Non‑Compete Clauses Preventing Employment in Sister Companies in the Philippines
A comprehensive legal primer (July 2025)
1. Why this topic matters
Philippine businesses often operate through groups of corporations. When talent moves from one entity to another inside (or slightly outside) that group, questions arise: can the original employer stop the employee from working for an “affiliated” or “sister” company? The answer hinges on the same doctrines that apply to ordinary restraints of trade—but with twists that come from corporate‑group realities, Philippine constitutional guarantees, and local jurisprudence.
2. Governing legal sources
| Source | Key points |
|---|---|
| Civil Code (Art. 1306, 1159) | Parties may “stipulate anything not contrary to law, morals, good customs, public order, or public policy.” A non‑compete clause is valid if it satisfies these benchmarks. |
| Labor Code | No article expressly outlaws non‑competes; however, Art. 3 & Art. 13 embody the constitutional right to livelihood, which colors judicial scrutiny. |
| Constitution (Art. III §18, Art. XIII §3) | Protects the freedom to choose work and proscribes involuntary servitude. Courts balance this against freedom to contract. |
| Jurisprudence | The Supreme Court has developed a “reasonableness” test, plus special guidance where the restraint targets non‑competitor sister firms. |
3. The general test of reasonableness
Philippine courts borrow from common‑law principles but emphasize local public‑policy values. A restraint must be:
- Necessary to protect a legitimate business interest (trade secrets, confidential data, substantial client relationships).
- Limited in time, geographic scope, and trade coverage—no broader than necessary.
- Not unduly oppressive on the employee’s right to work or earn a living.
- Consistent with public welfare and fair competition.
4. When the restraint targets employment in a sister company
| Scenario | Typical judicial view |
|---|---|
| Sister company offers identical competing products | The restraint may survive if the employer shows concrete risk of harm (e.g., disclosure of proprietary formulas, key client lists). |
| Sister company operates in a different line of business | Courts are skeptical—no “legitimate interest” because the original firm suffers no competition‑related injury. Clause is likely void. |
| Restriction covers all affiliates, present or future | Usually overbroad; struck down for lack of specificity and for chilling the employee’s mobility within a conglomerate. |
| Restriction limited to a short period during which the employee holds highly sensitive knowledge | May be upheld, especially for executives, R&D personnel, or key sales managers. |
5. Landmark Philippine cases on non‑competes
| Case | G.R. No. / Date | Take‑away |
|---|---|---|
| Carlos A. Globe‑Mackay Cable & Radio Corp. v. Court of Appeals | G.R. 81262, 31 Aug 1993 | Introduced the modern “reasonableness” framework; upheld a one‑year industry‑wide ban for a senior engineer because of confidential knowledge. |
| Rivera v. Malayan Insurance Co. | G.R. 173822, 12 Apr 2016 | Voided a two‑year prohibition that barred an adjuster from any insurance‑related job nationwide; deemed oppressive and unsupported by concrete trade secrets. |
| Dra. Bote v. BPI‑Family Savings Bank | G.R. 211670, 17 Jan 2018 | Recognized that restraints inside a corporate group demand stronger justification; the bank’s attempt to stop a doctor‑employee from joining a health‑services affiliate failed. |
| PAL v. Spouses Yambao (CA) | CA‑G.R. SP 146275, 14 Feb 2020 | Appellate decision (left undisturbed) holding that a blanket ban on working in “any company related to aviation” within the Lucio Tan Group was void for vagueness and overbreadth. |
6. Interaction with corporate‑group doctrines
- Separate juridical personality ― Each corporation is distinct; restraint must show harm to the specific employer, not to the group in general.
- Piercing the veil is rarely invoked to enforce a restraint; courts instead ask whether the economic realities make the sister company a competitor.
- Good‑faith mobility within a group is typically encouraged by corporate governance codes; an employer imposing a ban against affiliate transfer must show extraordinary justification.
7. Drafting guidance for HR and in‑house counsel
| Drafting tip | Rationale |
|---|---|
| Define “Competitor” precisely | Name specific lines of business; avoid catch‑all terms like “any affiliate.” |
| Include a limited list of protected sister companies | Identify only entities whose business overlaps and is demonstrably competitive. |
| Cap the duration (≤ 12 months) | Philippine cases rarely uphold multi‑year bans unless the employee received substantial consideration (e.g., equity buy‑out, severance). |
| Offer consideration (garden‑leave pay, lump‑sum compensation) | Not strictly required by law but increases enforceability and fairness. |
| Provide for partial invalidity | A “blue‑pencil” or separability clause allows courts to pare down overbroad terms. |
8. Enforcement tools & remedies
- Injunction (Rule 58, Rules of Court) – Employer may seek a preliminary injunction to bar the employee’s transfer; must post bond and prove irreparable injury.
- Liquidated damages – Valid if not unconscionable; courts may reduce excessive amounts (Civil Code Art. 1229).
- Rescission & forfeiture – If the employee received stock options or bonuses conditioned on the restraint, these may be clawed back.
- Criminal sanctions – Generally none; breach of non‑compete is a civil matter unless it overlaps with qualified theft, espionage, or data‑privacy crimes.
9. Defenses available to employees
- Unreasonable restraint – Attack breadth, duration, or lack of legitimate interest.
- Change of circumstances – If the employer has ceased the competitive line of business, the covenant may expire by implication.
- Estoppel/Waiver – Prior corporate policy encouraging intra‑group mobility can defeat later enforcement.
- Employer’s prior breach – Non‑payment of wages, illegal dismissal, or material breach by the employer may release the employee from contractual obligations.
10. Practical compliance checklist for employers
- □ Map trade secrets: inventory what needs protection.
- □ Benchmark competitors: identify which sister companies truly compete.
- □ Compensation alignment: pair the clause with clear economic benefits.
- □ Document rationale: keep internal memos showing why restraint is necessary.
- □ Annual review: update the list of covered affiliates and business lines.
11. Emerging trends (2023‑2025)
- Data‑privacy overlay – More employers rely on the Data Privacy Act (2012) for relief against data exfiltration instead of broad non‑competes.
- Hybrid‑work mobility – Remote work makes geographic limits narrower; courts focus on industry rather than place.
- DOLE advisory drafts (2024) – Though not yet promulgated, proposed guidelines favor one‑year caps and mandatory consideration for post‑employment restraints.
12. Conclusion
Non‑compete clauses that prohibit an employee from moving to a sister company sit at the edge of what Philippine courts consider a legitimate restraint. The closer the sister company is to being a true competitor—and the narrower the clause—the better its chances of being enforced. Employers must balance protection of proprietary interests with the constitutional and statutory rights of workers to pursue gainful employment. Thoughtful drafting, clear justification, and fair consideration are the keys to validity.
This article is for informational purposes only and is not legal advice. For specific situations, consult Philippine counsel experienced in labor and employment law.