Non-Compete Clause Singapore: A Legal Standpoint

What Is A Non-Compete Clause

It is a clause that appears in the employment contract drawn between the employer and employee.

Purpose of Non-Compete Clause

The clause prevents employees from seeking employment in another organisation or engaging in any kind of business in certain markets and geographical locations during a period of time. Its main purpose is to exercise control over an employee’s actions, both during the employment period or/and after the employment contract is terminated.

Circumstances for enforcing Non-Compete Clause

The non-compete clause is generally invoked by the employer to safeguard the “Legitimate Proprietary interest” at the termination of employment provided the clause is within the “reasonable scope”.

Legitimate Proprietary interest

Any asset or advantage that is regarded as the property of the employer solely belongs to the employer. This type of ownership, termed as “Legitimate Proprietary interest”, is meant to protect the employer from an employee’s unfair practices. Client and trade connections fall within the ambit of legitimate Proprietary interest. However, the advantage does not extend to any skill or know-how acquired by the terminated employee during the time of employment with the employer.

Reasonable scope

The Non-Compete clause should be reasonable both between the employer and the employee and for the interests of the general public. For instance, in order to be reasonable in the public interest, the geographic restriction on the employee in certain markets cannot adversely affect competition in those markets. However, the burden of proof to show that the scope is reasonable when seen from the perspective of public interest lies on the employee.

Circumstances for the Non-Compete Clause to have “Unreasonable Scope”

A non-compete clause is said to be unreasonable and hence, cannot be legally enforced if it is intended to have the following impact:

• Restrains competition illegally by applying the clause to all employees regardless of their nature of work, seniority, or accessibility to confidential information.
• Prevents the employee entirely from working for a rival, regardless of the employee’s new scope of work with the new employer.
• Forbids the employee from working or being employed in the same industry.
• Prevents the employees from using even their minimal expertise, which is not deemed vital to the operations of the organisation.
• No fixed duration of time. The duration depends on the employee’s nature of work, seniority and skill level, the extent of influence and access to confidential information and the particular industry in question.
• No fixed geographical limits are set as to where the former employee had actual and significant client contact in order to protect the possibility of acquiring future business. However, the geographical limits are relevant when it forbids a former employee from doing business in specific countries, in specific cities in a country—particularly for big countries that have larger geographical areas, and inside a set radius surrounding the employer’s present areas of practice.

Circumstances when “Unreasonable scope” is converted into “Reasonable scope” to enforce the non-compete clause

• The employer offers compensation for accepting the non-compete clause during the duration of non-competition.
• The employee had suggested or negotiated on the non-compete clause which has been duly included in the agreement during the time of contract by the contracting parties. A case of study could be the duration of time that the employee has agreed to restrain from working or being employed in the same industry or for a rival.

Pre-emptive attempts that may not have any effect on the enforceability of a non-compete clause

In some employment contracts, employers may include clauses that stipulate the following:

• The employee agrees that the non-compete clause is “reasonable and necessary” for the protection of the employer’s interest and/or
• The employee agrees to the non-compete clause provided he or she is paid a certain sum of money under the employment contract
• In case any parts of the non-compete clause are found to be unenforceable, then the clause will continue to apply with any deletions or modifications that may be necessary to make it valid and enforceable.

In all the above cases, the non-compete clause cannot still be enforced because the enforceability depends on “reasonable scope” and NOT inclusion of such stipulations or agreements between the contracting parties. This is so to protect both public policy and the employees if they try to leave their employer later on, as they will not know the extent of the restraint against them.

Consequences of unenforceable Non-Compete Clause

In case the Non-Compete cannot be enforced, the court will generally do one of the two things based on the existing circumstances:

• Strike down the entire non-compete clause from the employment contract as it is deemed unreasonable
• Strike down the unenforceable portions of the clause by applying the “blue pencil test.” This test is used to cancel out the parts of the non-compete clause that are unreasonable and hence non-enforceable. This is also known as the doctrine of discretionary severance. One essential thing to note is that the cancelling is done only to the extent that the remaining words in the clause still make grammatical sense and retain their original meaning. In no way can the “blue pencil test” be used to convert an “unreasonable” non-compete clause into a “reasonable” one so that the clause can be enforced.

It is important to note that the “blue pencil test” cannot be used to fix an unreasonable non-compete clause if there is nothing that can be cancelled out to make the clause reasonable.

The blue pencil doctrine gives courts the authority to either strike unreasonable clauses from a non-compete agreement, leaving the rest to be enforced, or actually modify the agreement to reflect the terms that the parties originally could have — and probably should have — agreed to.

Remedy for breaching Non-Compete Clauses

Employers can seek the following remedies if an employee chooses to break or violate a non-compete clause.

• Apply for an Injunction to stop an employee from continuing to violate the enforceable non-compete clause.
• Seek Damages from the employee by opting to sue.

Employees also have the option to legally counter the unreasonable non-enforceable Non-Compete Clause or any non-payment of compensation due to him or her as per the contractual obligations of the employer.

It is strongly recommended that an employer or employee consult an employment lawyer to seek assistance to determine if a non-compete clause in the employment contract is legally enforceable.