A non-compete clause is a provision in an employment contract that restricts an employee from working for a competitor or starting their own competing business for a specified period of time after the termination of their employment. The purpose of this clause is to protect the employer’s confidential information, customer relationships, and trade secrets.
On 5th January 2003, the Federal Trade Commission (FTC) introduced a new rule aimed at preventing companies from restricting their employees from working for a competitor. The proposed rule seeks to eliminate non-compete clauses in employment contracts, which prohibit workers from joining a rival company or starting a competing business for a specified period, often within a defined geographic region, after their employment has ended.
Business Times has reached out to us for our commentary on this issue and here is our response:
This ban – where the US is barring non-compete agreements in labour contracts is taking effect in the US. So for an employee to argue that a non-compete clause in his/her employment contract is unenforceable because of the ban (and it is unclear if the ban will have retrospective effect and lets assume it does) then, the employment contract must be governed by US laws.
With this ban, moving forward, US law governed employment contracts will not have non-compete clauses.
If the US companies in Singapore adopt Singapore law as the law governing their employment contracts and since no such ban is in place here now, it would be difficult for an employee to assert that non-compete clauses are unenforceable.
The position at present here is these non-compete clauses must be reasonable for it to be enforceable. So some factors which are considered to ascertain reasonability are duration of the employees’ non-compete obligations after they leave their current employers, geographical coverage of the clause etc.
Non-compete clauses have been a common feature in employment contracts. In my view, Singapore would be slow to follow suit. Non-compete clauses while being over used are necessary for certain roles particularly, senior executives.
Further, the non-compete obligations are for a certain duration only and so long as the duration is reasonable – then, there is very little room to challenge its enforceability. In fact, some organisations while retaining a non-compete clause in their employment contracts allow employees to join a competitor provided the employees obtain their consent.
In Singapore, non-compete clauses must be legitimate and reasonable to be enforceable. In my view it is also important to ascertain if such clauses are even necessary given the role played by an employee in an organisation.
Such clauses were common in the employment contracts of senior executives who play a key role in organisations and were privy to high level details and information of the company he/she was working for. But nowadays, we see such clauses are finding their way into employment contracts of employees who don’t play a vital role in an organisation and consequently are not privy to important details and information. So in a way, such clauses have been over used in the name of caution.
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