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.


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. Hi atty. tanong ko lang kung lumipat ako sa kliyente ng employer ko. Ang sitwasyon po kasi yung lilipatan ko ay sinusupplyan ng equipment ng current employer ko. Kasi yung current employer ko ay distribution samantalang yung lilipatan ko ay reseller.

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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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  3. Good day Sir. I am working in an multinational FMCG (Fast Moving Consumer Goods) in Philippines and is currently being considered (or pirated) for a position in the competitor of my current company but in South Korea. Will my current company have grounds to sue me even if my future company is no longer in Philippines?
    Thank you!

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  4. hi good day sir, My company are enforcing us to sign a non compete contract and told us that if we do not sign it we can be terminated due to article 282 of labor code. How was that? is that possible?

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  5. HI. are employers forced us to sign a non compete contract and tell us that if we refuse to sign the contract we can be terminated to artcle 282 of labor code. How was that?

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  7. Hi Atty, is non-compete still enforceable if the employer has forced their employee to resign by constructive dismissal? If the employee has also been doing the same line of work and in the same industry (local and abroad as ofw) for more than 7 years, does he/she has a chance to win a court battle in case he/she will transfer to a competitor of his/her previous company? Thank you in advance.

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  8. Hi Atty, resigned January 2017, non compete indicated (1 year for same business). Today I am om 1 year and 2 months (same type of business). can my previous company still sue me? since paso na yung 1 year validity indicated sa non compete). hope for your reply (scorgemces@yahoo.com) please send me an email as well. Thank you

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  9. Hi, is a non-compete enforceable if the employee was never given a copy after being made to sign it?

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  10. Good day Atty! I hope this messages finds you well. Would like to ask if its okay to include a non-compete clause to an employee contract of a Non-Profit Organizations or NGO?

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    1. If it is a "non-profit" organization then there wouldn't be any point in including a non-compete clause in your contract, unless in reality, your NGO/Non-profit org is in fact for profit. A non-compete clause is only relevant if you have profits/business interests to protect.

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  11. Hi Atty! I hope you are well. In the non-compete clause that i signed, it is stated that "...I shall not, directly or indirectly solicit or accept any offer of employment or consultancy from/with another company engaged in direct competition...whether in the Philippines and elsewhere, within a period of 2 years..." Don't you think that the place or territory limitation (i.e. in the Philippines and elsewhere) is unreasonable and could be ground for the entire non-compete clause to be void?

    Thank you Atty. Praying for your response. More power to you!

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  12. Hi Atty! I hope you are well. In the non-compete clause that i signed, it is stated that "...I shall not, directly or indirectly solicit or accept any offer of employment or consultancy from/with another company engaged in direct competition...whether in the Philippines and elsewhere, within a period of 2 years..." Don't you think that the place or territory limitation (i.e. in the Philippines and elsewhere) is unreasonable and could be ground for the entire non-compete clause to be void?

    Thank you Atty. Praying for your response. More power to you!

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  13. Good Day Atty! I am currently a consultant of an implementation company sa Philippines wherein ang customers namin is business within Philippines. I applied as a business process consultants sa isang implementation company (different software) na ang clients is sa abroad (they don't have clients within the Philippines), when my current company knew about this they threatened me na sasampahan ako ng kaso. Covered pa rin ba yung company na inapplyan ko sa noncompete agreement?

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    1. Check your consultancy contract. If you are a direct employee of that Ph implementation company and "consultant" is just a job position, then you are not really a consultant. The terms and conditions of your contract defines your relationship with your client (your DIRECT client).

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  14. Hi Atty,

    My non compete clause does not mention a geographical location. Does that imply na sa pinas lang sya applicable?

    Im working in a PH consulting company and works for Australian clients. My family is moving to australia na and when my client learned about this they were keen on hiring me as their employee sa australia. They knew about my move to aus after I resigned. Will this breach my non compete clause with my PH company if I accept the job?

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  15. Good pm atty. I hope my message finds you well. I am a home-based English instructor and I am concerned about the Non-Compete Covenant in my contract. My direct supervisor says to ignore it and that they will not sue, but refuses to change or revise the words written on the contract I am expected to sign. It limits me from taking any work related to “online language instruction” or “distance learning” for one year. I am a teacher by profession and the pandemic forces all kind of education to be distanced. Where does that leave me? Thank you and regards.

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  16. Hi Atty!

    I am a rank and file salesman and I have a non complete clause in effect 2 years after my resignation. Is it still enforceable if I work for a competitor and got assigned to a different area and there is no geographical limitation set? By the way, my current company hires from competitors that's why I find my non compete clause ridiculous.

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