Non-compete clauses in Singapore – issues to consider

Today’s dynamic and digitalised business environment obliges companies to protect its workforce, confidential information and trade connections; and a common way is to rely on non-compete clauses in employment contracts. One prime objective is to prevent key employees who have left the company from engaging in activities which would otherwise unduly interfere with or prejudice the company’s business. At the same time, this protection for the company cannot be absolute, as that would hinder the necessary flow of human capital, beneficial for an open economy.

Different jurisdictions have attempted to balance the protection of an employer’s legitimate business interests with the right for an employee to enjoy mobility of labour. The United Kingdom government recently announced that it would introduce a statutory limit of three months for non-compete clauses in employment contracts in Great Britain. In contrast, the United States Federal Trade Commission has proposed an outright ban on non-compete clauses. Whilst in our view, it is unlikely that Singapore will follow in either direction, this presents an opportune moment to reflect on Singapore’s present approach to non-compete clauses.

Enforceability of restraint of trade clauses in Singapore

The law relating to restraint of trade clauses in Singapore is not set out in legislation but is recognised and enforced within the legal framework governed by common law principles. Generally, a restraint of trade clause in the employment context is unenforceable, unless the employer can satisfy a two-part inquiry – first, that the clause protects the employer’s legitimate proprietary interest, and second, that the clause is reasonable.

For the first part of the inquiry, the Singapore Courts have recognised three main types of legitimate proprietary interests as being capable of supporting a restraint of trade clause. These are:

  1. Trade secrets or confidential information akin to trade secrets;
  2. Trade connections, eg with customers and suppliers; and
  3. Maintaining a stable, trained workforce.

It is not sufficient for employers to simply assert that they have a legitimate proprietary interest to protect. They would need to show why the legitimate proprietary interest relied on is applicable to the employee in the first place. For example, the employer relying on the clause must be able to justify why the employee, by virtue of his seniority, role or otherwise, would have access to confidential information as well as have direct contact with and influence over its customers.

As for the second part of the inquiry, the Singapore Courts will consider whether the clause is reasonable with reference to the interests of the contracting parties as well as the interests of the public. The main idea here is that the restriction should not be wider than reasonably necessary for the employer to protect its legitimate proprietary interest and should not deprive the employee of the ability to earn a living.

When determining whether the clause is reasonable in the interests of the public, the Singapore Courts have considered whether the enforcement of the restraint of trade clause would give the employer a virtual monopoly in the business.

As can be seen, the second part of the inquiry by the Singapore Courts is a highly fact-sensitive exercise; the result of which will depend on each case.

Cascading restraint of trade clauses – interplay with the doctrine of severance

One way in which employers have sought to mitigate the uncertainty of the court’s fact-finding process is to rely on cascading restraint clauses. For instance, instead of imposing a fixed duration for the restraint, employers would insert different tiers in the following manner:

‘The restraint period will last for the duration of: (i) 12 months, or (ii) if this is unenforceable, six months; or (iii) if this is unenforceable; three months, after the date of termination of your employment.’

The intention here is to attempt to make use of the ‘blue-pencil test’ for severance that has been judicially recognised as part of Singapore law and employed by the Singapore Courts. The cascading clause is drafted in the hopes that each tier will be treated as a separate and individual clause that can be severed by striking it out entirely if found to be objectionable by the Singapore Courts, leaving the lower-tier restriction untouched and enforceable against the employee.

However, the Singapore Courts have expressed doubt that an otherwise unenforceable clause can be saved in this manner, as it leaves the vulnerable employee uncertain as to which cascading restriction binds him in law until the issue is actually determined by a court, and this would only impose an unacceptable level of uncertainty on the employee.

Notice periods and garden leave – impact on restraint of trade clauses

Some employers place the departing employee bound by restraint of trade clauses on garden leave during their notice periods. Employers should note the impact the garden leave may have on the enforceability of the restraint of trade clauses; particularly where the garden leave period has already provided the employer with all the protection that it may be entitled to, the court may decline to enforce what would have otherwise been a valid restraint of trade clause. Rather than relying on cookie-cutter clauses, employers should take care to specifically craft their garden leave clauses to properly operate harmoniously with their restraint of trade clauses to meet their particular commercial concerns.

Other employers have tried to impose longer notice periods, lasting for as long as 12 to sometimes 18 months, in lieu of restraint of trade clauses. First off, such an exercise can be expensive, as the employee continues to receive salary and benefits for the entire period. Second, given the various legal and policy issues involved, especially in cases where the notice periods may be unduly long, it remains to be seen how the Singapore Courts will treat such notice period obligations.

Future guidance on non-competes

Given all the legal and policy issues involved in restraint of trade clauses the Ministry of Manpower and the Tripartite partners in Singapore are currently developing a set of guidelines on the inclusion of non-compete clauses in employment contracts.

It is hoped that these guidelines would go beyond the broad principles laid down in case law and provide specific guidance on how to improve the reasonableness of the non-compete clauses. One can envision that the guidelines may deal with defining a recommended range of monetary compensation to be paid to the employee during the restraint period and the profile of employees that non-compete clauses should be targeted at (eg employees above a certain salary threshold). We hold an optimistic outlook that such guidelines will aid employers in crafting valid restraint of trade clauses that achieve a harmonious equilibrium between safeguarding legitimate business interests and granting employees the freedom to pursue their professional growth and careers.