What is garden leave (also known as 'gardening leave')?
The term sounds pastoral, but its use is practical. Very simply, it is an agreed-upon period when an employer pays a departing key employee not to work before the employee joins a competitor.
Originating in England, it means that the employee is to stay “in the garden” for the term of the leave.
Garden leave is similar, but not identical, to other contracts where an ex-employee is paid in lieu of working for a competitor. On occasion, an employer agrees to a “safety net” or “bench pay” and pays the ex-employee’s salary for the length of a non-compete. The ex-employee must first show that the noncompete prevents them from obtaining suitable work. Garden leave, by contrast, is unconditional. Also, in garden leave, the employee remains on the payroll; in a “bench pay” situation, the employee has already left.
While the employee is on garden leave, the previous employer has the opportunity to contact the departing employee’s customers in an attempt 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 open season: both the departing employee and the old employer may solicit and pursue business freely.
How long does it last?
Garden leave can range from several months through a year. During the leave period, the employee does no work for either the old employer or the prospective employer. The employee defers the start date with the new employer until the end of the leave period.
Who uses it?
Garden leave is used most often in the investment banking and financial service sectors. In effect, it takes the place of non-competition and non-solicitation agreements. Many of the firms using garden leave are in the Northeast and Mid-Atlantic regions. During the past ten years, courts in these areas have begun to deal with garden leave provisions. This trend is likely to continue.
What are some of the advantages and disadvantages of garden leave?
The employer gains a brief period when only the employer can contact the departing employee’s clients without fear of competition from the employee. However, this period is far shorter than the periods that courts have found to be reasonable in enforcing non-competes.
The employee bears the burden of separation from customers and the possible stigma of not being active in the industry for a brief period. In exchange, the employee knows that, after expiration of a much shorter restrictive period, the former employer’s customers are fair game.
The employee must realize that the no-contact rule during garden leave is very important. Because the employee is still on payroll, any attempt by the employee to divert business to a new firm would violate multiple obligations, including the garden leave contract itself; the duty of loyalty that employees owe to employers; and possibly the obligations to preserve confidential employer information and trade secrets.
Why do employers use garden leave?
Garden leave has the benefit of being a less costly, more certain 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 this business. This is a more positive focus than the that of non-compete litigation, where the goal is to keep the departing employee from retaining customers or entering into competition.