Commentary - Post-Employment Benefits in Restrictive Covenants & Garden Leave Clauses

28 February 2018

Foo Soon Yien

Most companies in Singapore usually include non-compete provisions or restrictive covenants in their contracts of employment. This is especially so when they have a legitimate interest to protect.

In particular, companies are likely to have a non-compete provision bearing in mind the specific duties that the employee had undertaken, who he came into contact with, the type of information he acquired, and what specifically his employment duties extended to.
 
Writing in an extrajudicial capacity, the Honourable Judge of Appeal Andrew Phang made the following observations on restrictive covenants in the Singapore context (Contract Law in Singapore (Academy Publishing, 2012), pg. 997):
 
“Covenants in restraint of trade are extremely common today - especially in employment contracts. It is not surprising, therefore, that a fairly substantive body of case law has been developed over the years.”
 
There were 13 reported cases between 2012 and 2016 in which non-competition and/or restrictive covenants in employment contracts were raised before the Singapore courts.
 
These cases indicate that it is common practice for companies in Singapore to insert such clauses in their employment contracts, in order to protect their legitimate proprietary interests such as their trade secrets, trade connection and the maintenance of a stable and trained workforce.
 
Post-Employment Benefits in Restrictive Covenants
 
In determining the reasonableness of a restrictive covenant, one important factor which the court would consider is the payment of adequate compensation or post-employment benefits to the employee, in consideration of the restrictive covenant.
 
It is unfortunate that there are few cases in Singapore where such post-employment compensation is referred to and it is because such compensation clauses are uncommon in employment letters and contracts.
 
In Man Financial (S) Pte Ltd v Wong Bark Chuan David [2007] SGCA 53 (“Man Financial”), the plaintiff was the managing director and chief executive officer of the defendant, a brokerage company. The plaintiff was asked to resign and signed a termination agreement containing non-competition and non-solicitation clauses, in consideration for a “goodwill payment”.
 
The Court of Appeal held that the non-solicitation clause found in the termination agreement was reasonable in light of, inter alia, the “substantial post-employment benefits” which the plaintiff had received in relation to the restrictive covenants (Man Financial, at [139]-[140]).
 
It is notable that in Man Financial, the “goodwill payment” was provided in the termination agreement rather than in the main employment contract itself. Moreover, in the course of the judgment, there were no guidelines as to how the adequacy of compensation was to be assessed. Further, no information was provided in the case as to the pre-termination salary of the employee, or the salary he was likely to receive after leaving the defendant’s employment.
 
In Essen System Builders (S) Pte Ltd & Anor v Chew Boon Hee [1997] 1 SLR 671, (“Essen”) the High Court espoused on the adequacy of consideration as a relevant factor in determining the reasonableness of a restrictive covenant (Essen, at [17]).
 
However, the High Court’s decision in Essen offers little assistance, as the relevant compensation which the court took into account was the amount which the defendant had received for the sale of the goodwill of the business, rather than the loss that he would suffer due to his inability to secure alternative employment.
 
In the absence of clear judicial guidance, it is difficult to lay down any general rule as to the quantum of post-employment benefits which should be paid to departing employees in general.
 
Nevertheless, it is arguable that depending on the nature or the employee’s scope of work, he would suffer financially if he was not allowed to find alternative employment during the relevant period of restraint:

1. Where an employee has specialised skills and is prevented from working in any similar or competing industry, it is possible to argue that he would suffer greater financial prejudice and hence, should be compensated more; 
   
   
2. However, if the employee is still able to find an equivalent paying job or alternative employment during the relevant period of restraint and does not suffer financially compared to his earlier employment, then he should not be compensated at all, or as much; 
   
   
3. Much depends on the precise facts and circumstances surrounding the particular employee in question, such as his pre-termination salary, his position in the company, the nature of his duties, his post-termination salary and the transferability of his skills.

In light of the foregoing, the quantum of compensation to be offered should be based on the specific circumstances of the particular employee on whom the restrictive covenants are sought to be imposed.
 
Case law only offers limited assistance and should not be taken as a fixed, universal benchmark for the quantum of post-employment benefits that should offered to all departing employees in general.
 
In this regard, it is useful to refer to the following observations by the Court of Appeal in Chua Chian Ya v Music & Movements (S) Pte Ltd [2009] SGCA 54 (at [31]):
 
“By the nature of the doctrine of restraint of trade … it is dangerous to attempt to extrapolate by reference to the decision in a particular case, or to apply a decision on one set of facts to cases with different facts.”

By the nature of the doctrine of restraint of trade … it is dangerous to attempt to extrapolate by reference to the decision in a particular case, or to apply a decision on one set of facts to cases with different facts.

Court of Appeal, Chua Chian Ya v Music & Movements (S) Pte Ltd [2009] SGCA 54 at [31]

In any case, case law suggests that the presence of such compensation is only a factor to be taken into account by the court and may go towards strengthening its enforceability. The absence of such compensation or payment does not necessarily mean that the Courts will not enforce the restrictive covenant concerned.
 
Moreover, whilst the quantum of compensation is a relevant consideration, it is important to bear in mind that the three primary factors which the court would look at in determining the reasonableness of a restrictive covenant are (i) the duration of the restraint, (ii) the geographical scope over which it extends and (iii) the scope of activities covered by the clause. Parties are therefore advised to have regard to these factors when drafting such clauses.
 
 
Garden Leave
 
Employers have increasingly relied on garden leave clauses to protect their legitimate proprietary interests, by imposing restrictive covenants on employees serving their notice period before the termination of employment.
 
The primary purpose of garden leave clauses is to ‘neutralise’ the employee during the notice period by, inter alia, forbidding him from attending the workplace, having further interactions with clients or otherwise dealing with confidential information.
 
Nevertheless, as useful as these clauses may be, it is important to note that they suffer the following drawbacks:

1. During the period of garden leave, the employer will be required to incur the significant cost of paying the employee’s salary even though no work may be performed by the employee.
   
   
2. Moreover, garden leave clauses are only effective to restrain the employee during the period of notice and do not extend beyond the termination of employment.
   
   
3. Indeed, the Court of Appeal in Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2012] SGCA 42 observed (at [73]) that “the garden leave situation … is concerned with negative covenants during employment, rather than post employment.”

 
Therefore, if necessary, garden leave clauses should be used in conjunction with reasonably worded non-competition clauses (which apply post-termination) to cover the periods immediately before and after the termination of employment, so as to achieve an optimum level of protection of the employer’s proprietary and/or business interests.


Foo Soon Yien
Director, BR Law Corporation
foosoonyien@brlawcorp.com