Fruits of the secret garden: Garden leave and executive departures

28 October 2013

Pádraig Walsh, Katja Schiffelholz

A late summer’s eve. The sun is slipping from the sky. Golden hour is approaching. A figure toils with a hedgerow. A snip here. A clip there. All round him a beautifully tended garden. The fruit of six months’ labour. Only there is no joy in the accomplishment. He is not happy. He has been out of the market for six months. He is on garden leave.

Garden leave is the term in an employment contract that gives the employer the right to require an employee to go home during his notice period. The employee will be directed not to work or contact staff or clients. He will continue to be paid.

Garden leave is a great weapon for employers, particularly for executive departures. Here’s why:
  • The executive cannot start work for a competing business during his garden leave. He continues to be bound by his duty of fidelity to his employer.

  • The executive is out of the office from the start of his notice period. There is little chance of mischief-making “on site”. The executive is not there. 

  • Garden leave helps protect confidential information. The notice period is the period when confidential information is most under threat. 

  • The cost of keeping the executive is staggered according to the monthly payroll.

  • Garden leave provisions have a higher chance of being enforceable than restrictive covenants.
  • The garden leave provision is an effective deterrent to employee poaching by competitors.

  • The employer has a genuine choice each time whether to use garden leave; restrictive covenants always apply ... and may be unenforceable.

That’s the good news. Some guidance and words of caution are still needed.

If the skills of the executive are specialised and require consistent practice in the workplace, then an employee can claim he has a right to be provided work. An express term allowing garden leave in the employment contract can over-ride this.

The garden leave provision must be reasonable. The garden leave period generally should not be more than six months, and never more than the notice period.

The executive must be paid full wages and benefits. Refusing to pay the executive non-discretionary bonuses or commissions during the garden leave period, may give the executive the right to claim non-payment of wages and terminate the employment.

The executive has a statutory right to terminate the employment at any time by making a payment of wages in lieu of notice. This can bring the period of protection under garden leave to a swift end. The garden leave provision should be combined with reasonable, properly drafted restrictive covenants that apply after the employment ends.

The garden leave period and any post-employment restraint period should be treated as a single period of restriction. If the Courts believe the employer has received the protection it needs under the garden leave provision, then it will not enforce a non-compete restraint for the period after the employment ends. The period of restraint after employment should be reduced day-for-day by any period of garden leave.

The nature of an executive’s duty changes when he is on garden leave. Legitimate activities can include:

  • preparing business plans and discussing prospective business with a new employer (provided he does not compete or disclose confidential information)

  • arranging recruitment (but not from colleagues of his current employer)

  • setting up a new office (provided he does not work). 

There is a fine balance here. The executive must act consistently with his status as an employee of the company that placed him on garden leave. However, even if the executive goes too far, the only real remedy of the employer is to dismiss him for gross misconduct.

Garden leave is a very useful weapon for employers. The picture of someone at home idling in the garden on paid leave is fanciful. In the financial markets, for instance, time out of the action can cause serious prejudice. Yet, garden leave provisions are common for executives in this sector, and are consistently found to be enforceable. Can the same be said for restrictive covenants? Money brokers, forex traders, and securities dealers make grumpy gardeners.

This article is part of the Asia Employment Law Newsletter for November 2013

Authors

Walsh-Pádraig

Pádraig Walsh

Partner
China and Hong Kong

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