Future of non-compete clauses in Singapore – through the lens of employers

Tan Choon Leng, Vincent Tan and Prashaanth Rajandran on August 2, 2024

Imagine the scene – a small but growing company, say Company A, secures a promising candidate (Employee Z) after several rounds of interviews. Employee Z steadily rises through the ranks to become a senior executive of Company A with access to important clients and even confidential information relating to its growth strategy. Employee Z eventually attracts the attention of a larger company, Company B who makes an enticing offer to lead the creation of a new business line which will offer the same products as Company A. Through the grapevine, the management of Company A finds out that Employee Z is about to join Company B and decided that they will try to stop Employee Z from joining Company B in order to protect its business and prevent the potential loss of clients and trade secrets to a competing firm. However, after consulting with several lawyers, they then realise to their dismay that the non-compete clauses in Employee Z’s contract were drafted in a vague manner and may not be enforceable.

A delicate balance – a need for legislative intervention?

The construct in the paragraph above is entirely fictional but many companies have faced similar situations when a key employee leaves the organisation. Companies have devised several ways to retain talent and protect their business interests, and a common method is using non-compete and non-solicitation clauses in employment contracts. Such restrictions could include the prohibition to join competing companies in the same industry, or a prohibition to entice their ex-colleagues or ex-clients to the new company, which may give the new company an unfair advantage.

However, non-compete clauses are also problematic as it may impede upon the ability of an individual such as Employee Z from making a living. If Employee Z is trained in a specialised field and is prevented from joining any competing company for a long period of time, the possible employment options would be narrowed significantly. Other criticisms of the implications of such clauses include disadvantaging retrenched employees who are looking for new jobs, suppressing innovation and keeping wages low.

Given the need to balance the protection of the business of companies against the protection of the livelihood of workers, some jurisdictions have introduced legislation to reform the use of non-compete clauses in employment contracts. For example, in the United States of America, the Federal Trade Commission has enacted a ban against all non-compete clauses for workers, though it must be noted that the legality of this ban is currently challenged in court. Whereas in the United Kingdom, the Government has announced that they will be introducing a new rule that limits non-compete clauses in employment contracts to a maximum of three months, aiming to boost competition and innovation. In Asia, countries such as Malaysia and India have legislated against the use of non-compete clauses, though non-solicitation and confidentiality clauses remain enforceable.

Singapore’s position on non-compete clauses and recent developments in case law

In Singapore, non-compete clauses can be enforceable in certain situations (see paragraphs below). The Singapore government has also announced that the Minister of Manpower (“MOM”) and its tripartite partners are developing guidelines to assist employers in integrating non-compete clauses into their employment contracts. In the meantime, the enforceability of these clauses remains subject to the courts’ discretion.

Singapore’s position on this debate, as mentioned by the MOM’s written answer to MP Mr. Desmond Choo’s question in Parliament on 5 February 2024 on non-compete clauses in employment contracts is neatly summarised as follows:

“The tripartite partners’ position is that employers should only include restraint of trade clauses (also known as non-compete clauses) in their employees’ employment contracts if there is a genuine need for such clauses to protect legitimate business interests. Restraint of trade clauses must be reasonable in terms of scope, geographical area, and duration – they must balance employers’ needs to safeguard their businesses and employees’ ability to earn a living and should not be used to provide an unfair advantage. The courts have established clear principles on when such clauses are unreasonable, unjustified, and unenforceable.”

The Singapore Court of Appeal in the case of Man Financial (S) Pte Ltd (formerly known as E D & F International (S) Pte Ltd v Wong Bark Chuan David [2008] 1 SLR(R) 663 (“Man Financial”) sets out a two-step test for determining whether a restraint of trade clause (which includes a non-compete clause) is enforceable. The test comprises the following:

  • the court will first consider whether the restraint of trade clause protects a legitimate interest of the employer, AND
  • if the answer to (a) is yes, then the restraint of trade clause will be enforceable if it is reasonable in the interests of the parties, and reasonable in the public interest.

To satisfy the test as enumerated, both limbs must be satisfied. Further, where the protection of confidential information or trade secrets is already covered by another contractual clause (such as a confidentiality clause), the covenantee will have to demonstrate that the restraint of trade clause covers a legitimate proprietary interest over and above the protection of confidential information or trade secrets.

In two recent judgements released in 2024, namely Shopee Singapore Private Limited v Lim Teck Yong [2024] SGHC 29 (“Shopee”) and MoneySmart Singapore Pte Ltd v Artem Musienko [2024] SGHC 94 (“MoneySmart”), the Singapore courts found that the employer in each case had failed to show that there was a legitimate proprietary interest to be protected. In Shopee’s case, the court held that the confidential information was set out along generic categories and was already protected by a confidentiality clause. Also, the employer failed to prove its assertion that there was a risk that the ex-employee would breach the confidentiality and non-solicitation restrictions. Similarly, in MoneySmart, the employer failed to prove that the non-compete clause was meant to protect a legitimate proprietary interest that is over and above the protections afforded by the confidentiality clause. The court also rejected the employer’s assertion that the industry is a small and specialised one and that the employee had received training in this specialised field which would bring this case within the legitimate proprietary interest of maintaining a stable and trained workforce, as espoused by the court in PH Hydraulics & Engineering Pte Ltd v Intrepid Offshore Construction Pte Ltd and another [2012] 4 SLR 36.

Relevance of restraint of trade clauses after Shopee and MoneySmart

From an employer’s perspective, it may be slightly disconcerting to read the facts and outcome of the case in Shopee and MoneySmart. From a simple overview of the facts, both employees in those cases were senior executives, had access to confidential information belonging to the employers, and are joining direct competitors to their former employers, and yet the courts declined to recognise that there was a legitimate proprietary interest of the employer to be protected. If the business interests of the company cannot be protected through non-compete clauses, does it mean that employers are powerless to prevent competition from swooping in to gain an advantage by enticing its staff?

However, the devil is always in the detail, and it should be noted that the courts in Shopee and MoneySmart declined to recognise a legitimate proprietary interest in relation to the non-compete restrictions only. In relation to the non-solicitation restrictions, the court in Shopee commented that it was not disputed that the employer has a legitimate proprietary interest, but there was no evidence that the non-solicitation restrictions were breached or that there was a risk of breach.

As shown in Shopee and MoneySmart, it is insufficient for an employer to make a general assertion that the ex-employee has access to trade secrets and confidential information and if there is also a confidentiality clause in the employment contract that protects the trade secrets and confidential information, the employer will also need to demonstrate that the clause covers a legitimate proprietary interest that is over and above the protection provided by a confidentiality clause.

In practice, we observed that non-compete clauses are often inserted into employment contracts as a default, and it is not unusual that only the time period of restrictions and the applicable jurisdictions are adjusted each time a new employee is onboarded. In the case of an employer who experiences a large volume of employee turnover, it would be impractical for the internal human resources or the legal team to revisit and tailor the template clauses to suit the individual circumstances for each new employee. A further difficulty is that unless the non-compete clauses are regularly updated to account for a change in job scope and responsibilities, there may be a risk that what was previously drafted may not be deemed reasonable later. In the absence of clearly defined proprietary interests in the employment contracts, the question is whether non-compete clauses are still relevant in employment contracts.

Takeaways

While non-compete clauses still have a deterrent effect on employees, it may be less relevant as a tool to prevent potential breaches. However, it may be advisable for employers to wait for the MOM guidelines which are expected in the latter part of 2024 before making changes to their template contracts. In the meantime, employers should ensure that detailed and contemporaneous employment records should be maintained, and confidential information and documents should be clearly marked. There are other mechanisms which may be helpful to protect the company and give the company some time to adjust in case their employees leave the company, such as garden leave and conducting exit interviews.

For the termination of a senior executive, it may also be prudent to enter into a separation agreement to restate and remind them of their confidentiality and non-solicitation obligations.

If you are considering a change to your template employment contracts or facing a potential issue with the enforcement of a non-compete clause, or would like to have a chat to find out more, please contact our Singapore-based colleagues Tan Choon Leng, Vincent Tan and Prashaanth Rajandran.

A guide to the upcoming flexible work arrangements in Singapore

Vincent Tan and Prashaanth Rajandran on June 11, 2024

Flexible working arrangements in Singapore: Are you ready for the new mandatory guidelines?

The global trend in supporting flexible working arrangements remains strong in a post-COVID-19 world, as regulators and employers address challenges in the form of workforce transformation and advances in digital technology. Increasingly, employers are realising key benefits from allowing this greater flexibility; such as cost-savings due to the need for less office space and gaining access to a wider talent pool, which is important in a tight labour market. These positive impacts are seeing employers be more receptive to giving their employees flexibility in choosing where and when to work.

Singapore’s Ministry of Manpower announced in April 2024 the implementation of the Tripartite Guidelines on Flexible Work Arrangement Requests (the Guidelines), which will be effective from 1 December 2024. The Guidelines set out how employees should make a formal request for flexible work arrangements (FWAs), how employers and supervisors should handle those requests, and the minimum requirements employers must abide by to remain compliant with the mandatory Guidelines. 

What is a flexible working arrangement?

FWAs are work arrangements where employers and employees both agree to a variation from the standard work arrangement. The Guidelines set out the following three broad categories of FWAs:

  • Flexi-Place – where employees work flexibly from locations outside of the office.
  • Flexi-Time – where employees work flexibly at different timings, with no changes to total work hours and workload.
  • Flexi-Load – where employees work flexibly with different workloads and with commensurate remuneration.

How to request flexible working arrangements – key steps

  • The employee submits a formal FWA request – at a minimum, the formal FWA request must state, in writing, each of the following four requirements:
    • the date of the request;
    • the FWA requested (including its expected frequency and duration);
    • the reason for the request; and
    • the requested start and end date (if relevant).

    If the employer has instituted a process for employees to make a FWA request (for example, through a HR or company portal), the employee must follow that process in order for their request to be classified as a formal FWA request.

  • The employer should properly consider the FWA based on business needs (set out below).
  • The employer should communicate its decision within a timely manner in writing; at most, within two months. Any clarifications and discussions concerning the request should also be made within the two months.
  • If the FWA request is rejected, the employer should include the reason for doing so in writing and is encouraged to engage the employee on other alternatives.

    The employer may refer to Annex B of the Guidelines for how a formal FWA request could be responded to.

Scope:

The Guidelines only extend to:

  • Employees who have completed probation. However, employers can consider FWA requests from employees on probation.
  • Employees who have made a formal FWA request. Hence, if the employee does not satisfy the requirements for a FWA, it will be considered a non-formal FWA request and will not be covered by the Guidelines.

Factors for employers to consider:

When considering FWA requests, employers should consider factors pertinent to the employee’s role and the potential impact of the requested FWA on both the business and the employee’s job performance. Rejection of FWA requests should be grounded solely on reasonable business considerations, such as cost implications, productivity or output concerns, or practical feasibility, rather than personal biases against flexible working practices. Decisions that are influenced by a preference for traditional working arrangements, or a reluctance to depart from established customs, would be considered unreasonable grounds for rejecting a FWA request. 

How to prepare for the implementation of flexible working arrangements in Singapore?

  • Employers should start to devise a process for eligible employees to submit formal FWA requests and inform their workforce of the same.
  • Employers may consider implementing a formal policy for FWAs to streamline FWA requests or enquiries, detailing:
    • the types of FWAs available;
    • the guidelines for stakeholders (i.e. senior management, employees, supervisors and human resources) to consider in ensuring the successful implementation of FWAs; and
    • a code of conduct or expectation for the effective implementation of FWAs.
    • As far as reasonably practical, employers should explore ways to accommodate FWA requests, such as reviewing work processes or re-assigning work across team members, so that the company remains productive.

Are you ready for the new flexible working arrangements?

In introducing the new flexible working arrangements, the Singapore Government has purposefully chosen the route of mandatory guidelines, rather than enforcing the arrangements through legislation. Ms Gan Siow Huang, the co-chair of the tripartite workgroup, who made the recommendations to the Government and also the Minister of State for Manpower, said that a decision was made to introduce mandatory guidelines instead of legislation because of the need to be “administratively light”. She reiterates that the focus is on enabling and equipping workplaces, employers and employees, so that flexible working arrangements can be implemented in a sustainable way.

While the Guidelines are not law, and employers are permitted to reject (with reasons) FWA requests, employers who do not follow the Guidelines may be issued with a warning by the Ministry of Manpower and errant employers required to attend corrective workshops.

If you are wondering how to effectively implement the FWAs for your workplace or would like to have a chat to find out more, please contact our Singapore-based colleagues Vincent Tan and Prashaanth Rajandran, working in the offices of JurisAsia LLC with whom Gowling WLG has an exclusive association. We acknowledge, with thanks, the contributions of Ashley Tok, practice trainee to this article.