New-Hire Contracts Featuring Expanded Non-Compete Clauses in the Philippines
A comprehensive doctrinal and practical guide (updated to July 2025)
Key take-away: In Philippine law a non-compete covenant is not automatically void; it is enforceable if it passes the Supreme Court’s “reasonableness” test and respects constitutional and statutory limits. Recent practice, however—especially in BPO/IT-BPM, fintech, and hybrid-work environments—shows employers broadening the clause’s reach (“expanded” non-competes). Courts will still police such clauses strictly.
1. Statutory & Constitutional Anchors
| Source | Relevance to Non-Competes |
|---|---|
| 1987 Constitution • Art. III, § 1; Art. XIII, § 3 | Protects liberty of occupation and security of tenure; any restraint must serve a legitimate business interest and be no greater than necessary. |
| Civil Code • Art. 1306 (Freedom to Contract) & Art. 1159 (Obligations) | Parties may stipulate anything not contrary to law, morals, public order or public policy—basis for allowing non-compete covenants. |
| Labor Code (PD 442, as amended) | No specific non-compete provision, but policies on employee protection, security of tenure, and “holistic development of labor” influence judicial scrutiny. |
| Philippine Competition Act (RA 10667) | Ensures restraints do not unreasonably lessen competition; the PCC uses the ancillary-restraint doctrine to assess non-competes in M&A and employment contexts. |
| Data Privacy Act (RA 10173) & IP Code (RA 8293) | Legitimate employer interests (trade secrets, personal data, proprietary algorithms) often cited to justify broader temporal/territorial limits. |
2. The Supreme Court’s Reasonableness Test
Philippine jurisprudence adopts a three-prong inquiry (drawn from U.S. common-law influence but indigenised through caselaw):
Legitimate business interest – protection of trade secrets, confidential information, substantial client relationships, or investment in specialized training.
Reasonable scope – the covenant must be narrowly tailored as to:
- Time (the shorter the better; 6-24 months is the usual ceiling the Court is willing to uphold);
- Geographic reach (limited to areas where the employer actually operates or plans credible expansion);
- Trade/Activity (only the line of business in which the employee had actual engagement).
No undue prejudice to the public or the employee’s right to livelihood – the restriction must not coerce unemployment or impair competition.
Landmarks
- Daisy Tiu v. Platinum Plans (G.R. 163512, 28 Feb 2007) – 2-year, nationwide ban on selling rival pre-need plans was reasonable because the business dealt with sensitive actuarial pricing and client lists.
- Rivera v. Solidbank (G.R. 163269, 10 Jun 2005) – 1-year bank-wide restriction upheld; Court emphasised legitimate interest in safeguarding trust-banking clients.
- U-Bix Corp. v. Enriquez (G.R. 150290, 17 Nov 2004) – 5-year, national non-compete struck down: excessive duration and breadth.
3. What “Expanded” Non-Compete Looks Like (2022–2025)
| Traditional Clause | Expanded Clause Trend |
|---|---|
| Applies post-employment only | Extends to concurrent outside work (moonlighting/side-gigs) and garden-leave periods. |
| Restricts similar product lines | Restricts data-driven or algorithmic derivatives and adjacent services (e.g., AI analytics tied to BPO datasets). |
| Territory = physical offices | Territory = “any market reachable via remote or digital means,” effectively global. |
| Silent on compensation | Pairs restraint with garden-leave pay, stock option vesting, or lump-sum “non-compete pay”. |
| Single enforcement forum | Adds arbitration clauses (PDRCI, SIAC, BANI-PH) for speed, secrecy, and interim relief. |
4. Drafting & Enforceability Checklist
- Define the protectable interest clearly (trade secrets, source code repositories, model weights, key accounts).
- Cap duration – 12 months is the current “sweet spot”; justify anything longer with industry evidence.
- Territorial Limit – if global, show global clientele or remote operations; otherwise, scale down.
- Activity Carve-outs – allow non-competitive roles (e.g., teaching, generic IT work).
- Consideration – offer separate non-compete pay or continued benefits (shows voluntariness).
- Severability & Blue-Pencil Clause – courts can modify unreasonable parts rather than voiding the whole agreement.
- Mandatory Mediation/Arbitration – align with DOLE D.O. 170-17 on voluntary dispute resolution.
5. Remedies & Litigation Strategy
- Injunction/TRO (RTC/NCMB; arbitration tribunals may issue interim relief under the Special ADR Rules).
- Damages – lost profits, liquidated damages (must still be reasonable), or forfeiture of post-employment benefits.
- Forensic Preservation Orders – secure laptops, cloud logs under the Rules on Electronic Evidence.
- Philippine Competition Commission investigation risk if the clause appears to foreclose labor market competition (especially in niche tech talent).
6. Sector-Specific Nuances
| Sector | Observations |
|---|---|
| IT-BPM / AI | Employers draft “global-territory” clauses anchored on data-sovereignty risk; courts likely to require proof of genuine worldwide operations. |
| Fintech | Regulator (BSP) encourages mobility for compliance talent; non-competes exceeding 1 year are viewed skeptically. |
| Health BPO / Tele-medicine | HIPAA-style confidentiality bolsters the clause, but medical professionals’ licensure mobility limits duration. |
| Franchise/Distribution | Post-termination territorial lockdowns (radius clauses) remain valid if limited to the actual franchise territory. |
7. Interaction with Other Philippine Laws
- “180-Day Non-Solicit” clauses generally survive stricter scrutiny because they do not fully bar employment.
- Confidentiality & IP assignment may stand independently even if the non-compete is stricken.
- Whistle-blower & Occupational Safety laws override any clause that chills statutorily protected speech.
- Anti-poaching/No-Hire Pacts between companies (horizontal restraints) draw PCC scrutiny under RA 10667.
8. Proposed Legislation & Policy Shifts (2023-2025 Outlook)
- House Bill 935 (“Freedom-to-Work Act”) – seeks to void non-competes below ₱500 k annual salary but stalled at committee.
- Senate Bill 1384 – would require post-employment compensation equal to 50 % of last pay for the restraint’s duration.
- DOLE Advisory on Digital Employment (draft) – contemplates a model non-compete template for remote workers, highlighting proportionality.
- Regional Trend – ASEAN Framework on Cross-Border Data Flows (2024) indirectly pressures Philippine firms to rely more on NDAs and less on sweeping non-competes.
9. Practical Guidance
| For Employers | For Employees |
|---|---|
| • Pair the covenant with tangible benefits—garden leave pay, accelerated RSU vesting. | • Negotiate scope: ask for role-specific carve-outs and compensation for each month of restriction. |
| • Document the trade secret or client relationship you aim to protect; courts will inquire. | • Keep evidence of your actual duties; you may contest over-broad definitions of “competitive business”. |
| • Implement exit interviews to remind departing staff of obligations and retrieve devices. | • Consult counsel before signing or resigning; early advice can avoid TROs that freeze new job offers. |
10. Conclusion
An “expanded” non-compete in a Philippine employment contract is enforceable only when it stays within the high-court parameters of necessity, proportionality, and public policy compatibility. While employers in cutting-edge sectors justifiably seek broader protection, they must temper ambition with reasonableness—shorter durations, focused scopes, and fair consideration. Employees, for their part, should view the clause not as an absolute bar but as a negotiable term grounded in Philippine constitutional and civil-law principles.
Disclaimer: This article is for educational purposes and does not constitute legal advice. Consult Philippine counsel for advice specific to your situation.