On Jan 31, the Singapore High Court dismissed a lawsuit by Shopee in which the e-commerce giant attempted to enforce a non-compete clause against an ex-senior employee who now works for competitor ByteDance. 

This case has thrown increased attention on the forthcoming guidelines from the Ministry of Manpower (MOM) for such clauses in employment contracts — which will be released in the second half of the year, announced Manpower Minister Tan See Leng in Parliament on Feb 6. 

As we await the guidelines from the Government and its tripartite partners, here are some key points that should be given due consideration in their formulation:

LEGITIMATE INTEREST

Non-compete clauses are generally included in employment contracts to, by its very title, prevent the employee (“Employee A”) from engaging in competing conduct against the employer (“Company B”) — by working for another competitor, for instance. This is premised on protecting the employer’s legitimate business interests, which include trade secrets, confidential business information, trade connections and client relationships that Employee A may have access to via employment with Company B. 

Crucially, such clauses may not always be necessary or even enforceable when employers seek to pursue legal action.

Often, a key challenge for both employer and employee is in determining what this “legitimate interest” is that the employer is trying to protect through such clauses. As such, it might be helpful to set out that employers should include what such interests are when crafting non-compete clauses in their employment contracts. 

While such a list would by no means be exhaustive, it would be helpful for the employee to understand what such a non-compete clause is concerned with protecting should their employment with Company B come to an end.

‘REASONABLE’

Another key point of contention in the enforcement or dispute of non-compete clauses is whether the scope of the clauses is regarded as “reasonable”. Assuming that the requisite legal requirements of contract are met, this is generally reduced to three main factors: Duration, geographical scope, and the nature of the restricted activities.

i. Duration

A reasonable length of time for non-compete clauses should be set out in the guidelines, such that it is not punitive on employees nor harmful to their future job prospects. At the same time, it is understandable that Company B would not want Employee A to immediately switch to working for their competitor at the end of their working relationship, potentially harming Company B in the process. 

A useful gauge might be to consider the notice period for the respective employee as a starting point. For employees who hold key positions, their notice periods generally tend to be longer, and this should be reflected in the corresponding duration of their non-compete clause. 

If Employee A did not hold a key position during the employment with Company B and did not encounter or handle confidential information, it would be unreasonable and excessive to bar Employee A for over six months through the non-competition clause. This would prevent Employee A from making a living over a prolonged period.

ii. Geographical scope

The geographical location for the non-competition should also be scoped according to relevant considerations of the previous employment. Where does Company B carry out its work? Surely it cannot be reasonable to have A be excluded from working in all the countries where Company B has business operations or activity. 

Instead, non-compete clauses should indicate specific geographical scope, such that both employer and employee are aware of the locales in which the clause is meant to operate. This would be helpful to businesses in their operations, as well as not to unduly prevent employees from pursuing new work opportunities overseas where appropriate. 

iii. Nature of activities

Should an employer insist on restricting the kind of activities their ex-employee can partake in their pursuit of new employment, guidance should be given as to what these restrictions entail, with consideration given to why they are necessary. 

What kind of work did Employee A perform for Company B? If Employee A’s role was that of a lower management position that did not deal with trade secrets, it would be unduly harsh to restrict them from all management-level work with competitors, regardless of rank or position. Arguably, such clauses can be regarded as unreasonable and unenforceable in court. 

TAILOR NON-COMPETE CLAUSES TO SUIT EACH EMPLOYEE

Overall, it would be unfair to have an entry-level junior employee be bound and restricted the same way a senior employee would be. 

Consider situations where Employee A, as a senior employee, has access to confidential information while working for Company B. A more restrictive non-compete clause is understandable in this situation, compared to one where Employee A is a junior staff member and does not deal with any confidential information. 

It would be helpful if the guidelines emphasise that a one-size-fits-all blanket approach is not advisable when crafting non-compete clauses in employment contracts. 

Instead, guidance should advise employers to customise and tailor any non-compete clauses to suit the job scope of each employee, with consideration to the type of trade secrets, confidential information, and client relationships they might encounter during their employment.  

‘LIGHT TOUCH’ 

At the end of the day, a “light touch” approach should be encouraged when dealing with such clauses to minimise any negative impact on the hiring process for employers, especially given the muted employment growth seen in 2023 amid weaker economic conditions. 

Should the guidelines be too restrictive, it would make it difficult for businesses to hire in Singapore or even be attracted to set up shop here. Even if MOM’s guidelines are persuasive rather than strictly binding, like legislation, businesses operating or looking to operate here in Singapore would face pressure to abide by them regardless.

As such, the guidelines should also provide recommended phrasings for different non-compete clauses, depending on respective job scopes and functions, and to encourage employers to use them to avoid running into enforcement issues down the road. This does not need to be in the form of template clauses that employers should use — a glossary of useful words employers can refer to when customising their non-compete clauses would be helpful enough.

Any official guidance for dealing with non-compete clauses in employment agreements will be very helpful for employers and employees alike in the future. The construction of such clauses should be made more accessible and specific so that all parties understand what is being protected, what the employee is being restrained from doing, and why that is the case.

ABOUT THE AUTHOR:

Melvin Loh is a senior lecturer at the School of Law, Singapore University of Social Sciences. He is counsel at Peter Low Chambers LLC.