Dear PAO,

I resigned from my previous employer, and after three months, I was hired by another company. During the sixth month of employment with my new employer, I received a letter from a law office directing me to cease and desist from working with my current company, otherwise, I would be liable to pay liquidated damages amounting to P500,000, as stated in the non-compete clause of my employment contract. I would like to inquire about the legal implications that may arise from the enforcement of said non-compete clause. Thank you.

Lyka

Dear Lyka,

A non-compete clause, also known as a restrictive covenant, is a contractual stipulation whereby the employee is prohibited from competing against the employer in a similar activity for a certain period. In the Philippines, a non-compete clause, is generally recognized as valid, subject to certain restrictions. Such clauses are typically incorporated in employment contracts or service agreements to restrain an employee or former employee from engaging in activities that directly compete with the employer.

While non-compete clauses are not regulated by any labor law, the New Civil Code and the pronouncements of the Supreme Court may apply. Article 1306 of the same Code recognizes the freedom of contract, allowing parties to stipulate terms provided they are not contrary to law, morals, good customs, public order, or public policy. However, this contractual freedom is tempered by the constitutional guarantee of the right to work and earn a livelihood.

While an employer may incorporate a noncompete clause into an employment contract as part of established practice, such stipulation, while generally valid, may nevertheless be subject to challenge depending on its specific terms, scope, and limitations. In Rolando C. Rivera vs. Solidbank Corporation (G.R. No. 163269, 19 April 2006), the Supreme Court, speaking through Associate Justice Romeo J. Callejo, Sr., enunciated the guiding principles in determining the reasonableness of a non-compete clause. The following factors must be considered: (a) whether the covenant safeguards a legitimate business interest of the employer; (b) whether the covenant imposes an undue burden upon the employee; (c) whether the covenant is prejudicial to public welfare; (d) whether the time and territorial limitations therein are reasonable; and (e) whether the restraint is reasonable in light of public policy.

In the said case, the Supreme Court recognized the validity of non-compete clauses but emphasized the necessity of balancing the employer’s right to protect its business with the employee’s right to work. Clearly, overly broad, continuous, or geographically unlimited restrictions would be struck down as contrary to public policy.

Moreover, where the contract is prepared solely by the employer, leaving the employee with no choice but to adhere thereto, otherwise known as a “contract of adhesion,” the same may be subjected to judicial scrutiny and construed strictly against the party who drafted it, particularly where its provisions appear to be against public policy or to have been imposed for the purpose of oppressing the weaker party.

In your case, it is better to seek the advice of a legal counsel who can examine in detail the specific terms, conditions, and limitations of the non-compete stipulation in your employment contract. The lawyer may determine whether a violation exists by taking into account your former position with your previous employer vis à vis your present position with your new employer, the geographical location of the two establishments, the duration of the restrictive covenant, the amount of liquidated damages, and other circumstances surrounding your employment.

We hope that we were able to answer your queries. This advice was based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.

We appreciate your trust and support.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]