Enforcing Restrictive Covenants in Singapore Employment Contracts

Restrictive covenants are contractual provisions often included in employment agreements to protect an employer’s legitimate business interests after an employee leaves the company.

These clauses are designed to prevent former employees from unfairly competing with their previous employer, leveraging confidential information, or poaching clients. They can be just as important to protecting your business interests as drafting an air-tight shareholder agreement or conducting thorough legal due diligence for an M&A.

However, the legal position in Singapore dictates that such clauses are prima facie (i.e. on the face of it) void and unenforceable because they constitute a restraint of trade. Thus, a restrictive clause only becomes enforceable if the employer can prove that the restriction is reasonable in the context of the specific business.

If you’re seeking to enforce a restrictive covenant in Singapore to protect your corporate interests, here’s what you need to know. Consulting with a qualified legal firm can also guide you towards the right next steps while maintaining the legality of your situation.

Are Your Restrictive Covenants Legally Valid?

The courts in Singapore apply a stringent two-part legal test to determine the enforceability of any restrictive employment covenants:

1. Legitimate Proprietary Interest

The employer must first demonstrate that the clause protects a legitimate proprietary interest. The restriction cannot merely be an attempt to prevent competition itself, which the law views as contrary to public policy that promotes free trade.

What constitutes legitimate proprietary interest? This includes protecting the business’ trade secrets, confidential information (such as client lists or proprietary processes), and established customer connections, as well as maintaining a stable workforce.

2. Reasonableness

Even if a legitimate proprietary interest is proven, the restrictive covenant must be demonstrated to be reasonable in several key dimensions, both in the interest of the parties and in the interest of the public. This determines whether the clause is legally valid.

• Scope: The restriction must be no wider than absolutely necessary to protect the legitimate interest. It must precisely define the activities the former employee is prohibited from engaging in.
• Geographical Area: The restriction must be limited to the geographical areas where the business operates and where the employee had actual exposure or influence. For example, restriction covering the entire globe for a business operating only in Southeast Asia would be deemed unreasonable.
• Duration: The restriction must be for a reasonable period, often determined by the shelf life of the confidential information or the typical cycle for establishing new customer relationships. A restriction lasting five years, for instance, is highly unlikely to be considered reasonable unless the confidential information is extremely long-lasting.

Courts analyse these factors based on the specific circumstances of the employee (e.g. their seniority, access to confidential information, and client relationships) and the nature of the business. A junior executive who was employed for less than a year, for instance, would be likely less privy to privileged information than senior management who have been at the company for over 10 years. The level of potential ‘risk’ these two individual poses to their former employer’s legitimate interest, and thus the level of scrutiny they’re subjected to, is vastly different.

Common Types of Restrictive Covenants and Their Enforceability

Non-Compete Clause

A non-compete clause prohibits a former employee from working for a competitor in a similar capacity for a specified period after leaving the company. It is generally the most restrictive and therefore the most difficult type of restrictive covenant to enforce in Singapore.

Non-competes are generally used not to prevent competition itself but to protect a company’s specific interests. However, if the employer cannot clearly define the interest being protected (e.g. specific, highly-sensitive client relationships), the clause will likely fail. One common reason a non-compete agreement is rendered unenforceable is when it is drafted too broadly—for example, prohibiting a junior employee with no client contact from working for any competitor in the industry, regardless of the role.

Non-Solicitation Clause

A non-solicitation clause restricts a former employee from soliciting the former employer’s clients or employees. It directly protects the legitimate interest in maintaining customer connections and a stable workforce.

These are generally easier to enforce than a non-compete clause because they are more targeted. However, to be considered valid, the clause should specifically identify the clients or categories of clients it applies to (i.e. those the employee had significant dealings with) and the restriction period must be reasonable.

Confidentiality and Non-Disclosure Agreement (NDA)

Confidentiality and non-disclosure agreement (NDA) clauses prohibit the former employee from disclosing or misusing the employer’s sensitive and proprietary information. These are generally enforceable as they directly protect trade secrets and confidential information, which are clearly valid restrictive covenants protecting a proprietary interest.

Restraint of Trade Clause

This is the general legal term for all restrictive employment covenants. It simply means a term that restricts a person’s future ability to carry on a trade or profession. Every restrictive covenant falls under this umbrella and is subject to the same stringent legal test of legitimate interest and reasonableness.

Key Takeaways for Employers and Employees

For Employers:

• Be Targeted in Drafting Contracts: A highly targeted approach is necessary when drafting restrictive covenants. They must be specific, reasonable, and tailored to the individual employee’s role and access to protected information. Avoid using a generic, one-size-fits-all agreement.
• Use Garden Leave Strategically: Garden leave is a period during the notice period where the employee remains employed and receives pay but is required to stay home and not report for work. Strategically using it can protect your business interests by keeping the employee away from clients and confidential information immediately before their departure, while the pay-for-stay arrangement makes the subsequent post-termination restrictive covenants more likely to be seen as reasonable by the court.
• Always Maintain Clear Confidentiality: Always include a clear and separate confidentiality clause, as these are generally easier to enforce.

For Employees:

• Seek Legal Counsel: Employees should seek legal counsel from a legal firm if they have concerns about restrictive covenants in their contract.
• Assess Enforceability: Just because a clause is in the contract does not mean it is automatically enforceable. An employment contract lawyer in Singapore can assess if a non-compete or non-solicitation clause is likely to be deemed a valid and enforceable restrictive covenant.

Common Questions on Restrictive Covenants

What are some examples of restrictive covenants?

Restrictive covenants include clauses that prevent an employee from working for a direct competitor (non-compete clause), contacting former clients (non-solicitation clause), or hiring former colleagues (non-poaching clause).

What makes a restrictive covenant valid?

A restrictive covenant is valid only if the employer can prove it protects a legitimate proprietary interest (e.g, trade secrets or customer connections) and is reasonable in terms of scope, geographical area, and duration. The inclusion of a restrictive covenant into an employment contract does not make it automatically enforceable; employers are recommended to consult with an employment lawyer to ensure their contracts are reasonable.

What is the difference between a non-compete and non-solicitation clause?

A non-compete clause prevents an employee from working for a competitor. A non-solicitation clause prevents an employee from contacting or dealing with the former employer’s customers or employees.

How Farallon Law Can Help

The complexities inherent in drafting and enforcing restrictive covenants demand specialised legal precision.

Farallon Law has extensive experience in employment law, providing expert counsel in drafting robust and enforceable restraint of trade clauses to protect our clients’ business interests in Singapore and overseas. We are also well-equipped to advise employees on challenging restrictive covenants that are overly broad or unreasonable.

Contact Farallon Law for a consultation on your employment matters.