June 26, 2023

Non-compete clauses in job contracts: Are they enforceable?


SINGAPORE – After graduating from a private university in 2018, Mr Zong Xian took on his first job as a manager in a tuition centre, managing finance and human resource functions.

After four years, he decided to move on but was subject to a non-compete clause in his employment contract that forbade him from joining a competitor in the same industry.

“As a first-time job seeker who got a job offer… I didn’t know if (my employers) did enforce it, or how hard it is for them to enforce,” said the 30-year-old, who declined to give his surname.

He is now a civil servant after a short stint in a blockchain technology start-up.

There are signs that some employers – unwittingly or not – still include clauses in employment contracts as a form of deterrence against employees, like Mr Zong Xian, joining a competitor, even if they may be unenforceable, according to legal and employment experts.

Employment lawyer Clarence Ding said that non-compete clauses can be found in numerous industries, citing past cases involving employers in retail, healthcare, education and financial services which have come before Singapore’s courts.

“This can be because the employee was instrumental in helping the company develop and maintain several key client relationships, is highly influential within the organisation, or has access to sensitive or proprietary information which is of a very confidential nature.”

However, just because employer and employee agree on a non-compete clause does not make it enforceable.

Instead, employers must be able to show they have a legitimate interest to protect that would not be protected through other contractual terms, such as restrictions on the use of confidential or other proprietary information, noted the National Trades Union Congress (NTUC).

The duration, geographical area and scope of a non-compete clause should also be limited, taking into account the facts of each case, NTUC added.

“Employers should generally not have non-compete clauses in employment contracts for workers who are not in higher-paying jobs or for rank-and-file workers,” it said.

These workers are unlikely to have access to trade secrets or highly confidential information that would harm their current employer’s business interest, and a non-compete clause would also likely have a greater impact on their livelihoods, it said.

Nonetheless, there are companies that use the non-compete clause as part of a standardised employment contract across all roles, said Ms Irene Tay, a certified Institute for Human Resource Professionals senior professional.

Instead, human resource staff should work with company management and lawyers to identify specific roles that a non-compete clause has to apply to, stating clear reasons, she said.

Mr Ding said that it is “unfortunately fairly widespread” for employers to include a non-compete clause just to dissuade employees from joining a competitor, even though they might not be able to show a legitimate interest to protect, and their interest is already sufficiently protected by other contractual terms.

NTUC said 20 union members sought advice and assistance from the Tripartite Alliance for Dispute Management on the non-compete clauses in their employment contracts in 2022.

“Most of them asked about the reasonableness of the clauses and how they could approach their employers to waive the clauses.”

Out of the 20 cases, two of them were referred to the Tripartite Alliance for Fair and Progressive Employment Practices (Tafep) and another two were referred to NTUC’s legal clinic for advice from volunteer lawyers.

“When engaged by the Ministry of Manpower and Tafep, employers have generally been cooperative in removing or not enforcing unreasonable non-compete clauses,” said the labour movement.

“However, for non-unionised companies, the employment terms are left to the contracting parties to negotiate and agree on,” NTUC said.

Mr Ding said non-compete clauses tend to be more prevalent where employees operate in markets with a few firms, each with substantial influence and market share.

Other common attributes of sectors where non-compete clauses are prevalent include a high level of innovation, as well as those where key players are sworn rivals, or which have a reputation for poaching one another’s key employees, he said.

Typically, clauses last for six months to a year, and even longer in rare instances, said Mr Paul Ng, chief executive of recruitment firm TG Group.

A spokesman for education group EtonHouse said it does not include a non-compete clause in employment contracts for childcare staff and educators as the industry is small and the skill set is niche.

“We respect our staff’s decision should they decide to move on and seek other opportunities within the same industry.”

However, employees are subject to a non-solicitation clause, which prohibits them from approaching other staff or customers for business within six months of leaving.

This limits unfair practices within the industry and ensures a stable workforce that minimises disruptions to students, EtonHouse said.

Meanwhile, childcare provider Babilou has taken another approach.

The company said it expects all employees in Singapore, both in its childcare centres and headquarters, to adhere to a non-compete clause which is stated in its employee handbook instead of the employment contracts.

Explaining its rationale for the clause, the company said: “We regard all our employees, especially educators, as professionals, like doctors or lawyers, where their certified expertise and skill set are their key livelihood.”

It added that it has not received any feedback from staff on the clause.

In Mr Zong Xian’s case, the non-compete clause ultimately did not hinder his career move.

“I told my ex-boss where I was considering going to, and the non-compete clause was not even mentioned,” he said, adding that he had a good relationship with his boss and was looking at work opportunities in other sectors.

“I understand why employers feel the need for this… and especially with small and medium-sized enterprises, it may just be part of a template that’s not updated with time.”

Non-compete clauses under scrutiny

Non-compete clauses have come under scrutiny elsewhere in the world in recent years.

Most prominently, the United States’ Federal Trade Commission mooted in January 2023 a total ban on these clauses, following an executive order issued by President Joe Biden in 2021 that encouraged the commission to curtail the use of these clauses.

The competition watchdog is expected to vote on its own proposal in April 2024.

It is spearheading the US move as it regards non-compete clauses as a way for companies to gain an unfair advantage over their competitors by restricting talent flows.

In Britain, the government announced in May a plan to limit the length of non-compete clauses to three months by law, to boost flexibility and dynamism in the labour market.

Other options it considered included introducing monetary compensation for the duration of a non-compete clause or an outright ban.

However, the UK Department for Business and Trade concluded in a study in the same month which said that mandating compensation would introduce extra costs to business, while an outright ban could preclude specific circumstances where a non-compete clause could enable investments.

As for Europe, employers in Italy, France and Germany must compensate employees who are subject to a non-compete clause.

Reference: The Straits Times