Tuesday, October 25, 2016

Non-Compete Clause in Employment Contracts: Is it valid?

A business can be considered a property right for which an employer may use reasonable means to protect such property right or business interest through the use of a Non-Compete Clause in employment contracts with its employees. The usual question asked is whether or not  a Non-Compete Clause in an employment contract is valid in the Philippines. The answer is both yes and no. 

The Supreme Court of the Philippines, as held in Rivera vs. Solidbank Corporation that: 
restrictive covenants are enforceable in this jurisdiction unless they are unreasonable.  And in order to determine whether restrictive covenants are reasonable or not, the following factors should be considered:(a) whether the covenant protects a legitimate business interest of the employer; (b) whether the covenant creates an undue burden on the employee; (c) whether the covenant is injurious to the public welfare; (d) whether the time and territorial limitations contained in the covenant are reasonable; and (e) whether the restraint is reasonable from the standpoint of public policy.

A non-compete clause is basically a restrictive contract for which it must adhere to the aforementioned factors. In further determining the validity of non-compete clauses or non-involvement clauses, we have several jurisprudence that upholds its validity, provided that it adheres to reasonable limitations as to time, trade, and place. In Tiu vs. Platinum Plans, Inc., the Supreme Court gave several examples of what is an invalid non compete clause/non-involvement clause versus a valid one:

As early as 1916, we already had the occasion to discuss the validity of a non-involvement clause. In Ferrazzini v. Gsell, we said that such clause was unreasonable restraint of trade and therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for a period of five years after the termination of his employment contract and must first get the written permission of his employer if he were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forces an employee to leave the Philippines to work should his employer refuse to give a written permission.
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However, in Del Castillo v. Richmond,  we upheld a similar stipulation as legal, reasonable, and not contrary to public policy. In the said case, the employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employers place of business during the time the employer was operating his drugstore. We said that a contract in restraint of trade is valid provided there is a limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires.
Finally, in Consulta v. Court of Appeals,  we considered a non-involvement clause in accordance with Article 1306 of the Civil Code. While the complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in activities of other companies that compete with the business of her principal. We noted therein that the restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principals business. Further, the prohibition applied only for one year after the termination of the agents contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer.
Conformably then with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place.


4 comments:

  1. Hello Atty., regarding non compete clause my company prohibits me from establishing or applying to a company with the same nature for 1 year if I resign. Is there any way where I can still apply in another company dor the same job as I have now? Thank you and hoping for your response.

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    1. You can actually disregard it and hope for the best that your former employer will not sue you. Most employers won't go thru the hassle of suing unless they want to make an example out of you.

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  2. Good day sir inquiring my initial contract with my company has a blank space within the duration of the non competitive and restrictive covenat clause when they gave me a copy of my contract there was a hand written number 6 and underlined months for the said clause. This was not explained by the company.. is this legal

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    1. Did you ask questions? It is presumed you read the contract and understood it before you affixed your signature. The lack of an explanation does not in any way diminish the validity (presuming the contents are indeed valid) of the clause. If you signed the contract and agreed to the terms you are bound.

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