Asia-Pacific employers could see non-compete clauses curbed

Restrictive covenants are commonly used in Australia, particularly for employees with customer contacts and access to commercially-sensitive information, on high salaries or executive agreements.

The current law for post-employment restraints across Australia, apart from New South Wales, relies on the common law through precedents set by court decisions, as well as guiding principles in the Competition and Consumer Act 2010 (Cth). Under common law, a restraint of trade is contrary to public policy and therefore void and unenforceable, except to the extent that it is reasonably necessary to protect the legitimate business interests of the person – for example, an employer – seeking to rely on it.

Applying the common law, a court can remove any offending part of a restraint clause to make it reasonable and therefore enforceable, but it cannot add words – this is known as the ‘blue pencil’ approach. This has led to the common practice of drafting restraint clauses in what is known as the ‘cascading’ manner, where a number of different time periods and geographic areas are specified, which a court can delete if it considers them unreasonable.

In NSW, the Restraints of Trade Act 1976 (NSW) takes a different approach to the common law. It presumes a restraint is valid to the extent that it is not contrary to public policy. It also allows the Supreme Court of NSW to add words, if necessary, to make a restraint reasonable and enforceable.

The federal government is currently considering making changes which regulate, restrict or ban post-employment restraints of trade. The government’s Employment White Paper Roadmap, released in September 2023, noted “emerging” research that non-compete clauses in employment agreements may be restricting workers from moving to better paid jobs and hampering job mobility and innovation.

If the federal government does, as seems likely, propose legislative change before the end of 2024 or early 2025, to regulate, restrict or ban post-employment restraints of trade - with a likely effective date in mid to late 2025 – this will likely significantly impact many employers who make use of contractual non-competes, non-solicitation of customers, non-poaching of other staff and non-disclosure - that is, confidentiality - clauses.

What is at stake for employers is highlighted by a recent Federal Court of Australia decision where a former employee - who resigned from employment with his insurance broker employer to join a competitor - was found to be in breach of his contractual restraints and ordered to pay his former employer damages of AU$500,000 (US$343,000) plus legal costs.

Restrictive covenants are relatively common in Singapore employment contracts. However, they are more typically found in the employment contracts of senior and management level employees as opposed to rank-and-file employees. This is because senior employees are more likely to have access to confidential information and trade secrets or have fostered special trade connections that an employer might be interested in protecting. In the context of non-solicitation clauses, the seniority of the affected employee would be one of the factors which the court would take into account when determining the enforceability of the non-solicitation clause.

In Singapore, a restrictive covenant may be enforceable if an employer can show that it protects a legitimate proprietary interest and that the covenant is ‘reasonable’ – that is, between the parties and the public. Under Singapore law, the protection of trade secrets, trade connection and the maintenance of a stable and trained workforce would constitute legitimate proprietary interests. In addition, while the reasonableness of the covenant would depend on the facts of each case, the court would generally consider factors such as the categories of employees covered by the restrictive covenant, the geographical scope which the restrictive covenant applies to and the duration of the restrictive covenant.

In certain cases, the courts may consider that the enforceability of restrictive covenants are strengthened by the presence of relevant facts such as the employer offering consideration in exchange for the employee agreeing to be bound by the covenant, the offsetting of the duration of the restriction by a period of ‘garden leave’, and the employee having obtained independent legal advice with regards to the covenant.

Singapore’s Ministry of Manpower (MOM) has announced that it is in the process of developing guidelines relating to the reasonable use of restrictive clauses in employment contracts. The guidelines aim to find a balance between providing businesses the flexibility to adjust to market conditions and protecting workers and facilitating their re-employment. This suggests Singapore is unlikely to follow in the footsteps of the US in terms of imposing an outright ban on non-compete clauses.

The MOM aims to release the guidelines in the second half of 2024.

Non-compete covenants are very common in China. However, an employer may only enter a post-employment non-compete agreement with employees who are senior managers, senior technicians, or other employees with access to confidential company information and therefore subject to a confidentiality obligation. A non-compete agreement signed with a person who does not fall within one of these categories and does not have access to a company’s ‘business secrets’ could be deemed invalid.

To ensure a non-compete agreement is legally effective and binding on the employee, employers must consider:

• the eligibility of the employee - employees subject to non-compete obligations should fall into one of the categories set out in the relevant legislation;
• the non-compete period - this must not exceed two years from the date of employment termination. Any non-compete covenants lasting longer than two years are unenforceable and may be considered invalid; and
• the scope of non-compete obligations: the law provides a broad definition of non-compete obligations. Employees subject to post-employment non-compete obligations are generally restricted from working for an employer that produces or trades the same products as their previous employer or operates in the same sector, and running their own business involving the production or trading of the same products as their previous employer or within the same sector.

The law requires the employer and employee to agree on the scope of non-compete restrictions. It is essential to establish a fair and reasonable scope for the restricted business activities. An overstated or undefined scope related to territory, products and services, customers and suppliers could lead to disputes about whether a specific activity falls within the non-compete agreement or whether a particular restriction is fair and reasonable. This lack of clarity creates uncertainty for employers and can weaken their position in potential litigation.

Employers must also be aware that enforcing a non-compete agreement incurs a cost to employers. The employer is liable to pay the non-compete fee each month during the agreed non-compete period. If the employer fails to pay for three months or more, the employee may terminate the non-compete agreement.

Recent court cases have revealed the courts’ views regarding restrictive covenants. For one thing, given the covert nature of competitive behaviour, it has become much more difficult for former employers to provide evidence. As a result, the distribution of the burden of proof should be reasonably adjusted. Once the former employer provides preliminary evidence that reasonably leads the court to suspect the employee is the actual investor or operator of a competing business, the court may shift the burden of proof to the employee, requiring them to provide a reasonable explanation and corresponding evidence.

In addition, the main purpose of the non-compete clause in the Labor Contract Law is to protect the employer’s trade secrets and confidentiality matters related to intellectual property, and to regulate unfair competition rather than infringe on the employee’s right to freely choose their occupation. Employees who only access general business information, rather than core business information, during their normal duties would not be subject to non-compete restrictions.

Lastly, non-compete compensation is likely to be based on three factors - the extent to which the employee has access to company secrets, the employee’s salary, and the duration of the non-compete period. Even if the employee has agreed to it, excessively low non-compete compensation violates the principle of fairness and would be deemed invalid.

Though China is not a case law country, the points of view presented by the courts in their judgments could add weight and be taken as references when determining the terms of a non-compete agreement.

Restrictive covenants are common in Japan and may be enforceable if they are reasonably necessary to protect the business interests of the employer. 

Though not defined under Japanese law, restrictive covenants are used in employment contracts under the principle of good faith - including after the termination of the employment contract. To be valid, restrictive covenants must be considered reasonable.

The different types of restrictive covenants used include non-compete clauses, non-solicitation of customers; and non-solicitation of employees.

When enforcing restrictive covenants, there are two types of court actions available to employers following a breach of non-compete clauses and non-solicitation obligations - they can either demand an injunction or file a claim for damages.

Currently, there are no anticipated legal updates on the topic of restrictive covenants in Japan.

Restrictive covenants are commonly used in Vietnam, particularly for employees who are senior and on higher salaries.

The general position on the enforceability of restrictive covenants, however, is that clauses that attempt to restrict the future activities of an employee are unenforceable. In addition, the validity of restrictive covenants remains relatively untested in the Vietnamese courts.

Vietnamese law does not derive its definition of non-compete clauses from a labour law perspective. Instead, the statutory terminology is “agreement in restraint of competition”, which is set out in the Law on Competition 2018.

Vietnam’s courts rely on labour and civil law principles to determine the enforceability of non-compete clauses. However, due to the lack of a clear legal framework, their validity has been debated by various legislators and legal experts, and has been interpreted inconsistently by dispute settlement bodies.

Precedent No. 69/2023/AL, released by the Supreme People’s Court of Vietnam and applied in November 2023, provides additional certainty on the use of restrictive covenants. Under the precedent:

• a non-compete clause or agreement between the employee and employer form integral parts of the employment contract, and must observe the laws on employment and labour; and
• a non-compete clause or agreement, if made separately from the employment contract, forms as a civil agreement that is entered into by and between the parties on a free and voluntary basis.

Aside from Precedent 69, it is unlikely that there will be further developments by the Vietnamese authorities to legislate official regulations or guidance on the matter at this time. It is likely the Vietnamese courts will rely on Precedent 69 in accepting the validity of non-compete clauses in the future.

Restrictive covenants are relatively common in Malaysian employment contracts. However, it is not clear whether restrictive covenants are more typically found in employment contracts of a certain category of employees.

In line with section 28 of the Contracts Act 1950 of Malaysia, all agreements in restraint of trade are void. While section 28 does provide for exceptions relating to the sale of goodwill of a business and agreements made between partners in a partnership, these exceptions are not readily applicable to the employment context. 

This means that non-compete clauses would generally be void and unenforceable under section 28 of the Contracts Act. The position on whether non-solicitation clauses are allowed under the Contracts Act is unclear as such clauses do not directly contravene section 28. However, they have generally been found to be enforceable if the non-solicitation clauses were included as part of the terms and conditions of employment and if the duration of the restraint is a reasonable one. The enforceability of a non-solicitation clause may also be strengthened in cases where there was a breach of confidentiality or misuse of confidential information or trade secrets on the part of the employee.

There do not appear to be any developing trends or legal updates on the topic of restrictive covenants in Malaysia. Due to the limited enforceability of restrictive covenants under Malaysian law as well as the relatively straightforward position of the prohibition under the Contracts Act 1950 of Malaysia, it is unlikely that there will be any changes to the status quo in the foreseeable future.

Restrictive covenants are becoming an increasingly common feature of employment contracts in Thailand, particularly for senior level employees whose expertise and technical knowledge are considered valuable assets for their employers. Restrictive covenants are most commonly found in industries with intense competition for talent, such as the finance, telecommunications, tech and startup industries.

Restrictive covenants in Thai employment contracts are generally valid and enforceable, as long as the restriction is considered reasonable. In evaluating the reasonableness of non-compete clauses, the court would take into account three main factors – whether the employer has a proprietary interest it is entitled to protect, whether such a non-compete clause is contrary to public interest and whether the terms of the clause are reasonable. 

With regards to the last factor, section 5 of the Unfair Contract Terms Act B.E. 2540 states that the reasonableness of the non-compete clause must be evaluated with reference to the area and duration of the restriction. In terms of the area of the restriction, the courts have found that in a case involving the managing director of a large regional company, a clause which prohibited the employee from working for competitors in multiple neighbouring countries was enforceable.

Similarly, non-solicitation clauses are generally enforceable. This is especially so if the employee’s role within the company allowed him or her to establish strong client relationships or if the employee worked closely within a specialised team.

In general, employers also tend to be mindful of the enforceability of restrictive covenants and either avoid imposing such clauses on junior employees or impose a more narrowly defined restriction. For instance, in cases where the affected employee received a low salary or was in an operational level position, the Thai court has reduced the duration of non-compete clauses from two years to one year.

There do not appear to be any newly developing trends or legal updates on the topic of restrictive covenants in Thailand.

Restrictive covenants are relatively common in the Philippines and are generally enforceable. When determining the enforceability of such clauses, the court would generally assess the reasonableness of the restriction by considering whether:

• the time, trade and geographical limitations contained in the clause are reasonable;
• the clause protects a legitimate business interest of the employer;
• the clause creates an undue burden on the employee;
• the clause is injurious to public welfare; and
• the clause is reasonable from the standpoint of public policy.

The law does not state a maximum period of restraint which would make a restrictive covenant unenforceable, and its reasonableness would rest on the particular facts and circumstances of each case. In this regard, the courts have found that a two-year restriction may be enforceable.

In addition, case law suggests that the restrictive covenant should be supported by some form of consideration - it has been contended that the employment itself, along with the associated compensation and benefits, would constitute sufficient consideration for the restriction.

Employers in the Philippines are increasingly taking proactive steps to protect their business interests by instituting legal proceedings against former employees who breach their restrictive covenants. This has steadily shaped Philippines case law to move towards a more employer-friendly legal landscape, while retaining the overarching consideration of public policy.

Restrictive covenants are commonly included in Indian employment contracts. Even though non-compete clauses are generally unenforceable, employers are still likely to include both non-compete and non-solicitation clauses in employment contracts as a deterrent. In a period of fierce competition for senior executives and poaching of C-suite talent, employers have begun tightening the employment restrictions that apply to high-level executives. This includes stricter non-compete and non-solicitation clauses with longer notice and restriction periods in the employment contracts of senior employees.

Restrictive covenants are governed by section 27 of the Indian Contract Act 1872. Under section 27, non-compete clauses are considered an impermissible restraint of trade and are generally unenforceable. However, there have been exceptional situations where the courts have enforced non-compete clauses in cases where there is a high probability that a breach of the non-compete clause would result in the disclosure of the employer’s confidential information.

The courts in India have adopted a more liberal approach towards non-solicitation clauses. Non-solicitation clauses that prohibit the solicitation of employees to work for a competing business are not prohibited under section 27 and they have generally been held to be valid and enforceable. The enforceability of non-solicitation clauses can also be strengthened by ensuring that it only applies for a reasonable duration, such as two years from the employee’s exit from the company. 

In March, the 22nd Law Commission of India released its ‘Trade Secrets and Economic Espionage’ report, recommending the introduction of a new legal framework to adjudicate claims relating to the disclosure of trade secrets. It also proposed some key provisions which the new legislation should include. Under the proposed law, the holder of a trade secret is entitled to bring legal proceedings against anyone who misappropriates its trade secret and seek relief which may include an injunction, damages or an account of profits.

This legislation could offer an additional layer of protection against former employees, reducing concerns that they might share critical confidential information with competitors.  Importantly, the proposed legislation would go beyond non-compete clauses, which have often been found to be largely unenforceable.

Restraints of trade are commonly used in New Zealand but can only be enforced if there is a valid restraint of trade clause in the employee’s employment agreement. Such clauses – mainly covering non-competition and non-solicitation - can be included if the employee agrees to it.

If an employee misuses confidential information or breaches a restraint of trade clause, an employer may be able to apply to the Employment Relations Authority or the Employment Court for an injunction which restrains the employee from continuing such activities. 

The New Zealand Parliament is currently looking to enact the new Employment Relations (Restraint of Trade) Amendment Bill (Bill), which would prohibit the use of restraints of trade in employment agreements for employees who earn less than three times the minimum wage.

The proposed Bill also requires employers of higher income employees to carefully consider whether a restraint of trade is appropriate in relation to those employees and, if they were to insist on a restraint of trade, to compensate the employees for it.

The Bill is currently before parliament and, if passed into legislation, will have a significant impact on the use of restraints of trade in New Zealand.