Garden Leave Allows Some Protection for an Employer
The term sounds pastoral, but its use is practical. For example, garden leave is an agreed-upon period when an employer pays a departing key employee not to work before the employee joins a competitor. In essence, it's another type of restrictive covenant.
Originating in England, the employee is to stay "in the garden" for the leave's term.
Garden leave is similar, but not identical, to other contracts where an ex-employee is paid instead of working for a competitor. For example, an employer occasionally agrees to a "safety net" or "bench pay," paying the ex-employees salary for the length of a non-compete. However, the ex-employee must first show that the non-compete prevents them from obtaining suitable work.
Garden leave, by contrast, is unconditional. Also, on garden leave, the employee remains on the payroll. Conversely, the employee has already left in a "bench pay" situation.
While the employee is on garden leave, the previous employer has the opportunity to contact the departing employee's customers to retain them. The departing employee has what amounts to a paid vacation and must not work for a competitor during this period. Once this period ends and the employee starts with the new firm, it is an open season. The departing employee and the old employer may solicit and pursue business freely.
How Long Does Garden Leave Last?
Garden leave can range from several months through a year. During the leave period, the employee does no work for either the old or prospective employer. The employee defers the new employer's start date until the leave period's end.
What Type of Companies Use It?
Investment banking and financial service sectors often use this approach. In effect, it takes the place of non-compete agreements. Many firms using garden leave are in the Northeast and Mid-Atlantic regions. During the past ten years, courts have begun to pay more attention to its provisions, and the trend is likely to continue.
Pros of Garden Leave
On the surface, garden leaves appeal to courts more so than non-competes. These covenants lower the burden on employees. First, they get paid. Second, the length of the agreement is typically less than a non-compete. It's essential to note that case law is limited in many jurisdictions, leading to concerns about its enforceability.
For employers, garden leave allows them to remove an employee while ensuring they can't use company resources to further their agenda. It also offers the employer some protection as they investigate the situation.
During the leave, only the employer can contact the departing employee's clients without fear of competition from the employee. Courts allow the typical 30 to 90-day period of most garden leave agreements. And that's a critical time for employers following an employee's departure. In addition, employers can release departing employees from the contract if they present no threat.
On the other hand, the employee bears the burden of separation from customers and the possible stigma of not being active in the industry for a brief period. But, they get paid. And the employer can't hire a replacement during garden leave. In addition, employees know that the former employer's customers are fair game after a much shorter restrictive period expires.
Garden Leave Cons
Although the shorter timeframe may benefit an employer, it provides less protection than a restrictive non-compete covenant. Non-competes generally use terms of six months up to two years.
Equally important, the employer pays the employee without them performing work. However, from the employee's perspective, they remain employed and may be required to work during the garden leave period.
Employers can legally fire employees who refuse to take garden leave without explaining. So if employees are not prepared to risk losing their job, their employers can force garden leave upon them.
Employees must realize that the no-contact rule during garden leave is critical. Because the employee is still on the payroll, any attempt by the employee to divert business to a new firm would violate multiple obligations:
- The restrictive covenant itself
- The duty of loyalty that employees owe to employers
- The commitment to preserve confidential employer information and trade secrets
Why Do Employers This Type of Restrictive Covenant?
As a restrictive covenant, garden leave is a less costly, more specific way to sever ties with an employee who poses a competitive threat.
Its use depends on an ex-employers motivation to pursue and secure business that might otherwise migrate with the departing employee. The goal for the employer becomes how to retain business, a more positive focus than non-compete litigation. With a non-compete, the goal is to keep the departing employee from retaining customers. It also prevents them from entering into competition against their former employer.
If you require legal advice regarding garden leave or any other employment law matter, don't hesitate to contact Thomas D. Rees at 610-275-0700 or trees@highswartz.com. The employment lawyers at our Norristown and Doylestown law offices are here to help.