Can Employers Prevent An Employee From Joining A Competitor After The Employment Ends?

You may have seen this type of clause in your employment contract:

 

“After the termination of employment for any reason whatsoever, the employee shall not for a period of 12 months from the date of termination carry out any business of any nature that is similar in nature to or is in competition with the employer.”

 

This Clause is commonly known as “non-competition clause”, or “restraint of trade” clause.  It essentially prohibits an employee to join a competitor after he or she left the company.

 

This clause may seem to favour the employers, as it protects the company’s trade information by preventing the ex-employees from providing their services to another company. Thus, the question is, does the Malaysian laws allow it?

 

Non-Competition Clause Has No Legal Effect

Non-competition clause cannot be enforced in this country, due to Section 28 of the Contracts Act 1950 (“CA 1950”). It reads as follow:

 

“Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.”

 

In the case of Nagadevan a/l Mahalingam v Millenium Medicare Services [2011] 4 MLJ 739, the Court of Appeal held that in restricting the liberty of the employee to carry on the practice of a medical practitioner for a period, was an agreement which has no legal effect under Section 28 of the CA 1950.

 

There are, however, 3 exceptions to the general rule under Section 28:

  1. When selling a business, the seller can agree with the buyer that the later will not operate a similar business to compete with the business.
  2. Business partners can agree not to compete with each other during the partnership, or after the dissolution of the partnership.
  3. Business partners can agree not to operate any other business while their partnership is in effect.

Hence, if your situation does not fall under these 3 exceptions, the law does not allow you to restrict another person from conducting a lawful business.

 

Restriction During the Course of Employment is Allowed

The rule in Section 28 does not apply to employees during the course of employment. In other words, the employers are allowed to impose certain restrictions in the employment contract to prohibit the employees from having direct or indirect interest in any rival company.

 

Further, it should be noted that an employee also owes a duty of care towards the employers to act in good faith for the benefits of the employer. The standard required for loyalty, good faith and avoidance of conflicts of interests depends on factors such as the position of the employee, the nature of the corporate opportunity, and the nature of employment.

 

For example, a highly skilled employee giving spare time to a competitor as an ‘odd jobs’ man is more likely to be found to be in breach of his duty to his employer. However, a less skilled employee who gave his spare time to a competitor as an ‘odd jobs’ man may not be found to be in breach. The vital point is, whether the work done for the rival company in his spare time will cause, or likely to cause any substantial harm to the employer.

 

How Can the Employers Protect Their Confidential Information from Being Revealed by an Ex-Employee?

Although employers are not allowed to prevent the employees from joining a competitor after the employment ends, the company is, however, allowed to prohibit an ex-employee from using, disclosing or divulging confidential information or trade secrets to its detriment. 

 

However, it must be also bear in mind that the limitations contained in the clause has to be reasonable. In the case of Worldwide Rota Dies Sdn Bhd v Ronald Ong Cheow Joon [2010] 8 MLJ 297, the court held that restrain is permissible if it is fashioned in such a way as to prevent a misuse of trade secrets or business connexion. In determining reasonableness, the Court will take into account the nature of business, extent of restrictions, as well as the commercial reality of the matter.

 

If you have any questions in relation to non-competition clause in your employment contact, kindly contact an employment lawyer to assist you.

 

Disclaimer: This article is written by ZY Ho. The above article is intended for general informational and education purposes only and not for the purpose of providing legal and professional advice. Have a question on the Malaysian Employment Law? Contact members of Chern & Co. at info@chernco.com.my

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