Singapore: Restrictive Covenants

General Principles

Restrictive covenants are only enforceable in Singapore if the employer can demonstrate that they:

• protect a legitimate interest of the employer; and
• are reasonable both in the interests of the parties and in the public interest.

Currently, restrictive covenants are not governed by statute, and are instead dealt with through common law.

Legitimate Interest

Legitimate interests include (but are not limited to) restraining the misuse of trade secrets, protecting special trade connections, and maintaining a stable and trained workforce.

Reasonableness

The court makes this determination on a case-by-case basis, but some of the main factors that contribute to this determination are:

• Scope of Activity: If the scope of a restricted activity is overly wide, the covenant will be deemed unreasonable. The scope should be proportionate to that of the employee’s job and duties, whereas a blanket prohibition—regardless of an employee’s previous scope of employment—will likely be unreasonable.

• Duration: A period of restraint should not be longer than necessary, typically ranging from 3-12 months, based on the employee’s seniority or access to trade secrets and influence over trade connections or the workforce.

• Geographical Scope: The restraint should be limited only to jurisdictions that an employee has material dealings with, and covenants with no geographical limit will likely be deemed unreasonable.

Consideration

For new employees, the job offer and compensation package constitute sufficient consideration for restrictive covenants. For existing employees asked to agree to enhanced restrictive covenants, however, additional consideration is required (such as a pay rise), as continued employment alone is inadequate.

Other Clauses

The inclusion of the following clauses may help restrictive covenants with enforceability:

• offsetting the covenant duration by any garden leave period;
• mandating disclosure of existing covenants to new employers;
• mandating independent legal consultation about the covenant, at the employer's expense; and
• severability.

Payment

There is no legal requirement to pay employees during the period of the restriction. However, the payment of “substantial post-employment benefits” in consideration for an employee’s agreement to the restrictive covenants may make it more likely for clauses to be reasonable.

"Blue Pencil Test”

Restrictive covenants deemed invalid are unenforceable. A court may strike off the entire restrictive covenant but, where possible, it can also apply the “blue pencil test” and sever a particular element that is considered invalid without having to modify or add to the remaining wording (i.e., the court will not re-write a covenant), and uphold the remainder of the restrictive covenant.

Non-competition

The above general principles apply to non-competition restrictive covenants.

Non-service or non-dealing

The above general principles apply to non-service or non-dealing restrictive covenants.

Non-service tends to cover active targeting of business, whereas non-dealing prevents the employee from accepting business from a customer, even if they had not actively sought the business.

Prospective customers/clients can be included in this type of restriction, but this would generally be limited to those that the employer was actively targeting prior to termination.

These restrictive covenants are often limited to prohibiting contact with customers/clients actually known to the employee, or for whom they were responsible or had some involvement with during their employment during a limited period of time before termination (e.g., in the 12 months before termination).

Non-solicitation

The above general principles apply to non-solicitation restrictive covenants.

Prospective customers/clients can also be included in this type of restriction, but this would generally be limited to those that the employer was actively targeting prior to termination.

As with non-dealing restrictive covenants, these are often limited to solicitation of customers/clients actually known to the employee, or for whom they were responsible or had some involvement with in the course of their employment during a defined period of time before termination (e.g., in the 12 months before termination).

Usually, non-solicitation of employee restrictive covenants will define the employees who cannot be solicited by reference to their seniority, grade, or level. They often only apply to colleagues that the departing employee had a reasonable level of contact with, knowledge of or responsibility for, and within a defined period before the departing employee leaves.

On the Horizon

The Ministry of Manpower (MOM) has recently announced that the tripartite partners have been working together to develop a set of guidelines on restrictive covenants. These guidelines aim to shape norms and provide employers with guidance on the inclusion of restrictive covenants in employment contracts, in order to ensure that “unreasonable employment contract clauses do not become a norm in our workplace.”

The proposed tripartite guidelines will be legally non-binding, but are expected to be persuasive to courts, and may offer additional guidance to companies and employees. As MOM has also mentioned aggrieved individuals may seek assistance from the Tripartite Alliance for Fair and Progressive Employment Practices (TAFEP) or MOM, any decision or action taken in response to such a complaint will likely be based on the principles set out in the guidelines. 

Back to A Guide to Restrictive Covenants