Changing jobs can be challenging, especially when your previous employer places restrictions on your next career move. Restraint of trade clauses in the employment contract can significantly impact your professional freedom after leaving a job.
These clauses protect legitimate business interests by preventing former employees from competing directly with their previous employers or disclosing confidential information. Understanding these clauses is crucial for employees to avoid unexpected legal hurdles and safeguard their career prospects.
Here’s what you need to know more about the restraint of trade clause in Singapore.
1. Types Of Restraint Of Trade Clauses
Restraint of trade clauses come in various forms, each designed to protect specific business interests by restricting certain activities of former employees. They are:
Non-Compete Clauses
Non-compete clauses are a common form of restraint of trade used to prevent employees from working for competitors or creating a similar business within a specified geographical area and for a certain duration after leaving a company. The primary aim is to protect the company’s business interests, trade secrets, and client relationships.
Non-Solicitation Clauses
Non-solicitation clauses restrict former employees from soliciting the company’s clients, customers, or employees for a set period. This type of clause helps maintain the stability of the company’s workforce and customer base, ensuring that the departure of key personnel does not disrupt trade connections.
Confidentiality Clauses
Confidentiality clauses, or non-disclosure agreements (NDAs), require employees to keep company information and trade secrets confidential even after their employment ends. These clauses are crucial for protecting sensitive information and maintaining a competitive edge in the market.
2. Legal Criteria For Enforceability
In Singapore, the Courts evaluate these clauses based on specific criteria to ensure they are reasonable and necessary to protect legitimate business interests without unduly restricting an employee’s ability to earn a livelihood. The key legal criteria are duration, geographic scope, and scope of activities.
Duration
The length of the restraint of trade is a key factor in determining its enforceability. The clause must specify a reasonable fixed duration, meaning it should not extend longer than necessary to protect the employer’s legitimate business interests.
Typically, the acceptable duration varies depending on the industry and the employee’s role within the company. Overly lengthy restraints might be deemed unreasonable unless justified by the nature of the business and the level of access the employee had to trade secrets and proprietary information.
Geographic Scope
The geographic scope of a restraint of trade clause defines the physical area where the employee is restricted from engaging in competing activities. Based on the employer’s business operations, this scope must be reasonable and justifiable.
For example, a global restriction might be acceptable for an executive with worldwide responsibilities, but it would be excessive for a lower-level employee with a local role.
Scope Of Activities
The scope of activities the clause restricts must be specific and directly related to the employer’s business interests. This means the clause should only prohibit activities that could harm the employer’s competitive position.
General or overly broad restrictions are unlikely to be enforced. The Court will assess whether the clause reasonably protects the employer’s legitimate proprietary interests without unduly limiting the employee’s ability to work.
3. Employee Responsibilities After Signing Restraint Of Trade Clauses
When employees sign a restraint of trade clauses as part of their employment contracts, they enter into legally binding agreements that impose specific obligations even after their employment ends. Some key responsibilities employees must uphold when bound by such clauses in Singapore are:
- Compliance with Non-Compete Clauses: Employees must refrain from engaging in business activities with the direct competitor of their former employer’s business. This includes not joining a competitor or starting a similar business.
- Adhering to Non-Solicitation Clauses: Employees must avoid soliciting their former employer’s clients, customers, or employees for a set period. This helps maintain the former employer’s business relationships and workforce stability.
- Maintaining Confidentiality: Employees must continue to protect any confidential information or trade secrets they were exposed to during their employment. This responsibility extends beyond their tenure at the company, ensuring sensitive information is not disclosed to unauthorised parties.
- Respecting Reasonable Clauses: Employees should ensure that the restraint of trade clauses they agree to are reasonable in scope, duration, and geographical area. If a clause is deemed unreasonable, employees can challenge its enforceability in court.
4. Challenging Restraint Of Trade Clauses In Singapore
Employees or ex-employees in Singapore can challenge the restraint of trade clauses if they believe they are unreasonable or excessively restrictive. To do so, they can take the following steps:
- Evaluate the Reasonableness: Employees should assess whether the restraint of trade clause is reasonable regarding duration, geographic scope, and the specific activities it restricts. Clauses that are overly broad or indefinite are more likely to be deemed unenforceable by the Courts.
- Seek Legal Advice: Legal professionals and employment lawyers can help employees understand their rights and the potential grounds for challenging the clause.
- Negotiation: Employees can attempt to negotiate with their employer to modify or remove the restraint of trade clause. This is often a first step before formal legal action and can lead to a mutually agreeable solution.
- File a Legal Challenge: If the negotiation fails, employees can challenge the clause in court. The Singapore High Court evaluates such clauses based on their reasonableness and necessity to protect legitimate proprietary interests. The court considers factors like the clause’s duration, geographical limits, and the nature of the activities restricted.
- Present Evidence: Employees must present evidence that the clause is unreasonable, such as demonstrating that it excessively restricts their ability to earn a livelihood or is broader than necessary to protect the employer’s interests.
5. What Happens After A Restraint Of Trade Clause Is Found Unenforceable
If a non-compete clause is unenforceable, employers and employees must understand the subsequent steps to address the situation. Here are the steps typically followed:
Court Strikes Down The Clause
When a court finds a non-compete clause unenforceable, it may strike down the entire clause or modify it. This decision is based on whether the clause can be severed from the rest of the employment contract without rendering the contract nonsensical or unfair.
The “Blue Pencil” Test
Courts may use the “blue pencil” test to remove the unenforceable parts of the clause while keeping the rest intact. If the clause still makes sense and serves a legal purpose after the offending sections are removed, the court may enforce the modified clause. For instance, the court might enforce the clause within the revised limits if a geographical limit is too broad but can be narrowed.
Redrafting
Employers and employees may negotiate to draft a reasonable and enforceable new non-compete clause. This process often involves legal counsel to ensure compliance with legal standards and address the concerns that led to the initial clause being deemed unenforceable.
Alternative Remedies
Employers can explore other forms of protection for their business interests, such as:
- Non-solicitation Clauses: These may be more acceptable and easier to enforce, as they focus on preventing the solicitation of clients or employees rather than outright competition.
- Confidentiality Agreements: Ensuring that proprietary information and trade secrets remain protected without broadly restricting the employee’s employment opportunities.
- Garden Leave Clauses: Place the employee on garden leave during the notice period to prevent them from immediately joining a competitor.
Review And Compliance
Both parties should review the Court’s decision and comply with the new terms or absence of the non-compete clause. For employees, this means understanding what actions are now permissible without risking legal action. For employers, this means ensuring that any new clauses or protective measures are clearly communicated and legally sound.
6. Best Practices For Drafting Enforceable Clauses
Drafting enforceable restraint of trade clauses requires careful consideration to ensure they are clear, reasonable, and legally compliant. By following best practices, employers can create clauses that protect their business interests while remaining fair and defensible in court.
- Clarity and Specificity: Employers should ensure that restraint of trade clauses are clear and specific. Vague or overly broad clauses are more likely to be deemed unenforceable by the courts. Specificity helps protect the employer’s legitimate interests while providing clear guidelines for the employee.
- Reasonableness: Clauses that are perceived as overly restrictive or punitive are unlikely to be upheld by the courts.
- Legal Compliance: Employers must draft restraint of trade clauses in compliance with Singapore’s employment laws and judicial precedents. It is advisable to work with corporate lawyers to ensure that such clauses are legally sound and tailored to the business’s specific needs.
7. Remedies Available To Employers For Breach Of Clause
When an employee breaches a restraint of trade clause, employers have several remedies available to protect their legitimate business interests and seek redress. These remedies aim to prevent further breaches and compensate for any damages incurred.
Injunctions
If an employee fails to comply with the restraint of trade clause, employers can seek an injunction from the court to prevent further breaches. An injunction is a court order that requires the employee to comply with the terms of the clause and cease any activities that violate the agreement.
Compensation For Damages
Employers can also claim compensation for any financial losses incurred due to the breach. This can include lost profits, damage to trade secrets, and harm to client relationships. The compensation awarded will depend on the damage’s extent and the breach’s specific circumstances.
Conclusion About Restraint Of Trade Clauses
Achieving a fair balance between protecting legitimate business interests and upholding individual liberties is essential. Employers should ensure that restraint of trade clauses is reasonable and necessary, while employees should be aware of their rights and responsibilities.
At Tembusu Law, we have experienced attorneys who can help draft effective restraint of trade clauses and employment contracts.
Additionally, our lawyers are well-equipped to assist employees in considering challenging restraints of trade clauses, ensuring that both parties’ interests are fairly represented and protected.
For legal matters concerning corporate law, criminal law, and family/divorce law in Singapore, don’t hesitate to contact us. Book an appointment today!
Frequently Asked Questions About Restraint Of Trade Clauses
Can Restraint Of Trade Clauses Be Applied To Independent Contractors In Singapore?
Yes, restraint of trade clauses can be included in contracts with independent contractors to protect the employer’s business interests. However, the same criteria of reasonableness apply to ensure the clause is enforceable.
Are Restraint Of Trade Clauses Common In Singapore?
Yes, restraint of trade clauses are commonly included in employment contracts in Singapore, especially for roles that involve access to sensitive information, trade secrets, or key client relationships.
Can Restraint Of Trade Clauses Be Enforced Internationally?
Enforcing restraint of trade clauses internationally can be complex and depends on the legal frameworks of the respective countries. Employers may need to hire lawyers to understand the enforceability of the law in different jurisdictions.
What Industries Commonly Use Restraint Of Trade Clauses?
Industries that frequently use restraint of trade clauses include technology, finance, legal, healthcare, and any sector where employees can access sensitive information or client relationships.
