Are non-compete clauses enforceable?7.10.2022
Your employment contract may contain non-compete clauses. These are used by an employer to prevent employees from carrying out business in certain geographies and markets for a certain period of time.
The purpose of non-compete clauses is to control employee’s conduct during and/or after the employment period (in other words, after the contract of employment is terminated). They are sometimes known as ‘restraint of trade’ clauses because they restrain the freedom of the employee to trade with relevant parties in the future.
Non-solicitation clauses may also be included in a non-compete clause, which restrains former employees from soliciting clients or employees of the former employer.
Are non-compete clauses enforceable in Singapore?
In general, an employer in Singapore can restrain employees from working for another organisation during their time of employment.
However, a non-compete clause applying after the employment contract is ended may not be enforceable, unless:
- Its purpose is to safeguard the employer’s “legitimate proprietary interest”
- The non-compete clause’s scope is reasonable
What is a “legitimate proprietary interest”?
A proprietary interest is an asset or advantage which is considered as the employer’s property. If the former employee appropriates the employer’s property for his own purposes, it is unfair to the employer. Any skill or know-how that the former employee acquires during their employment will not be regarded as an asset or advantage.
The courts in Singapore recognise that client and trade connections are considered as legitimate proprietary interests. However, a non-compete clause which intends to illegally restrain competition is not enforceable.
The scope of the non-compete clause must be reasonable
The reasonableness of the scope of a non-compete clause can be affected by several factors. For each factor, the court will examine the non-compete clause based on whether it is reasonable:
- Between the parties; and
- in the public interest (for example, safeguarding the freedom of competition and trade)
Some examples of the factors used to examine the non-compete clause’s reasonableness include:
(a) Scope of employees being restrained
The non-compete clause may be viewed as unreasonable if it applies to all employees, regardless of their seniority, the nature of their work, or their authority to access confidential information. A clause such as this would indicate the true intent of the employer – i.e. to restrain competition.
(b) Scope of activity being restrained
A non-compete clause is unreasonable if it:
- Includes a ‘blanket prohibition’ preventing the employee from working in the same industry;
- Prevents an employee from working for a rival, regardless of the employee’s scope of work with the new employer; or
- Covers all activities, even those involving minimal expertise, and which are not vital to the operations of the organisation.
(c) The period of the restraint
The reasonableness of the period of restraint depends on the following factors:
- The nature of the work performed by the employee
- The employee’s seniority and skill level
- The level of influence the employee has with clients
- The level of access that the employee has to confidential information
- The particular industry involved.
The employer is not allowed to fix the period of restraint arbitrarily, and it must not be longer than is necessary.
A non-compete clause that does not have a fixed period of restraint will be deemed unreasonable and unenforceable.
(d) The geographical scope of the restraint
In its geographical scope, the non-compete clause must aim to protect the employer’s actual and existing business, but not the possibility of acquiring future business. It is a geographical limit in circumstances where the ex-employee had actual and significant contact with clients. A non-compete clause that has no geographical limit at all – i.e. it applies globally – is very likely to be defined as unreasonable.
The former employee may be prohibited from conducting business by the non-compete clause:
- In certain countries
- In certain cities in a country (in particular, big countries which have large geographical areas)
- Within a certain radius surrounding the employer’s current area of practice.
(e) Special circumstances
Special circumstances apply when something extra is provided by the employer in exchange for the employee accepting the non-compete clause. For instance, an employee is offered payment by the employer for the non-competition period. As the employee had been given compensation, the court might consider that the non-compete clause is reasonable.
What if a non-compete clause is found to be unenforceable?
If the non-compete clauses are unenforceable, then the court may either strike out the unenforceable parts of the clause only, or they may strike out the whole of the non-compete clause – whichever is more appropriate in the circumstances.
Striking out only the non-enforceable parts
In this case, the court will follow the doctrine of discretionary severance and apply the “blue pencil test” to “cancel out” the parts of the non-compete clause which are unenforceable.
The court may only do this if the remaining wording of the same clause is still grammatically correct, and the original meaning of the clause is not affected. Therefore, the court may not use the “blue pencil” to fix an unreasonable non-compete clause if the clause cannot be made reasonable by canceling something out.
For example, if a period of restraint is not stated in the non-compete clause, then there is nothing that the court can cancel out or fix, in order to make the clause reasonable with a specific restraint period.
Striking out the whole non-compete clause
The court has the authority to strike out the entirety of the unreasonable non-compete clause from the contract.
Employer’s remedy for breaking non-compete clauses
An employer has the following remedies available to them:
The employer can apply for an injunction to prevent an employee from continuing to violate the enforceable non-compete clause.
If the former employee violates the non-compete clause, the employer may sue for damages. It is highly advisable that an employer or an employee should consult a lawyer as to whether a non-compete clause is enforceable, and they should also consider seeking assistance in drafting an enforceable non-compete clause.