The recent US Federal Trade Commission (FTC) proposal to ban employers from imposing non-competition clauses (“non-competes”) on their workers has sparked off massive debate. Support comes from those who believe the proposed rule believe would encourage entrepreneurship and innovation[1] and lead to more businesses forming. On the other hand, critics of the proposed rule argue that non-competes are necessary to protect confidential information, such as marketing strategies or pricing plans[2], although the opposition is focused largely on questioning FTC authority to pass the rule. It is not certain whether this proposed rule will pass but there have already been 5000 public comments on it so far. Guidance can be drawn from other jurisdictions like the United Kingdom (UK) and Singapore where competing interests between the right of an employer to protect is confidential information, retain employees and reduce competition are balanced against employees’ right to market mobility, sometimes with different outcomes.
This article will attempt to briefly summarize the employment landscape in each jurisdiction with respect to non-compete agreements, highlight some differences between them, and in turn demonstrate the nuances between the jurisdictions, and their pro-employer or pro-employee leanings.
I: Overview of New York’s Employment Landscape
Currently, the laws governing non-competes vary by state. In New York state[3], restrictive covenants are “disfavored”[4]. However, they are generally enforceable if narrowly tailored to protect legitimate business interests such as trade secrets, confidential information or customer goodwill and do not unreasonably restrict an employee’s right to earn a living. The duration and geographical scope of the non-compete must also be “reasonably limited.”
In the seminal case of BDO Seidman v. Hirshberg[5], the New York Court of Appeals held that a non-compete agreement that prevented an accountant from working for any client of his former employer for 18 months, even if he had never worked on that client’s account, was overly broad and unenforceable. The court noted that such a restriction would effectively prevent the employee from working in his chosen profession, and was not necessary to protect the employer’s legitimate interests.
The FTC proposal seeks to place a broad ban on non-competes, citing that such broad non-competes affect more than 30 million people in the private sector and if banned, would increase American workers’ earnings by $250 to $296 billion. The new FTC rule would apply to any private business except for companies not under FTC authority like financial institutions. Under the new rule, employers would also not be permitted to force employees to pay for their training if they leave the job within a certain time.
It is submitted that the new FTC rule would not have much impact on the New York courts’ approach to non-competes given how they are already disfavored. However, the same rule may affect other more permissive pro-employer states like Maryland[6].
II: Overview of UK’s Employment Landscape
Across the Atlantic, the enforceability of non-compete agreements is subject to common law principles and statutory regulations. Generally, non-compete clauses are enforceable only to the extent that they are reasonable and necessary to protect the employer’s legitimate business interests. The case of Tillman v Egon Zehnder Ltd[7], heard by the UK Supreme Court in 2019, clarified the law on restrictive covenants. Ms. Tillman, a former employee of Egon Zehnder, challenged the enforceability of a non-compete clause in her employment contract that prohibited her from “directly or indirectly engaging or being concerned or interested in any business carried on in competition with” her former employer for six months after the termination of her employment. The Supreme Court held that the clause was unenforceable as it was too wide and prevented Ms. Tillman from holding even a minor shareholding in a competing business.
Another significant case is the case of Marathon Asset Management LLP v Seddon, which was heard by the UK Court of Appeal in 2017. In this case, Mr. Seddon, a former employee of Marathon Asset Management, had signed a contract containing a non-compete clause that prevented him from working for a competing company for six months after leaving his job. Mr. Seddon went on to work for a competing company within the prohibited period, and Marathon sued him for breach of contract. The Court of Appeal held that the non-compete clause was too wide and therefore unenforceable, as it prevented Mr. Seddon from working for any competing company, regardless of whether it was a direct competitor or not.
These cases demonstrate the UK’s slightly stricter approach to non-compete agreements where reasonableness and necessity are scrutinized, and overly broad or restrictive clauses deemed unenforceable by the courts.
III: Overview of Singapore’s Employment Landscape
In Singapore, non-compete agreements are enforceable to the extent that they protect an employer’s legitimate business interests and are reasonable in scope, duration, and geographical coverage. Singapore courts have generally taken a more employer-friendly approach to non-compete clauses than some other jurisdictions, but they will still strike down clauses that are overly restrictive or unreasonable.
For instance, where other jurisdictions like New York may allow non-competes to protect confidential information, in Singapore, where the protection of confidential information is already covered by another clause in the contract (e.g. a confidentiality clause), the covenantee will have to demonstrate that the restraint of trade clause in question covers a legitimate proprietary interest over and above the protection of confidential information or trade secrets[8]
IV. Similar Legal Tests – Different Outcomes
While the legal tests in each jurisdiction are very similar if not identical, the application of these legal principles are informed by the countries’ public policy considerations. In the UK, courts have taken a stricter approach to the enforceability of non-compete clauses due to the country’s public policy of promoting competition and preventing the restriction of trade. This has resulted in a greater emphasis on the need for non-compete clauses to be narrowly tailored to protect the legitimate interests of the employer without unduly restricting the employee’s ability to work.
In contrast, Singapore has a different public policy approach towards non-compete agreements, where they are generally viewed as a legitimate means for businesses to protect their proprietary interests. This has resulted in a more permissive approach to the enforcement of non-compete clauses, with the courts taking into account the duration, scope, and nature of the restrictions, as well as the legitimate business interests of the employer.
V. Conclusion
Given the substantial and often negative influence of big corporations in US on “labour market fluidity”, with non-competes common even for fast-food workers, clerks, and low-level hospital employees, FTC’s proposed rule is timely. The UK and Singapore experience demonstrate how public policy considerations and other factors such as industry practices, level of competition, and the nature of the job market lead to slightly different outcomes with respect to the enforcement of non-competes.
[1] FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Federal Trade Commission, 5 January 2023
[2] Big Business’ Plan To Block Biden’s Plan on Noncompete Agreements, The Intercept, Ken Klippenstein, Lee Fang & Jon Schwarz, 3 February 2023
[3] This article is limited to New York State when discussing non-competes in the the US context.
[4] FTC proposes ban on non-compete agreements, Rochester Business Journal, 3 March 2023
[5] 712 N.E.2d 1220 (1999)
[6] Title 3 of Maryland’s Code Annotated for Labor and Employment, Section 3-716 only prohibits employers from requiring non-compete agreements when the employee is earning equal to or less than $15 per hour, or $31,200 per year. These monetary restrictions are limited and appear to allow non-competes for many professions that exceed those numbers.
[8] Smile Inc Dental Surgeons Pte Ltd v. Lui Andrew Stewart [2011] SGHC 266
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For further information on the issues raised, please contact Nadia Moynihan at nm@branchaustinmccormick.com
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