Non-compete clauses: To regulate or not regulate

As an employer, you may be wondering should I even include any non-compete clauses?

Under Singapore law, restraint of trade clauses (which include both non-compete and non-solicitation  clauses), particularly those in the context of employment, are prima facie void and unenforceable. This  is to give effect to the public policy that frowns upon attempts to unreasonably proscribe freedom of  trade. As a result, the courts will generally take a very restrictive approach when deciding whether such  clauses are enforceable.

Since January 2024, there has been increasing focus on the Ministry of Manpower’s (MOM) approach  towards restraint of trade clauses found in an employee's employment contract. The initial understanding  was that the tripartite partners, consisting of the MOM, the National Trades Union Congress, and the  Singapore National Employers Federation, will finalise the guidelines and release them in the second  half of the 2024 but the year has since passed and nothing has been issued. When questioned in the parliamentary sitting on 7 January 2025, the Minister of Manpower clarified that the discussion is ongoing and that more details will be made available in due course.

This delay is not surprising given that this is definitely not an easy topic to find a resolution for. Whilst  the tripartite partners are in the midst of coming up with the guidelines, it may be useful to explore the  potential challenges that the tripartite partners will need to navigate in this knotty issue.  

The “legitimate interests” to be protected – can such interests be clearly defined as part of the executive  powers? 
Courts have not always struck down non-compete clauses on the basis that there is no legitimate  interest to protect. In fact, courts have identified to date three different legitimate interests which they  have considered as valid, namely, protection of trade secrets and confidential information, protection of  special trade connections, and maintaining a stable trained work force. One of the key challenges that  the tripartite partners can face will be the scope of legitimate interests. Without the benefit of reviewing  the majority of cases that may come before it, the tripartite partners may not be able to exhaustively or  even reasonably comprehensively draw up the list of legitimate interests that employers may seek to  protect from having a non-compete clause included.

Further, the position taken by the courts, when reviewing the scope of legitimate interests, seem to be  looking from the perspective of the employers but there can be occasions or circumstances under which  the legitimate interests of the non-compete clause can benefit both the employers and the employees.  

For example, when an employee accepts a non-compete clause imposed by the employer, the employer  may feel more comforted to entrust greater responsibilities (which can come with greater access to  certain sensitive information and/or personal trade connections) to the employee. As a result, the  employee, in weighing up against restriction of future job opportunities upon departure from the  employer, may still feel that the better job opportunity with a higher prospect of a longer-term  employment may be a better trade-off. In this case, the legitimate interest (from an employee standpoint)  should be taken into consideration.  

The example above also demonstrates that the contractual freedom of both employers and employees  to contract based on what their best interests are in an employment relationship may be a stronger  reason for the tripartite partners to be cautious about over-regulating this space, which in turn poses  another challenge for the tripartite partners to consider carefully.  

Test of reasonableness – what is the standard of reasonableness? That of the reasonable employer or  the employee or that of the MOM?
Even assuming an employer manages to prove that there is a legitimate interest to protect through a  non-compete clause in the employment contract, the employer will still need to be able to demonstrate  that the non-compete clause is reasonable in terms of the business that is the subject of the non compete clause, the time restriction and the geographical scope. The standard of reasonableness will  need to be reviewed in light of the legitimate interest that the employer seeks to protect in the first place.

Putting aside the challenges in determining the legitimate interests, how does one define what is  reasonable? The courts have the benefit of making that assessment by allowing evidence to be  adduced given that whether the reasonable standard has been met is a fact-based inquiry which cannot  be determined simply by setting out from the onset the factors that will contribute towards the  reasonableness standard. How will the tripartite partners achieve the same without the permutations of  factors that they will need to consider?  

The tripartite partners can consider listing down the factors that will contribute towards a non-compete  clause being reasonable or unreasonable but the list will not be comprehensive.

Is a new test required or should we take a tailored approach and define the criteria for which non compete should not apply?
In light of the challenges set out above, it may not be ideal for the tripartite partners to try to come up  with guidance that is simply an attempt to re-look the judiciary positions; rather, a better approach may  be to supplement the current judicial decisions by making it simpler so that once determined outside of  the judicial framework, employers and employees do not have to look to the courts for support and  decision-making. One way would be to state upfront which types of employment contracts or which  sectors of employees should not have non-compete clauses included in their employment agreements  – a somewhat similar approach to the types of workmen and employees to whom Part 4 of the  Employment Act 1968 applies but in a reverse manner.  

By stating upfront which employees are outside the scope of non-compete provisions, it will leave more  room for new additions to legitimate interests and avoid the difficulty of having to define what is a  reasonable standard – both of which are better left to the courts to deliberate.

Please note that the contents of this article do not constitute legal advice. Please reach out to  the author(s) of this article if you wish to consult on the contents of this article.