senior employee and where the senior employee was to be paid a significant sum of money, for example from a bonus or expenses reimbursement, but for the termination.
Losing intellectual property rights and confidential information
In today’s knowledge economy, most companies and businesses are heavily dependent 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 have well-written IPR clauses to ensure that the company owns the intellectual property rights in the work that its employees create, minimise the risks of employees stealing or leaking confidential information and reduce the risk of the company being held liable for infringement of third party intellectual property rights due to the actions of its employees.
This is especially crucial for any invention that the employer wants to protect indefinitely, by keeping all information on the invention as a trade secret, instead of protecting it using patents, which requires that the invention be disclosed to the public (for e.g., the formula for Coca Cola or Kentucky Fried Chicken).
Also, while Singapore law does provide that intellectual property rights 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, inadvertently publicises details of an invention before a patent is filed for, or if the employee incorporates third party intellectual property rights in the work or invention created for the employer.
An employment contract that does not have well-written or appropriate intellectual property clauses may also expose the employer to having to make extra payments to an employee. This is because if an employee creates an invention or work outside the course of employment, he or she retains ownership of the intellectual property. This may happen where the employee is tasked with a new job scope or duties that are not reflected in the employment agreement, and the company relies on a standard employment contract template that has not been customised or updated to reflect the change in job scope or duties.
It is therefore extremely important for the employer to specify in the employee’s job description that their role includes inventing or conceiving of new products and ideas as this can have an impact on whether or not the invention or work created is done so in 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 the risk where employees uses the company’s confidential information or materials for non-work-related purposes or retains the company’s materials after the termination of employment. This increases the chances of the company having its important confidential information being leaked to competitors or losing their quality of confidentiality.
Therefore, employers should have properly drafted employment contracts with strong and enforceable confidentiality clauses, especially if the job scope or role of the employee is such that he or she is in possession of particularly 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 incentivise the employee to stay with the company for a longer period, by requiring the employee to give sufficient notice so that the company may find and train a suitable replacement. Alternatively, the employer may want to keep the employee out of the marketplace (especially from competitors) for long enough to ensure that any valuable information they have will go out of date, or for the employee’s successor to establish themselves, particularly with customers, so to protect 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 place restrictions on an employee during their notice period, while they continue to receive their salary and contractual benefits. These restrictions include preventing them from attending the workplace or having contact with clients. They help deter a competitor from poaching key employees and increase the employer’s bargaining position with any disaffected employees.
As such, not having a written employment contract or having an employment contract without such restrictive covenants or garden leave rights would expose the employer to leakage of trade secrets and trade connections that can cause significant damage to its commercial interests in the long run.
Even if an employer has an employment agreement that contains such clauses, it must take care to ensure that the restrictive covenants and garden leave clauses are properly-written and implemented correctly, because use of these rights is subject to certain conditions and are often difficult to enforce or rely on.
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.