Non-Compete Clauses in Singapore

As an employee, it is possible to find a non-compete clause in your employment contract. A non-compete clause is a stipulation or provision utilised by employers to prevent their employees from engaging in business in specific markets or geographical locations for a fixed duration of time.

Simply put, a non-compete clause aims to regulate an employee’s conduct throughout the course of his or her employment, and/or even after his or her employment period, such as after the employment contract is terminated.

A non-compete clause is also referred to as a restraint of trade clause, as it restrains or constricts an employee’s freedom or independence to do potential business with relevant parties.

A non-compete clause may also include a non-solicitation clause, which restricts a former employee from soliciting employees or clients from a previous employer.

Enforceability of A Non-Compete Clause in Singapore

Typically, employers may opt to restrict their employees from working with another organisation or company throughout their employment period with them.

Note, however, that once the employment contract is terminated, non-compete clauses may not be enforceable unless:

• It serves to safeguard the “legitimate proprietary interest” of the employer; and
• The non-compete clause’s scope is considered reasonable.

Definition of “Legitimate Proprietary Interest”

A proprietary interest can be defined as an asset or advantage considered to be the property of the employer. If a former employee were to appropriate the employer’s property for his or her own purposes, this would be unfair to the employer.

The asset or advantage shall not refer to the skill or know-how acquired by the former employee during their period of employment with the employer.

The Singapore court acknowledges that trade and client connections are classified as a legitimate proprietary interest. However, a non-compete clause that aims to restrain competition illegally is unenforceable.

Reasonable Scope of a Non-Compete Clause

Numerous factors can affect how reasonable a scope a non-compete clause can have. For every factor, the Singapore court will scrutinise whether the non-compete clause is reasonable both between the parties, and for the interests of the general public.

The following are common examples of the factors used to examine how reasonable the scope of a non-compete clause is:

The scope of employees being restrained

If a non-compete clause applies to all employees regardless of their nature of work, seniority, or accessibility to access confidential information, then the clause may be deemed as unreasonable. Such clause would signify the employers’ true intention of restraining competition.

The scope of activity being restrained

A non-compete clause may be deemed unreasonable if it includes the following:

• A “blanket prohibition” that essentially forbids an employee from working or being employed in the same industry;
• Inhibits an employee from working for a rival, regardless of the employee’s new scope of work with another employer; or
• Covers all activities involving minimal expertise, which are not deemed vital to the operations of the organisation.

The period of the restraint

How reasonable the period of restraint is depends on numerous factors, including:

• The nature of work performed by the employee;
• The seniority and skill level of the employee;
• The level of influence the employee has with clients;
• The level of access the employee has to confidential information; and
• The particular industry in question.

An employer must not determine the period of restraint arbitrarily, as its duration should not be longer than necessary. Without a fixed period, a non-compete clause is considered unreasonable and unenforceable.

The geographical scope of the restraint

A non-compete clause’s geographical scope must aim to protect the actual and existing business of the employer—and not just the possibility of obtaining business in the future. This geographical limit must be where the former employee had substantial and actual contact with the client. If the non-compete clause sets no geographical limit, such as being applicable worldwide, then it is likely deemed to be unreasonable.

Note that a non-compete clause may forbid 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.

Special circumstances

In some instances, special circumstances exist when the employer offers the employee something extra for accepting the non-compete clause. The employer for example, could offer the employee payment for the duration of non-competition. The court may consider the non-compete clause reasonable since the employee receives compensation.

When the Non-Compete Clause is Unenforceable

If a non-compete clause is found to be unenforceable, the court may opt to do either of two things depending on the circumstances:

• Strike down the entire non-compete clause; or
• Strike down the unenforceable portions of the clause.

Strike Down the Entire Non-Compete Clause

The court has the authority to strike down the entire non-compete clause from the employment contract as it is deemed unreasonable.

Strike Down the Unenforceable Parts

When it comes to striking down just the unenforceable portions of a non-compete clause, Singapore court refers to the doctrine of discretionary severance and thus apply the “blue pencil test.”

The court may only strike down specific parts of the non-compete clause if the original meaning of the clause is unaffected, and if the remaining words are grammatically correct. Thus, a “blue pencil” cannot be used to fix an unreasonable or unenforceable non-compete clause if there is nothing that can be cancelled or removed to make the clause a reasonable one.

If, for example, an unenforceable non-compete clause did not explicitly state the restraint period, then the court will have nothing to fix or cancel out to make it a reasonable clause with a specific restraint period.

An Employer’s Remedy to Breaking Non-Compete Clauses

Employers that break a non-compete clause may opt to use the following remedies:

• Injunction – To stop a former employee from continuing to breach an enforceable non-compete clause, an employer may opt to apply for an injunction.
• Damages – If a former employee violates a non-compete clause, the employer may opt to sue for damages.

It is strongly recommended that an employee and/or employee consult with an experienced lawyer to seek assistance in drafting an enforceable non-compete clause, as well as determining whether a non-compete clause is actually enforceable.