Malaysia Update: Post-Employment Restrictions: Non-Compete, Solicitation & Confidentiality

Gone were the days where employees stayed loyal only to one employer till retirement. Following the growth in living standards and education in Malaysia, employees tend to seek for better career opportunities and progression. Leaving a job to pursue a better opportunity and career progression are becoming social norms. The raging Covid-19 pandemic situation has also magnified the rate of workforce turnover in the market. Employers spend considerable time, money and effort in developing strong relationships with suppliers, customers and employees. These strong relationships contribute greatly to the success of the business.

In such circumstances, employers would require legal protection to protect their business interests to prevent poaching of customers and staff by their former employees. A non-solicitation agreement or clause is an agreement between employer and employee whereby employee agrees not to solicit any of the employer’s business customers or colleagues after the employee left to join a competitor or be a competitor of the employer. 

Non-Solicitation Clauses 

Recently in Singapore, an insurance company’s former top group agency manager and his company were sued by the insurance company for breaching contractual and fiduciary duties by poaching the agents for a competitor while he was still with the company.

The High Court in Singapore was of the view that it was an agency’s instruction that the former manager had to abide by a non-solicitation obligation when he was with the company. However, such obligation was absent in the agency agreement he had signed with the company. Therefore, he was not subject to any non-solicitation obligation after he left the company. Due to how his agency agreement with the company was drafted, the company was only able to prove the breach of an express contractual obligation in his agency agreement that he had failed to “conduct his insurance business with integrity and honesty”. Even though the Court found that he was not bound by any non-solicitation clause, it went on to opine that had the clause been in the agency agreement, it would have been reasonable and enforceable against him. 

In light of the Court’s finding, this serves as a reminder to employers that non-solicitation clauses should be validly incorporated to protect their business interests.  The essential takeaway is that an express and properly worded non-solicitation clause needs to be validly incorporated in any employment contracts to be binding on employees. Otherwise, it would be difficult for an employer to seek recourse for the wrongful conduct of a former employee in soliciting his former customers or colleagues.

The Enforceability of Non-Solicitation & Non-Compete Clauses in Malaysia

The position is rather similar in Malaysia. Although post-termination non-compete clauses are clearly void and unenforceable in Malaysia, a non-solicitation clause may be upheld. A non-solicitation clause in an employment contract is binding on the employee during and post-employment. A reasonable post-employment period should be set, to make the non-solicitation clause enforceable post-employment. Most importantly, a non-solicitation clause may be rendered ineffective if they are not clearly worded or properly incorporated. A poorly drafted non-solicitation clause can be tricky and employers should not leave it to chance.

Duty of Confidentiality & Trade Secrets

Employers would have legitimate reasons for employees to sign a non-solicitation agreement for the protection of trade secrets, client lists and employee-poaching during the term of employment and a reasonable post-employment period. An employee’s duty for non-solicitation of customers and employees is often intertwined with the duty of confidentiality. Trade secrets are not only limited to manufacturing processes or secret formulae. In Malaysia, customers’ names, lists and details have been judicially recognized as being confidential in nature and they can be trade secrets. Wrongful utilization of such particulars warrants injunctive protection from the Court.

Employers should also include a clause in the employment contract for the duty of good faith or fidelity of an employee. The duty of good faith or fidelity does not only require that the employee refrains from misuse or from disclosing confidential information whilst still in the employment of the employer. There is an implied duty that prohibits the employee from using any confidential information obtained during his employment, without the employer’s consent, for his own or someone else’s use after the employment contract ends.

By Leonard Yeoh and Pua Jun Wen, Tay & Partners, Malaysia, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact malaysia@transatlanticlaw.com

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