Expanding into the Asia-Pacific (APAC) region brings opportunities as well as unique challenges, with non-compete agreements making news headlines. For example, the courts in Singapore recently ruled that non-compete clauses are only enforceable if they protect “legitimate business interests.”
This development has sparked a broader conversation about the role and legitimacy of non-competes throughout APAC. These clauses, often included in employment contracts, aim to prevent ex-employees from competing with former employers.
However, the enforceability of these clauses varies widely across APAC jurisdictions. This influences how international companies approach hiring and termination practices in these markets.
In this blog post, Marcos Salgado, GoGlobal Senior Manager in APAC, answers frequently asked questions (FAQs) on non-competes.
What does a non-compete agreement typically involve in APAC?
Marcos: Non-compete clauses in APAC employment contracts generally prevent ex-employees from engaging in competitive activities against their former employers.
These clauses may restrict employees from working in certain geographical areas or in specific trades or businesses for a set period post-employment. However, enforceability varies widely across APAC jurisdictions.
How does the enforceability of non-compete clauses vary across APAC?
Marcos: Each jurisdiction maintains its own rules for non-competes, so international companies should consult with local experts when drafting employment contracts. Here’s a sample of how non-compete regulations vary in three jurisdictions:
- Malaysia: Non-compete clauses are typically void and unenforceable due to Section 28 of the Malaysian Contracts Act 1950, which nullifies agreements restraining lawful profession, trade or business.
- Singapore: Non-compete clauses are ‘prima facie void’ but can be enforced if they protect legitimate proprietary interests. This includes confidential information or trade secrets. The agreement must also be reasonable in scope, duration and geography.
- Hong Kong: Similar to Singapore, non-compete clauses are ‘prima facie void’ in Hong Kong but enforceable if they protect legitimate proprietary interests. They cannot be wider than reasonably necessary in terms of duration, scope and geography.
Are tech jobs in APAC also subject to non-compete agreements?
Marcos: Non-compete agreements often apply to tech jobs. However, their enforceability follows the same jurisdictional rules.
What steps should an employer take to enforce a non-compete agreement?
If an employer wishes to enforce a non-compete agreement, they can first negotiate with the former employee. The goal is to come to a mutually agreeable solution. If negotiation fails, consider mediation where a neutral third party facilitates communication and negotiation between the two parties. If this is unsuccessful, the employer may choose to file a lawsuit to enforce the non-compete agreement.
If the employer demonstrates the former employee has violated the agreement, the court may grant an injunction to prevent further violations. Additionally, the employer may seek damages if they can demonstrate harm as a result of the violation.
However, the specific steps and success of enforcement may depend on the jurisdiction and the terms of the agreement. Consulting with legal counsel is recommended.
Having said that, the most important measure for enforcement is the non-compete compensation. One factor to consider when offering compensation is reasonableness. The compensation should be proportional to the duration and geographical scope of the non-compete.
If the compensation is too low, a court may deem the non-compete unenforceable. Conversely, if it’s too high, the employee may feel burdened or resentful.
Next, consider what’s typical or standard in your industry. Are most non-competes accompanied by a generous compensation package, or are they more of a bare-bones affair?
Take the employee’s salary and position within the company into consideration. Higher-paid employees or those in more senior positions may expect or deserve more compensation for agreeing to a non-compete.
Negotiations are often a key part of the compensation process. Don’t be afraid to involve legal counsel to ensure that the compensation is reasonable and enforceable. After all, the goal is to create a win-win situation that benefits both parties.
Timing is another important consideration. Will the compensation be paid in a lump sum at the time the non-compete is signed? Will it be spread out over the non-compete period? Each option has its pros and cons, so think carefully about what makes the most sense for your situation.
Don’t forget about tax implications. Depending on the jurisdiction and nature of the payment, the compensation may be subject to income tax or other taxes.
Finally, make sure that the compensation is clearly documented in the non-compete agreement. In some cases, this is contractually agreed upon before the employee signs the employment agreement. Having this documentation helps to demonstrate the reasonableness of the compensation and the enforceability of the non-compete.
Can non-compete agreements be considered a formality that employees no longer take seriously?
Marcos: The perception of non-competes varies:
- Jurisdictional Differences: Some regions around the world strongly disfavor non-competes, affecting perceptions globally. For example, non-compete agreements were recently banned in the United States of America.
- Public Perception: Criticism and media coverage can influence how seriously these agreements are taken.
- Employer Enforcement: Vigorous enforcement by employers can underscore their seriousness, although overly aggressive tactics may have negative repercussions.
How can non-competes be effectively used to protect both employer and employee interests?
Marcos: To balance interests and remain compliant, international companies should:
- Define Scope Clearly: Ensure the non-compete is limited to relevant activities, reasonable in duration and geographically appropriate.
- Provide Consideration: Offer something valuable to the employee in exchange for signing. This may include additional compensation or continued employment.
- Clear Communication: Explain the terms and reasons for the non-compete clearly to employees.
- Regular Updates: Review and update the non-compete to reflect changes in the business or applicable laws.
How does the enforceability of non-competes across borders affect international companies?
Marcos: Enforcing non-competes across different jurisdictions can be complex, as enforceability standards vary. Companies should consult legal experts familiar with laws in both the original and new jurisdictions to navigate these challenges effectively.
What are the potential impacts of non-competes on employee morale and turnover?
Marcos: The impact of a non-compete depends on the jurisdiction and how it is drafted.
For example, severely restrictive non-competes can negatively affect company morale by making employees feel restricted in their career mobility. This may lead to decreased motivation and higher turnover.
Employers should weigh these potential impacts against the benefits of non-competes. International companies, especially those unfamiliar with business landscapes in APAC, should seek advice from local experts.
How can an employer’s interests be protected if non-competes cannot be enforced?
Marcos: Non-competes are not the only way to protect an employer’s interests. Non-solicitation agreements, confidentiality agreements and garden leave can all serve as effective options.
Non-solicitation agreements prevent former employees from soliciting the company’s clients, customers or other employees for a specified period. Confidentiality agreements protect sensitive information from being shared with competitors or other third parties.
Garden leave is enforceable while the employment still exists, but the employee is not performing duties. It does not bar the employee from accepting immediate post-employment offers and imposes no limitations on post-employment options. However, it keeps the employee from working during their tenure. This can be advantageous in situations where a worker may cause harm or steal confidential information.
Employers can still safeguard their interests from a different perspective even if non-competes cannot be enforced.
Local expertise is key for managing non-competes
As recent rulings and headlines convey, the regulations and perceptions of non-compete agreements are in transition around the world. Employers in the APAC region must conduct thorough due diligence, particularly international companies unfamiliar with the local landscape.
Drafting agreements in accordance with local laws and best practices is crucial. If internal HR teams lack local expertise, it is advisable to seek guidance from local professionals in APAC.
A strong approach to non-competes can help protect company interests, ensure compliance and foster positive employee relationships.
Check out our ‘What is an EOR?’ guide or contact us to talk with an international HR expert about how an EOR solution can support your business goals.