The Truth You Never Knew About Non-Compete and Non-Solicitation Clauses

As an employer, you would not be unfamiliar with non-compete and non-solicitation clauses. Collectively known as restraint of trade (ROT) clauses, employers or their lawyers have probably drafted one form or another of ROT clauses into your standard employment contracts so as to restrain employees from engaging in certain activities.

Nevertheless, despite your employee’s signature on the dotted line, he may not always be bound by these contractual clauses. In fact, in some cases, an employee does exactly what is prohibited in the clause, and there’s plainly nothing you can do.

Invalid by default

Here’s a bigger surprise: ROT clauses are by default contrary to public policy, and the default attitude of the courts is that they have no effect. This is because there is a public interest in every person carrying on his or her trade freely, and ROT clauses seek to restrain just that.

Does that mean you’ve wasting money inserting these clauses? Not necessarily. Although they are invalid by default, there are certain conditions under which the clause will be able to bind your ex-employee.

You must have a legitimate interest that you, as employer, wish to protect.

This is not to mean that any interest would do. You need to have a legitimate proprietary interest to protect, such as trade secrets, trade connections or the maintenance of a stable and well-trained workforce.

For example, if you’re in the food industry, often you might have a special recipe that is the secret behind your successful business. Now that would qualify as a trade secret you want to stop an employee from leaking to a competitor.

Another example is this: let’s say your employee who used to manage your clients now wishes to leave. The danger with that is eminently clear – these confidential trade connections could be easily lost if such an employee is not stopped. If lost, that could certainly spell doom for your business.

How about the need to maintain a stable and well-trained workforce? Well, ever heard of those big bankers jumping ship and bringing along an entire team? Preventing employees who wish to leave from enticing his companions to do the same is a legitimate thing to protect as well.

Note that none of this includes the “skills, experience, know-how and general knowledge acquired by an employee as part of his job during his employment”. An example of this would be general cooking skills, as compared to a secret recipe. Even if these will ultimately equip him or her as a competitor, that’s the risk you take in employing him or her.

All restraints must be reasonable.

If you have one of the above, it doesn’t mean that you can now wave the clause in your ex-employee’s face. In addition to a legitimate proprietary interest, the restraints you attempt to place on your ex-employees’ future trading activities must also be reasonable.

Well, you probably think that everything you put inside your employment contracts is reasonable, but that doesn’t mean that the courts will necessarily agree with you. Whether something is reasonable or not is very dependent on the factual circumstances, and it is best to always engage a lawyer to advise on your situation.

However, some factors emerge consistently as important considerations. For example, if your ex-employee is your company’s equivalent of a Most Valued Player (MVP), that might justify a longer period of restraint than a bench-warmer equivalent. Furthermore, if he or she partook in different areas of your company’s business, you could also include a wider range of activities in the ROT clause and it might still be enforced. However, if you’re going to attempt to stop him or her from partaking in these activities not just in Singapore, but anywhere else in the world, that’s equivalent to forcing him or her to change trade, and that’s rarely deemed reasonable.

At the end of the day, know that your restraints must genuinely be for protecting your own interests, and not primarily to prevent your ex-employees from getting employment elsewhere.

Popular practice

One practice that has become popular to try to “increase” the enforceability of ROT clauses is by entering into a separate agreement with your employee, which compensates him or her with an additional consideration specifically for the period of restraint. Since this is evidence that the employee is properly compensated, it might convince courts that the ROT clauses are acceptable.

Seek legal advice

Due to the fact-sensitive nature of the enquiry, whether a ROT clause is enforceable is not something that can be conclusively answered by this article. Nevertheless, it is hoped that the main takeaway of this article is that standard ROT clauses cannot be used indiscriminately for all your employees regardless of circumstances. Instead, seeking better drafting advice could be more effective in reducing your business risk.

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The contents and views set out above are those of the author(s) and/or are personal views and for information only. It does not constitute in any way any legal advice or representation to the reader even if the facts appear similar to your fact situation.  You are strongly encouraged to seek legal advice should you have any legal issues.