Non Compete Clauses

Non-compete clauses are usually found in your employment contract. An employer uses a non-compete clause to prevent their employees from trading or engaging in businesses in certain markets and geographies for a fixed duration.

Non-compete clauses aim to control employees’ conduct during the employment period and/or after the employment period i.e. after the employment contract is terminated. It is also known as the restraint of trade clause as it restrains the employees’ freedom to trade with relevant parties in the future.

Non-compete clauses also include a non-solicitation clause where it restrains a former employee to solicit clients or employees of the former employer.

Are non-compete clauses enforceable in Singapore?

Generally, employers can restrain their employees from working for another organisation during their period of employment with them.

However, non-compete clauses that apply after the employment contract is terminated may not be enforceable, unless:

1. It serves to safeguard the employer’s “legitimate proprietary interest”.
2. The scope of the non-compete clause is reasonable.

What is “legitimate proprietary interest”?

Proprietary interests are an advantage or asset which are considered as the employer’s property. It is unfair to the employer if the former employee appropriates the employer’s property for his own purposes. The advantage or asset shall not be regarded as the skill or know-how that the former employee had acquired during their employment.

The Singapore court recognises that the client and trade connections are considered as a legitimate proprietary interest. A non-compete clause which aims to illegally restrain competition, however, is unenforceable.

Scope of the non-compete clause must be reasonable

There are several factors which can affect the reasonableness of the scope of a non-compete clause. For each factor, the court examines the non-compete clause based on whether it is reasonable:

1. Between the parties; and
2. for public interests (for instance, safeguarding the freedom of trade and competition)

Examples of the factors to examine the reasonableness of the scope of a non-compete clause are as follows:

(a) Scope of employees being restrained

A non-compete clause may be regarded as unreasonable if it applies to all employees irrespective of their seniority, nature of work or authority to access confidential information. Such a clause indicates the true intention of the employer which is to restrain competition.

(b) Scope of activity being restrained

It is unreasonable for a non-compete clause to:

1. Include a “blanket prohibition” prohibiting the employee to work in the same industry; or
2. Prevent an employee to work for a rival, irrespective of the employee’s scope of work with the new employer; or
3. Cover all activities that involve minimal expertise and not vital to the organisation’s operations.

(c) The period of the restraint

Reasonableness of the period of restraint depending on the following factors:

1. Nature of the work performed by the employee.
2. Employee’s seniority level and skill level.
3. Employee’s level of influence with clients.
4. Employee’s level of access to confidential information.
5. Particular industry.

The employer must not fix the period of restraint haphazardly. It shall not be longer than needed.

A non-compete clause without a fixed period of restraint is unreasonable and not enforceable.

(d) The geographical scope of the restraint

The geographical scope of the non-compete clause must aim to protect the employer’s actual and existing business but not to protect the possibility of acquiring future business. It is a geographical limit where the former employee had actual and significant client contact. A non-compete clause with no geographical limit at all i.e. it applies worldwide is likely to be defined as unreasonable.

A non-compete clause may prohibit the former employee from conducting business:

1. In certain countries.
2. In certain cities in a country (especially big countries having large geographical areas).
3. Within a certain radius around the employer’s current areas of practice.

(e) Special circumstances

Special circumstances appear when the employer provides something extra in exchange for the employee’s acceptance of the non-compete clause. For example, the employer offers payment to an employee for the period of non-competition. As the employee has received compensation, the court may consider the non-compete clause reasonable.

What if a non-compete clause is found to be unenforceable?

If the non-compete clauses are not enforceable, the court will strike down only the non-enforceable parts of the non-compete clause or strike down the whole non-compete clause, whichever is appropriate in the circumstances.

Striking down just the non-enforceable parts

The court follows the doctrine of discretionary severance and applies the “blue pencil test” to “cancel out” the unenforceable parts of the non-compete clause.

The court can only cancel out certain parts of the clause if the remaining words of the same clause are still grammatically correct and the original meaning of the clause is not affected. Thus, the court cannot use a “blue pencil” to fix an unreasonable non-compete clause if there is nothing that can be cancelled out to make the clause reasonable.

For instance, if an unenforceable non-compete clause did not state the period of restraint, then the court has nothing to “cancel out” or fix in order to make the clause reasonable with a specific period of restraint.

Strike down the whole non-compete clause

The court is authorised to strike down the whole unreasonable non-compete clause from the contract.

Employers remedy towards breaking non-compete clauses

The remedy available to the employer are as follows:

Injunction

The employer may apply for an injunction to stop an employee from continuing to violate the enforceable non-compete clause.

Damages

The employer may sue for damages for the violation of the non-compete clause by the former employee. It is highly advisable that an employer or employee to consult a lawyer as to whether a non-compete clause is enforceable, or seek assistance to draft an enforceable non-compete clause.