Challenging a Five-Year Non-Compete Clause in the Philippines

A comprehensive practitioner-oriented guide (updated May 2025)

1. Overview

Non-compete covenants in employment contracts walk a constitutional tight-rope: they safeguard an employer’s proprietary interests, yet they also restrict the employee’s fundamental right to livelihood (Art. III §18, 1987 Constitution) and the constitutional policy of full employment (Art. XIII §3). Filipino courts therefore treat every restraint of trade as prima facie void unless the employer proves that the limitation is reasonable in all the circumstances. A five-year restraint is especially vulnerable, because Philippine jurisprudence has rarely upheld anything beyond two years without unusually strong facts.

2. Legal Sources

Source	Key principle
Civil Code Art. 1306	Freedom to contract, limited by “law, morals, good customs, public order, or public policy.”
Civil Code Art. 1159, 1191, 1229	Binding force of contracts; rescission for breach; reduction of iniquitous liquidated damages.
Labor Code Arts. 3 & 294	Security of tenure & protection to labor—often cited to invalidate overly broad restraints.
Constitution Art. III §18(1)	Prohibits involuntary servitude; the longer the restraint, the nearer it edges to servitude.
Constitution Art. XII §19	State regulates monopolies and unfair competition—invoked where an industry-wide ban stifles competition.
Rules of Court (Rule 58)	Procedure for obtaining or dissolving an injunction relating to non-compete enforcement.
DOLE Advisory opinions (several, 2003-2024)	Non-competes are civil—not labor—disputes, but an employer’s file for clearance may still be scrutinised by the NLRC if it amounts to constructive dismissal.

3. Doctrinal Test of Reasonableness

Philippine courts have borrowed the classic Anglo-American three-prong test and adapted it through case law:

Legitimate Interest – The restraint must protect trade secrets, confidential information, goodwill, or substantial investment in the employee’s training.
Reasonable Scope
- Time – “No longer than necessary.” One to two years is the usual ceiling; three years sometimes passes muster in high-level executive or R&D roles; five years has never been upheld absent extraordinary proof.
- Territory – Must match the employer’s actual market footprint; nationwide bans are disfavoured unless the business truly operates nationwide.
- Activity – Must be limited to the specific line of business or type of work the employee performed.
Public Policy Balance – The covenant must not unduly restrain trade or impoverish a worker; factors include availability of comparable employment, employee’s age, and the country’s policy of encouraging competition.

4. Key Supreme Court and CA Rulings

Case	G.R. No.	Ruling on Duration
Carlos Gsell v. Pedro Koch (1910)	L-12615	Upheld a 3-year ban limited to selling German-made cigars in Manila; emphasised employer’s legitimate interest.
William Scott v. Gsell (1918)	L-9700	Struck down a 5-year restraint as per se excessive.
Anselmo Ferrazzini v. Gokongwei Bros. (1965)	L-24153	Sustained a 2-year, city-limited clause; warned that longer terms require “compelling necessity.”
Dresser–Rand Phils. v. Abella (CA, 8 Aug 2017)	CA-G.R. SP No. 148923	Voided a 4-year, ASEAN-wide clause because it barred the engineer from the entire oil-and-gas sector.
Zuellig Pharma Corp. v. Roderick Perez (SC, 3 Oct 2018)	238022	Confirmed that an 18-month ban tied to specific clients is reasonable; distinguished it from broader multi-year covenants.
Sun Life Grepa v. Clariza Sioson (SC, 11 Jan 2023)	253761	Clarified that employers seeking an injunction must show imminent threat to trade secrets; speculative damage is insufficient.

Trend: No Philippine decision has approved a pure five-year employee restraint since pre-Commonwealth days, and even those early cases flagged the term as suspect.

5. Typical Red Flags in a 5-Year Clause

No express consideration beyond the employee’s regular salary.
Geographic overbreadth (e.g., “anywhere in the Philippines or abroad”).
Industry-wide ban rather than targeted activity.
Liquidated damages so huge they are punitive (e.g., ₱5 million flat penalty).
One-sided amendment clause letting the employer extend the term unilaterally.
Silence on post-employment compensation (garden-leave pay).

Any one of these can supply grounds for nullity; in combination they almost guarantee it.

6. How to Challenge a Five-Year Covenant

Stage	Forum	Key Relief / Strategy
A. Preventive Negotiation	HR, Legal, or mediation under DOLE Single-Entry Approach (SEnA)	Argue lack of reasonable necessity; propose shortening to ≤ 24 months, limiting to specific clients, and adding separation pay.
B. Declaratory Action	Regional Trial Court (RTC) – Civil Action under Art. 1397 Civil Code	Seek declaration of nullity and avoidance of liquidated damages; request temporary restraining order (TRO) if employer threatens enforcement.
C. Labor Complaint	NLRC / Labor Arbiter	If employer withholds clearance or Certificate of Employment, file for constructive dismissal or illegal withholding of wages.
D. Defense to Injunction	RTC (if employer sues first)	Oppose preliminary injunction by showing: (1) covenant is void; (2) no irreparable injury; (3) public interest in employee’s right to work.
E. Appeal	Court of Appeals → Supreme Court	Track ordinary appeal periods (15 days CA; 15 days SC).

Burden of proof: The employer bears the onus to justify reasonableness. Once the employee shows that the duration or breadth exceeds what is customary, courts usually require the employer to present concrete, contemporaneous evidence of trade-secret risk.

7. Defensive Tools for Employees

“Blue-Pencil” Doctrine Request – Ask the court to sever the unreasonable portions rather than strike the entire contract, leaving a narrowed clause (common in Singapore; increasingly cited in PH litigation).
Evidence of General Knowledge – Demonstrate that the alleged “confidential information” is publicly available or outdated after 6-12 months.
Economic Hardship Proof – Present job offers withdrawn because of the restraint; highlight family obligations.
Industry Practice Expert Testimony – Show that peer companies limit covenants to ≤ 24 months.
Constitutional Argument – Invoke Art. XIII §3 (“full protection to labor”) to frame the restraint as contrary to public policy.

8. Practical Drafting Tips for Employers (to survive scrutiny)

Pay garden-leave equal to at least 50 % of last basic pay for the duration of the restraint.
Limit time to 12-24 months for ordinary employees, 36 months only for C-suite R&D or sales employees with access to unique formulas or client lists.
Define “Competing Business” narrowly—e.g., “manufacture and sale of ABC-brand refractory bricks” rather than “construction materials.”
Tie geographic scope to actual business zones (e.g., “within Metro Manila” or “within Region VII”).
Add a severability clause expressly authorising blue-pencilling.
Make liquidated damages a sliding scale (e.g., three months’ gross pay) rather than a fixed, punitive sum.

9. Tax and Benefits Implications

Garden-leave payments are considered compensation income subject to withholding tax (BIR RMC 50-2018).
Amounts collected as liquidated damages are taxable in the employer’s gross income, but seldom reported because collection is rare—failure to report may trigger BIR audit.

10. Risks of Over-Enforcement for Employers

Damages for Lost Employment – Art. 2200 Civil Code allows recovery of “all damage which may be attributed.”
Reputational Harm – Aggressive suits deter future applicants.
Administrative Scrutiny – DOLE may investigate if refusal to issue clearance morphs into an unfair labor practice.

11. Summary Checklist for Employees Facing a 5-Year Non-Compete

Read the exact wording—note time, territory, activity, penalties.
Secure copies of all HR manuals, incentive plans, and emails referencing the covenant.
Gather evidence of skills that are public-domain or non-confidential.
Consult counsel before signing or resigning; consider sending a letter of reservation contesting the clause’s validity.
Explore amicable settlement; many employers prefer trimming the clause over protracted litigation.

12. Conclusion

In Philippine law, “five years” is prima facie excessive for a post-employment non-compete unless the employer can prove (a) truly unique trade secrets that will remain competitively sensitive for half a decade and (b) corresponding compensation to cushion the employee’s loss of livelihood. Absent such proof, courts will almost certainly declare the covenant void for being an undue restraint of trade. Employees armed with the constitutional right to work, the Civil Code’s reasonableness doctrine, and a century of jurisprudence have robust grounds to challenge—and defeat—a five-year non-compete clause.

This article is for informational purposes only and does not constitute legal advice. For case-specific guidance, consult Philippine counsel.