6 lessons on severance packages and non-competes
A recent decision of the Singapore High Court looked at enforcement of a severance package and a non-compete undertaking.
The employee was a regional cement trader with a commodity trading company for close to four years before their relationship deteriorated. He resigned after a discussion with his employer on a severance package and the package was later formalised in a confirmation letter issued by his employer. He had signed a non-compete undertaking at the outset of his employment.
The employer wanted to:
- withhold payments under the severance package because the employee had been engaging in activities prohibited under his non-compete undertaking, and
- stop the employee from further breaching the non-compete undertaking for the remaining two year non-compete period.
The employee wanted the opposite. They both got some of what they wanted and have a few lessons for employers in the process.
Lesson 1 – Tailor your non-compete to your employee’s role and responsibilities
Your company may be in the commodities trading industry, but it wouldn’t be wise to draft a blanket prohibition from working in that industry.
Instead, you should think carefully about the ‘legitimate interests’ you have which may be reasonably protected. The closer your non-compete is tailored to what the employee has actually worked on or where the employee has actually worked, the more likely it is that it will survive judicial scrutiny.
In this case, the judge was particularly impressed with the restriction of the non-compete to “products and services that the employee was involved with during the 12 months immediately preceding the date of termination”. The employee was not prohibited from dealing in other commodities in the commodity trading industry.
It also helps to ensure that the territories to which the non-compete applies are closely tied to territories the employee had actual and significant customer contacts – even if this occurs indirectly in your drafting.
Lesson 2 – Don’t forget your group structure when you’re drafting a non-compete
It is not uncommon for businesses to have elaborate corporate structures these days. Some might have a special company that employs all employees and does little else.
Does this mean that a non-compete may only apply to the business of the company employing the employee? You’d be relieved to hear that the answer is ‘no’. You should provide for a situation where an employee works for or their work benefits the employer’s affiliates.
However, while the restriction might apply to products, territories or customers of affiliates, it is still important that the non-compete is limited to products, territories and customers the employee has meaningful access to during a reasonable period of their employment.
A careful drafter would protect the interests of affiliates and a better drafter yet would do that without pushing your employee’s post-termination restrictions beyond the boundaries of enforceability.
Lesson 3 – Only apply non-competes to special employees
Not all employees will build material relationships with your clients or customers. Similarly, not all your employees will have access to your trade secrets or other important confidential information.
In this case, the judge took into account the fact that the employee was essentially “the person-in-charge” of trades in particular countries. Even if he was required to obtain approval for trading decisions, he was expected to build rapport with clients and trade relationships for the employer in the region.
It is understandably easier to justify a non-compete against an employee who has been liaising with your clients and who has a measure of influence over where they bring their business to.
Lesson 4 – Longer non-competes need better justification
The period of your non-compete should not be a number picked out of thin air. It should be grounded in realities such as the employee’s role in your business and the time it would reasonably take to re-establish a relationship with the client or customer after the employee departs.
In this case, the length of the non-compete was a little on the high side but the employee’s role (and possibly his blatant breach of his non-compete undertaking) meant that the non-compete was found to be enforceable.
Lesson 5 – If your severance package comes with conditions, make sure you say so
Before you finalise your severance package, you might want to consider things your employee may do later which may mean you’d prefer not to hand over the money.
For example, if your employee breached any surviving confidentiality obligations or started to disparage you with your clients or employees, you may feel even less happy about parting with your cash.
In this case, the employer did not specify compliance with the non-compete undertaking as a condition of payment of monies under the severance package. While the employer sued for breach of the non-compete, it was not able to withhold payments under its severance package.
Lesson 6 – If you’re going to say that the severance package is ex-gratia, you shouldn’t just label part of it ex-gratia
Perhaps this is more a lesson on consistency in drafting. If your severance package is ex-gratia (i.e. payable at the employer’s sole discretion), your agreement should reflect that. Labelling certain payments as ex-gratia does not cut it. It only invites the conclusion that the parties agree that only those payments are ex-gratia.
In this instance, the employee was promised payment of 3.7 months’ salary and a variable bonus (calculated based on a formula provided). The former was labelled as ex-gratia, but the latter was not.
We hope these lessons help when you’re considering a severance package or a non-compete undertaking. Non-compete undertakings and other post-termination restrictions are usually scrutinised by the courts for enforceability.
Each case is decided on its own facts, but lessons from this case and others demonstrate that post-termination restrictions that are drafted clearly and precisely will have a better chance of being held enforceable.
Get in touch with us if you’d like a tailored review of your post-employment restrictions.
 Tan Kok Yong Steve v Itochu Singapore Pte Ltd  SGHC 85
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