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Three unfair employment contract clauses employers should avoid

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In a blogpost yesterday, NTUC Assistant Secretary-General, Zainal Sapari spoke up against the unethical clauses certain employers resort to when addressing the problems they are facing.

This was on the back of an article by CNA titled ‘TADM recovers S$29m in owed wages; resolves 85% of salary claims within 2 months.

In the post, he noted that due to the challenging business environment, some employers may resort to underhand practices or tactics to address the problems they are facing, but to the possible detriment of the workers.

“Some employers have included in employment contracts certain clauses that may not be fair to the workers, perhaps to address staff attrition, recoup losses they incurred due to liquidated damages, or protect their business interest. Regardless, including unfair clauses is unethical as they abuse the vulnerable position the workers might be in,” he wrote.

The three clauses he highlighted (and that you should avoid including in your contracts) were:

1. Liquidated damages borne by workers

Such clauses are typically seen in the outsourced service industry, such as cleaning and security where it is quite a standard practice for service buyers to reflect the liquidated damages payable for non-performance issues in the contract.

Given the narrow profit margins service providers are getting, employers may then resort to passing the cost of liquidated damages to the workers.

However, according to the Ministry of Manpower’s website, salary deductions for liquidated damages should not be made even if consent has been obtained from the employees, as it is not to the benefit of the employee, Zainal wrote.

He further noted that if reported to TADM, employers must reimburse deductions arising from the list of liquidated damages to the employees.

2. Penalties and conditions for termination of contract

These clauses come in various forms, for example:

  • If the contract was terminated within one year, regardless of whether the termination was initiated by the employee or employer, the employee was liable to pay the company a penalty of $50 per calendar day from the date of the termination notice till the one-year term.
  • If the contract is terminated by the worker within two years, the worker has to compensate the company one month’s salary in addition to the notice period.

Not only are these clauses unfair, but also, based on common law cases, it would seem that liquidated damages that are not a genuine pre-estimate of the losses incurred would be unenforceable. However, this is not clear to employers and employees, Zainal wrote.

Presently, there is a lack of guidelines on the applicability and enforceability of such clauses. However, it is perhaps best to avoid including such clauses in your firm’s employment contract.

3. Non-compete / Restraint of Trade clauses

These ‘Restraint of Trade’ clauses typically aims at protecting the company’s interest by preventing employees holding positions in senior management from competing with the company after they leave.

However these have also been used to prevent non-critical or rank-and-file employees employees from leaving the company, or come with an excessive amount of liquidated damage payment.

Such clauses typically look something like:

  • The contract stated that the agency will take legal action if the employee was found to have worked for another company in the industry within four months of leaving the company.
  • The employee has to pay a liquidated damage of S$100,000 to the company, should they resign and work for another company in the same industry.

In the first case, should the worker challenge the claim, the courts would likely stop such ‘restraint of Trade’ clause from being imposed on non-critical or rank-and-file employees.

In the second situation, if case went to court, it is likely that the court would hold the clause invalid, as the amount of S$100,000 seems excessive and may be deemed to be a penalty clause.

He concluded: “It is sad to see employment contracts, which should benefit and protect both employers and employees by preventing potential miscommunications and missteps, being used by unscrupulous employers to take advantage of unsuspecting employees.”

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