In collaboration with tripartite partners such as the National Trades Union Congress and Singapore National Employers Federation, MOM is developing a set of guidelines on the reasonable use of non-compete or restraint of trade clauses in employment contracts – which limit employees from doing similar work or joining a competitor for a set duration after they leave their current job. This is so that retrenched employees are not further limited in finding employment due to overly restrictive employment contracts as stipulated by employers.
Enforceability of non-compete clauses
A non-compete clause in employment contracts is not absolute, and will only be enforced if it is reasonable.
If the non-compete clause is unenforceable, then the court may either strike out the unenforceable parts of the clause only, or they may strike out the whole of the non-compete clause – whichever is more appropriate in the circumstances.
Hence, if an employer would like to include a non-compete clause, the employer should tailor the clause to a specific role and limit the scope of activity, duration, and geographical coverage to what is necessary to protect both the employee’s and the employer’s interests.
In turn, employees should carefully review and understand the implications of such a clause before signing an employment contract, and negotiate on any terms that they find overly restrictive.
The tripartite partners’ position is that employers should only include restraint of trade clauses in their employees’ employment contracts if there is a genuine need for such clauses to protect legitimate business interests.
Legitimate business interests include advantages and assets regarded as the employer’s trade secrets and confidential business information, as well as trade connections or relationships with clients which have a direct impact on an employer’s sales, business prospects, and profitability. Such information, connections, and advantages may be unduly used for an employee’s own gain. It does not include the skills or know-how the employee acquired during their employment.
As such, non-compete clauses are typically found in employment contracts of higher-level executives and employees with substantial access to confidential information and trade secrets, who are also the most likely to be affected by the new guidelines. MOM recommends avoiding restraint of trade clauses for those with low-paying jobs as they are less likely to harm the employer’s interests, and could instead suffer a detrimental pay cut. Higher-paid jobs still largely require such clauses to protect legitimate business interests.
If a non-compete clause is deemed too wide or excessive, it may be considered an ‘unreasonable restraint of trade’ which is generally not enforceable. For example, a non-compete clause may be viewed as unreasonable if it applies to all employees, regardless of seniority, the nature of work, or access to confidential information. A restraint might instead be reasonable if it only prevents the employee from performing the same work in a specific area that the employee had been involved in with the employer.
In Singapore, the length of non-compete clauses can vary, spanning from as little as a few months to a few years. Should there be no specific timeframe specified, or an excessively long timeframe, the court is inclined to deem the clause as unreasonable. The duration should not exceed what is essential to safeguard the employer’s legitimate business interests, depending on the employee’s specific roles and expertise.
Geographical boundaries outlined in a non-compete clause delineate the area in which the former employee is restricted from engaging in competition with their former employer. To be legally binding, the geographical extent must similarly be rational and aligned with the employer’s legitimate business interests. For instance, imposing a worldwide restriction might be considered excessively restrictive for a local business without any international operations.
Lazada Retrenchment Exercise
The proposed guidelines are partly in response to the much-criticised Lazada layoff in January 2024, where the company retrenched an undisclosed number of employees without first consulting the Food, Drinks, and Allied Workers Union (“FDAWU”), despite these workers being unionised. The retrenchment exercise was described as ‘impersonal’ and ‘inconsiderate’ thus indicating the need for greater openness, transparency, and consultation with workers and unions. In response to this, MOM engaged with Lazada and the FDAWU to help retrenched staff receive a suitable resolution to their predicaments.
Failed Shopee Court Bid
Recently, Shopee Singapore failed in a court bid to prevent its former employee from joining rival company ByteDance. The employee was accused of violating a non-competition clause that stated that he would not seek or accept employment with a competitor for 12 months after leaving the company. However, these claims were dismissed as Shopee did not show that there was a serious question to be tried about whether the non-competition clause was breached. The judge cited a ‘lack of legitimate proprietary interest’ and ‘reasonableness of the geographical restraint’ as reasons for casting doubt upon its non-competition restrictions.
Course of Action for Employers and Employees
The new guidelines are being developed as part of Singapore’s balanced approach to employment laws – where workers are protected, and businesses are provided with the flexibility to adjust to market conditions and maintain a stable and trained workforce. Current measures include the Employment Act, which stipulates minimum notice periods that employers are required to give when ceasing employment of their workers. The Advisory for Managing Excess Manpower and Responsible Retrenchment also recommends a payout of retrenchment benefits at 2 weeks to 1 month salary per year of service, depending on the company’s financial position and the industry.
If an employer considers an employee or ex-employee to have flouted the provisions of a non-compete clause, or other terms of their employment contract, it can apply to court for an injunction to prevent further breach by the employee and claim damages for losses suffered due to the breach.
On the other hand, employees who believe that they are affected by unreasonable or unjustified restraint of trade clauses can seek assistance from their unions, from TAFEP (“Tripartite Alliance for Fair & Progressive Employment Practices”) or MOM, or the courts. When engaged by MOM and TAFEP, employers have generally been cooperative in removing or not enforcing unreasonable non-compete clauses without any additional penalties. However, for non-unionised companies, the employment terms are left to the contracting parties to negotiate and agree on, which may complicate the nature of retrenchment benefits received by employees.
Restraint of trade clauses must reasonably balance employers’ needs to protect their businesses and employees’ ability to earn a living. Public interest is also a factor in deciding what is reasonable; non-compete clauses must not restrict trade in a wider context or prevent normal competition between businesses. This will allow Singapore to continue to flourish as a business-friendly environment for companies and employees alike.
While the revised guidelines are not in themselves legally binding, they provide guidance if legal recourse is sought by either employers or employees.
Employers would have a better understanding as to the scope, duration and other factors outlined above to ensure the enforceability of their non-compete clauses and other terms of their employment contracts.
Conversely, employees will gain a better understanding of their rights and the support provided to them, allowing for greater transparency between employers and employees and career resilience.
If you have further enquiries, please feel free to contact Krithika Gunasingham (krithika@globalaw.com.sg) or Sivarajan C Sivalingam (siva@globalaw.com.sg), or contact us at:
GLOBAL LAW ALLIANCE LLC
3 Phillip Street, #11-01 Royal Group Building, Singapore 048693
Tel: (65) 6533 0800 Fax: (65) 6535 6678
The content of this Memorandum is not intended to be exhaustive, and does not constitute a complete analysis of the laws relating to this complex area. Its content, therefore, should not be construed to constitute legal advice. Please contact us if you require any further assistance.