Non‑Compete Restrictions by Former Employers on Affiliated Companies

A Comprehensive Philippine‑Law Perspective

1. Overview

A post‑employment non‑compete clause (sometimes called a “restrictive covenant”) is an agreement by which an employee promises not to engage in work that competes with the former employer after the employment ends. Filipino contracts sometimes broaden that promise so that the ex‑employee also agrees not to work for, or render services to, any company “affiliated” with the former employer’s competitors—for example, a parent, subsidiary, or sister corporation.

Because these covenants restrain the constitutional right to the free pursuit of a lawful livelihood (Art. III, Sec. 3 & Art. XIII, Sec. 3, 1987 Constitution) they are enforceable in the Philippines only when they meet a demanding “reasonableness” test developed in more than a century of Supreme Court jurisprudence.

2. Primary Legal Foundations

Source	Key Principle for Non‑Compete Clauses
Civil Code art. 1306	Parties may “establish such stipulations … as they may deem convenient,” provided they are not contrary to law, morals, good customs, public order, or public policy.
Civil Code art. 1159	Contracts have the force of law between the parties, but only if valid.
Labor Code (PD 442)	Nothing expressly bans non‑competes, yet the Code’s pro‑labor orientation guides courts toward a narrow construction of restraints on post‑employment livelihood.
Philippine Competition Act (RA 10667)	Generally inapplicable to individual employment covenants, but an overly broad restraint that limits the mobility of skilled labor across an entire sector could, in theory, be attacked as an “anti‑competitive agreement.”
Intellectual Property Code (RA 8293) & trade‑secret doctrine	Legitimate need to protect trade secrets and confidential know‑how is the usual lawful objective that justifies a narrowly drawn non‑compete clause.

3. The Supreme Court’s “Reasonableness” Test

Philippine courts follow a common‑law style balancing approach, crystallised in cases dating back to Ferrazzini v. Gsell (1909) and Gsell v. Koch (1910). A post‑employment restraint is valid and enforceable if, and only if, it is:

Supported by a legitimate business interest – typically the protection of trade secrets, confidential customer data, or substantial training investments.
Limited in time – Philippine decisions generally uphold one‑ to three‑year restraints; a five‑year restraint survives only with robust justification. Indefinite or “for so long as the former employer is in business” restraints have been struck down.
Limited in geography or market scope – The narrower the territory / product market, the more likely a clause is reasonable. Nationwide bans are suspect unless the employer does business nationwide and the employee had nationwide responsibilities.
Narrow as to restricted activities – It must bar only those roles or lines of business that genuinely compete with the former employer.
Not unduly oppressive to the employee or injurious to the public – Courts weigh the employee’s livelihood and the public’s interest in free competition.
Supported by adequate consideration – Continued employment may be consideration while still employed; for post‑employment periods, Filipino practice increasingly offers a garden‑leave or “non‑compete pay” equal to part of the employee’s salary during the restriction.

Affiliated‑Company extensions face heightened scrutiny under items 3‑4, because they often sweep in businesses that are not true competitors or activities far removed from the employee’s former duties.

4. Snapshot of Key Jurisprudence

Case (Year)	Holding & Take‑Away
Anselmo Ferrazzini v. Carlos Gsell (1909)	A restraint void where it banned competition for life and across the entire archipelago. Introduced the proportionality/necessity analysis.
Carlos Gsell v. Gustav Koch (1910)	Upheld a two‑year, Manila‑only ban on competing in the same flour‑milling trade. Confirms that reasonable limits are enforceable.
William Golay & Sons (Phils.) v. Paul Ching (1963)	Struck down a five‑year restraint on a travelling salesman because the geographic scope (“anywhere in the Philippines”) was too broad relative to the employee’s Luzon‑only duties.
DMI Medical Supply v. Nario (2007)	Non‑compete limited to one year and to selling competing medical products upheld; the Court emphasised the employer’s need to protect hospital account lists.
Rivera v. Solidbank (2013)	While chiefly about retirement benefits, the decision reiterates that contracts of adhesion in labor settings are construed strictly against the employer when restrictions impinge on fundamental rights.

No published case has yet squarely tested a clause forbidding work for an affiliate of a competitor, but the ratio from these decisions—particularly items 3‑4 of the reasonableness test—provides clear guidance.

5. Special Issues When the Clause Covers “Affiliates”

Corporate Separateness and Public Policy
- Philippine corporate law recognises each corporation’s separate juridical personality—even among a group under common control. A covenant that lumps all affiliates together blurs this line and will be upheld only where the affiliate competes in the same relevant market.
Proof of Legitimate Interest
- The employer bears the burden of proving that trade secrets shared within the corporate group would be jeopardised by the employee’s service to the affiliate. Generic assertions (“We share strategies inside the conglomerate”) are insufficient.
Overbreadth & Severability
- Courts may “blue‑pencil” (sever) an overbroad affiliate clause and enforce the remainder—but only if the contract contains an express severability provision and the offending language is grammatically severable.
Examples of Drafting Pitfalls
- Vague affiliate definition (“any corporation related in any manner”) → almost certainly void.
- Industry‑agnostic ban (e.g., a logistics employee prohibited from joining any affiliate of a competitor, including an affiliate that runs a cafeteria chain) → void.

6. Interaction with Other Philippine Laws

Law / Regime	Impact
Labor Arbiter & NLRC Jurisdiction	Disputes over validity of post‑employment restraints are civil in nature and usually filed in regular trial courts; however, if raised as a defense in an illegal‑dismissal claim, labor tribunals may pass upon validity incidentally.
Data Privacy Act (RA 10173)	Where the employer’s concern is the ex‑employee’s access to personal data, the proper protective mechanism is a confidentiality covenant plus DPA compliance, not an over‑broad non‑compete.
Taxation	Lump‑sum non‑compete pay is subject to income tax but not to 13th‑month pay or mandatory social‑security contributions because it is not “wage” for work performed.
Foreign Direct Investment (FDI) rules	Multinationals must balance Philippine non‑compete norms with usually stricter covenants enforceable in their home jurisdictions. Choice‑of‑law clauses that attempt to apply foreign law to Filipino employees are generally struck down as contrary to Philippine public policy.

7. Practical Drafting & Compliance Checklist

Define “Affiliate” narrowly – limit to entities that (a) operate in the same line of business and (b) are more than 50 % owned by, or under common control with, the employer.
Tie the restriction to protected interests – recite the specific trade secrets, client relationships, or innovation pipelines the employee had access to.
Set a realistic duration – 12 months is the local best practice for most industries; exceed 24 months only with compelling evidence of long‑lived proprietary technology.
Pay garden‑leave or a non‑compete stipend – paying at least 50–100 % of base salary during the restricted period greatly improves enforceability.
Include a severability clause and a forum‑selection clause – designate Philippine courts and allow blue‑pencilling of overbreadth.
Combine with confidentiality & IP assignment agreements – layered protection is more defensible than a single sweeping non‑compete.
Regularly review the clause – business models evolve; a clause reasonable today may be overbroad tomorrow.

8. Enforcement & Remedies

Injunctive Relief – The usual remedy is a prohibitory injunction; ex‑employers seek to restrain the employee from working for the competitor or affiliate for the remainder of the period.
Liquidated Damages – Many contracts stipulate a fixed penalty (e.g., six months’ salary). Courts will enforce such clauses if the amount is not unconscionable.
Actual Damages – Employers may also prove lost profits or loss of client accounts, but the evidentiary burden is heavy.
Criminal sanctions – None. Breach of a non‑compete is purely civil.

9. Trends & Emerging Issues

Tech & BPO Talent Wars – Non‑competes in Philippine outsourcing often try to cover the global affiliate network of the foreign principal. Local jurisprudence has yet to test these clauses, but the broad language faces the same reasonableness gauntlet.
Legislative Proposals – Bills periodically filed in Congress aim to ban post‑employment non‑competes for rank‑and‑file employees entirely, mirroring recent U.S. FTC moves. None has reached enactment as of July 2025, but the policy debate is gaining traction.
Remote Work & Jurisdiction – With Filipino professionals servicing offshore entities from home, employers seek to apply Philippine non‑competes extra‑territorially. Enforcement abroad hinges on foreign courts, so Filipino employers often rely instead on arbitration clauses seated in Manila.

10. Key Take‑Aways

No Philippine statute specifically authorises or forbids post‑employment non‑competes; validity rests on the Civil Code and a century of cases applying the reasonableness doctrine.
Affiliate‑wide bans are not per se void, but they face stricter scrutiny because they inherently broaden the restraint’s scope.
Success in enforcement depends on proving a real, protectable interest, drafting surgical limitations, and giving fair economic consideration.
Employers should pair non‑compete clauses with robust confidentiality, IP‑assignment, and data‑security programs; covenant overreach is rarely a substitute for sound trade‑secret hygiene.
Employees should understand that not all restrictive covenants are unenforceable—ignoring a carefully limited, well‑paid, and trade‑secret‑driven non‑compete can result in injunctions and damages.

This article synthesises Philippine constitutional provisions, Civil Code principles, labor‑law policy, and Supreme Court doctrine up to July 25 ‑ 2025. It is for general information only and is not legal advice; specific situations require professional counsel.