2024 Labor Law, Q9

Preston Salon and Spa (PSS) hired Nixon as a senior stylist in its Manila branch. Nixon signed an employment contract which provides that “employees shall not engage in or set up within the same locality a business similar or related to the company during their course of employment and for a period of one year after their tenure.” Thereafter, PSS received information that Nixon assisted his sister in establishing a new salon in Manila. Nixon admitted lending PHP 300,000.00 to his sister as capital and that he shall be entitled to 10% yearly profits of the new salon. Nixon also referred two former PSS employees as applicants to the new salon. After the required notices, PSS dismissed Nixon for violation of his employment contract. Is Nixon’s dismissal valid? Explain.

Quick check

Under Century Properties v. Babiano, what is the legal status of an exclusivity clause prohibiting employees from competing during employment?

Why was senior stylist Nixon's financial assistance to his sister's salon considered a violation of his employment contract?

Under Article 297 of the Labor Code, which statutory ground justifies terminating an employee who actively assists a direct business competitor?

What action by an employee during employment violates the contractual duty of loyalty owed to their employer?

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What requirement must an employer satisfy after proving an employee's willful breach of a valid non-compete agreement?

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1. Exclusivity Stipulations
Under Philippine labor law and jurisprudence (Century Properties v. Babiano), non-compete and exclusivity clauses prohibiting employees from engaging in or assisting competing businesses during employment are valid and enforceable. Such contractual stipulations protect an employer's legitimate business interests, trade secrets, and client goodwill. When an employee signs an employment contract containing an exclusivity clause, the employee assumes a duty of loyalty and fidelity to the employer. Engaging in a competing enterprise while actively employed constitutes a direct breach of contract, justifying disciplinary action and potential employment termination under labor standards regulations.

2. Duty of Loyalty
An employee owes an inherent duty of loyalty, trust, and fidelity to their employer throughout the existence of the employment relationship. Assisting a direct business competitor within the same locality—whether through financing, acquiring an equity or profit-sharing stake, or recruiting company personnel—violates this basic obligation. Such competitive acts create a severe conflict of interest that subverts the employer's business operations. Demonstrating intentional participation in a competing enterprise breaks the fundamental relationship of trust and confidence between the employer and employee, establishing a valid ground for dismissal.

3. Willful Breach Just-Cause
Under Article 297 of the Labor Code, serious misconduct, willful disobedience of lawful employer orders, and willful breach of trust constitute statutory just causes for termination of employment. A deliberate violation of a valid contractual prohibition against engaging in a competing business satisfies these statutory grounds. When an employer proves that an employee intentionally provided financial capital, secured a profit share, and solicited staff for a rival business, the employer validly exercises its management prerogative by terminating the employee after complying with statutory procedural due process requirements.

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The questions reproduced here are the official texts of the Philippine Bar Examinations, published by the Supreme Court. They are reproduced for study purposes.The suggested answers are the author’s own.

They are not official answers, have no connection with the Supreme Court, the Office of the Bar Confidant, or any bar review institution, and are not endorsed by any of them. Official answer keys, where released, should be preferred over anything here.Nothing on this page is legal advice, and reading it creates no lawyer-client relationship. Do not rely on any suggested answer in an actual legal matter. Consult counsel on your own facts.Suggested answers reflect the law and jurisprudence the author considers applicable as of the date shown.

Where a question comes from an earlier examination, the suggested answer applies the law as it now stands, which may differ from the law in force when the question was given, and may therefore differ from what would have been the correct answer at that time. Where the difference is material, the answer notes it.The practice scoring feature measures wording overlap with the suggested answer. It is not a grade, carries no official weight, and says nothing about whether your reasoning is sound.Errors are possible. If you find one, please tell me and I will correct it.Last reviewed: October 2026