When drafting an employment contract, employers might wonder if they should include a non-compete clause. After all, it does sound like a good idea to protect their company’s interests by preventing outgoing employees from joining the competition.
Employees, on the other hand, might wonder if they should sign non-compete clauses if they feel it would unfairly hamper their future career prospects.
Here’s a practical guide to help you better understand non-compete clauses and how they work.
What Are Non-Compete Clauses?
A non-compete clause states that an employee is not allowed to engage in activity that competes with the company when they leave. Non-compete clauses could be part of an employment contract, or a standalone document prepared when someone leaves a company.
Are Non-Compete Clauses Enforceable?
There is a misperception among both employers and employees that just because an employment contract that was signed has the insertion of a non-compete clause that’s it’s automatically enforceable. This isn’t true. The existence of a non-compete clause doesn’t automatically make them legally-binding. For the non-compete clause to be enforceable, they need to fulfil two main criteria.
The non-compete clause must 1) protect a legitimate proprietary interest; and 2) be reasonable to the parties involved and to the public.
Legitimate Proprietary Interest
To fulfil this criteria, you must show that you have a valid proprietary interest that is worth protecting. It could be property such as your assets, advantages, customer connections or trade secrets. For example, if your company has a list of all your clients and how much each of them spent with you, along with other valuable information such as the mobile numbers and email addresses of the key decision-makers, this would be something that clearly can’t be easily shared with a competitor that your ex-employee is working for.
However, note that any skills or experience imparted to your employee during their tenure does not count as a legitimate proprietary interest. If you taught a former employee to bake and they leave you to open another bakery, there isn’t a valid proprietary interest here to protect. Similarly, if you train a person to do financial writing well and he leaves to write for another publisher, it’s a skill and experience that he has that cannot be counted as a legitimate proprietary interest of your company.
Do note, however, that the Singapore court does recognise client and trade connections as a legitimate proprietary interest.
Let’s use a cement trader and his employer as an example. The trader develops strong connections with cement customers, fostered and maintained on behalf of the company. If the employee leaves for another cement trading company and diverts businesses away, the company can prove it has a valid proprietary interest that’s worth protecting. However, a non-compete clause that seeks to prevent the employee from using their skills picked up on the job, would not be valid.
Read also: Here’s Why Small Businesses In Singapore Need To Care About Employee Retention
Be Reasonable To The Parties Involved And To The Public
Business owners should ensure that the non-compete clause is reasonable – it should be just restrictive enough to protect the company, and not too strict such that it affects an employee’s ability to earn a livelihood.
For the non-compete clause to be reasonable, you should tailor the agreement to adhere to the following factors.
Scope Of Employees Being Restrained:
Employees at various roles and levels of responsibility would have different access and influence over your company’s propriety interest, so a valid non-compete clause would need to take that into account. For example, it wouldn’t be fair to prevent a receptionist from working in the same industry in the same way you would a senior salesperson.
Scope Of Activity Being Restrained:
Your non-compete clause should only restrict core activities that your former employee was involved in, and not be unreasonably wide. In the same example of the cement trader, a reasonable restraint would be to prohibit the employee from trading cement products. Preventing him from trading other commodities, such as coal or wood, might be seen as unreasonably restrictive.
Duration That The Employee Is Being Restrained For:
You must include a fixed time period and it should not be an arbitrary duration or longer than necessary. Consider how long it takes for you to find a new hire and train him up to a comparable level to demonstrate their effectiveness to clients.
Borrowing the example of the cement trader, he was the person-in-charge of the employer’s cement markets in Vietnam and the Philippines for four years. A two-year non-compete clause was considered reasonable to the courts, as it would take at least that amount of time for a new employee to rebuild the same connections, especially since trading cement products was a specialised industry.
Geographical Scope Of Restraint:
You should be specific about the geographical boundaries in which you wish to restrict your former employee from conducting business. For your clause to be enforceable, the scope needs to be where your business currently operates and shouldn’t pre-emptively include future areas you plan to expand into. Having no geographical limit at all would likely be seen as unreasonable as well.
Strengthening A Non-Compete Clause’s Enforceability
As you can see, non-compete clauses are unenforceable by default, unless they meet the dual criteria of protecting legitimate proprietary interest and being reasonable, which the onus would be on the employer to prove should the matter be taken to court.
One way that an employer’s case is strengthened is if an employee demonstrates that they understand and agree to the non-compete clause. These could include the employee negotiating specific terms of the non-compete conditions, or accepting compensation in exchange for signing the non-compete clause.
Thus, employees need to keep this in mind before accepting compensation or revised terms of a non-compete contract. This is because once you signed the revised terms or received compensation, you are deemed to have found the terms reasonable, and you would probably be in violation if you were to breach the non-compete clause later on.
What Can You Do When An Employee Leaves?
When an employee who signed a non-compete contract leaves, it makes sense to speak to them and remind them about the non-compete terms they agreed to, since it wouldn’t be beneficial for either party to take this matter to court, which is an expensive and time-consuming process.
If you have proof that your employee has breached their non-compete agreement, you can apply to the court for an injunction, which stops them from carrying out their new role. Alternatively, you can also sue for compensation from your ex-employee – or threaten to do so, in hopes they would cease their actions.
The Devil Is In The Details
A fair non-compete clause protects companies’ interests, while not unfairly hampering employees’ career prospects. By having both parties understand and agree to carefully scoped out terms, we can have a win-win situation without resorting to threats or legal actions.
Read also: Here’s Why Offboarding Employees Is As Important As Your Onboarding Processes
This article was first published in October 2019 and we have updated it with more information
Subscribe To The DollarsAndSense Business Pass
Enjoy what you are reading and want more? Join The DollarsAndSense Business Pass and unlock access to valuable tools, exclusive networking opportunities, and tap into the wisdom of industry experts to fuel your business expansion!
