Non Compete Clause: What Employers and Employees Need to Know

In today’s competitive job market, it’s common for companies to include non compete clauses in employment contracts, especially in industries like BPO, tech, and legal services. But are these clauses enforceable in the Philippines? And what rights do employees have if they’re asked to sign one?

This expert guide explores what non-compete clauses really mean under Philippine civil law, when they can be enforced, and what employers and employees should watch out for in 2025.

What Is a Non-Compete Clause?

A non-compete clause is a contractual provision that prohibits an employee from working for a competitor or starting a similar business for a defined period after leaving a company.

These clauses typically include:

• Time-based limits (e.g., 6 or 12 months after resignation)
  
• Geographic restrictions (e.g., within Metro Manila or the entire Philippines)
  
• Industry or scope restrictions (e.g., same sector or specific client base)
  

Employers often include non-competes to protect sensitive business information, client relationships, and proprietary systems.

Is a Non-Compete Clause Legal in the Philippines?

There is no specific provision under the Philippine Labor Code that directly addresses non-compete clauses. However, they are governed by Article 1306 of the Civil Code, which allows parties to enter into contracts provided they are not contrary to law, morals, good customs, public order, or public policy.

Courts in the Philippines have recognized non-compete clauses as valid and enforceable, but only if they meet the test of reasonableness.

Key Supreme Court rulings include:

• Rivera v. Solidbank Corp.: A non-compete clause is enforceable if it protects a legitimate business interest and is not unduly restrictive.
  
• Anselmo Ferrazzini v. Carlos Gsell: Upheld the principle that non-competes are valid if the restrictions are reasonable in time and trade.
  

When Is a Non-Compete Clause Enforceable?

For a non-compete clause to be upheld in court, it must:

• Be reasonable in duration, usually between 6 months to 1 year
  
• Apply only to specific geographic locations, not nationwide unless justified
  
• Be limited to relevant business activities or client segments
  

Overly broad or vague restrictions will likely be struck down. For example, a clause that prevents a former employee from working in any tech company globally for five years would be considered void for being contrary to public policy.

Employers bear the burden of proof to show that the clause is necessary to protect a legitimate interest and does not unreasonably restrict the employee’s right to livelihood.

Common Scenarios in the Philippines

Employee Examples:

• A call center agent moves to a competing BPO within the same city.
  
• A software developer joins a startup that builds similar enterprise tools.
  
• A freelance designer signs a contract with a non-compete clause restricting work for similar clients.
  

Employer Concerns:

• A sales executive attempts to poach clients and staff after resigning.
  
• A former manager sets up a competing business using internal methodologies.
  

What Happens If a Non-Compete Clause Is Violated?

Violation of a non-compete clause leads to a civil case, not a criminal one. An employer can file a suit for:

• Damages: Compensation for business loss
  
• Injunctive relief: Court order preventing the former employee from continuing prohibited activities
  

To succeed, the employer must:

• Prove the clause is valid, reasonable, and enforceable
  
• Show that the violation caused actual or probable harm
  

Often, these cases are settled to avoid prolonged litigation.

Do Non-Compete Clauses Apply to Freelancers and Project-Based Workers?

Yes, but with important nuances.

• Freelancers are bound only if they enter into a civil contract with a valid non-compete clause.
  
• Project-based or probationary employees may be subject to a clause, but enforceability depends on whether it restricts future livelihood unreasonably.
  
• The Department of Labor and Employment (DOLE) considers independent contractors differently from regular employees, so companies must ensure that such contracts are compliant and fair.
  

How Are Non-Compete Clauses Different from Other Contractual Restrictions?

Industry Focus: BPO and Offshoring

The BPO and offshoring sector in the Philippines often uses non-compete clauses to:

• Protect client confidentiality
  
• Deter high attrition and talent poaching
  
• Prevent replication of proprietary processes
  

However, employers should focus on non-solicitation and confidentiality agreements, which are more defensible in court and less likely to be challenged under public policy grounds.

Tip: Complement restrictive clauses with strong employee engagement, retention incentives, and professional development opportunities.

Best Practices for Employers

To avoid legal and reputational risks, employers should:

• Draft clauses that are clear, specific, and narrowly scoped
  
• Avoid vague or overly broad terms
  
• Include the clause in a separate signed agreement or a well-defined section in the employment contract
  
• Explain the clause during onboarding to promote transparency
  

What Employees Should Watch Out For

Before signing, employees should:

• Review the clause for excessive restrictions (e.g., time, geography, scope)
  
• Ask: “Can this prevent me from earning a living?”
  
• Clarify vague language
  
• Seek legal advice if the clause feels overly broad or unfair
  

Remember, your right to work is constitutionally protected. No contract should unreasonably prevent you from pursuing your career.

Final Thoughts: Use With Caution, Enforce With Fairness

Non-compete clauses are not inherently illegal in the Philippines. But they are subject to strict legal standards and public policy considerations. When used correctly, they can protect legitimate business interests. When abused, they can be struck down by the courts.

For employers: Use narrowly tailored clauses and prioritize enforceable alternatives like NDAs and non-solicitation.

For employees: Know your rights and don’t hesitate to ask for clarity before signing. Your future career depends on it.

Need help drafting or reviewing employment contracts? Consult a Philippine labor law expert to ensure your agreements are fair, compliant, and enforceable.