Garden leave or restrictive covenants?
- Alex Kleanthous
- Updated: Tue, 24th Jan 2017
Gardening leave or restrictive covenant clauses, clients often ask. They are different. In summary: A reasonable garden leave clause is determined when an employee leaves. A reasonable restrictive covenant is determined when the contract is signed.
Garden leave in the employment contract entitles the employer, after notice has been given by either party, to require:
- The employee to stay at home; and,
- Not work or contact clients;
- Thus giving the employee time to look after the garden.
If an employer lacked the ability to place an employee on garden leave, then the employer is probably not entitled to keep the employee at home. Note that the employee has a right to work.
In many situations, especially where the employee has crucial and transferable client relationships, employers use garden leave to get alongside clients before the employee leaves. Thus employers can better retain clients. Garden leave can be enforced by an injunction.
Garden leave vs restrictive covenants
Restrictive covenants generally prevent the employee from competing, or seeking to poach clients, for a period after employment terminates. These restrictive covenants can be enforced by an injunction. However, but, crucially, only in so far as they go no further than is reasonably necessary to protect the legitimate interests of the employer (for more detail click here).
A recent UK employment law case has illustrated the similarities and differences between use of a restrictive covenant clause and use of a garden leave under the employment contract.
Garden leave in practice
The employee was an investment manager. He had agreed to a twelve month notice period and garden leave clause. He handed in his notice and intended to join a competitor. The employer put him on garden leave for the 12 months.
However, the employee purported to terminate the employment contract for constructive dismissal. If the constructive dismissal was correct, then this would negate the garden leave clause. The employee was about to join the competitor when the employer obtained a temporary injunction to stop him joining the competitor.
When the case came to a full hearing, the court decided the alleged constructive dismissal was:
- Just constructed by the employee, in an attempt to get out of the employment contract.
Garden leave: enforceability
The court decided that the rule for garden leave clauses was essentially the same as for restrictive covenants . Hence garden leave clauses will be enforceable under the employment contract if they go no further than is reasonably necessary to protect the employer’s legitimate interest.
Here, the employer’s interest was preserving the client relationships. The judge decided that 12 months was a reasonable period in the circumstances.
Garden leave and a restrictive covenant are different
The judge made clear that there is a very significant difference between restrictive covenants and garden leave. The difference is the point in time when the court decides the clause is reasonable.
- Restrictive covenant: The point in time to consider whether the covenant is reasonable is the point in time the restrictive covenant is entered into. Either it was reasonable or it was not. So, if the restrictive covenant goes too far, e.g. it is too long in time, then it is wholly unenforceable. Thus if the restrictive covenant purports to restrict competition for 12 months and the court feels that only 6 months would be reasonable, the restrictive covenant will not be enforced at all.
- Garden leave: The point in time to see whether the garden leave clause is reasonable is the time of enforcement. The court can then decide the extent to which garden leave can be enforced. So in the example above, the court could have decided on an injunction to enforce garden leave for 6 months.
Garden leave may be more reliable for employers
The consequence is that it is often better for an employer to rely on garden leave in an employment contract than a restrictive covenant. Garden leave is even better if the reasonableness of a restrictive covenant could be questioned.
It is not all bad news for employees. If an employer enforces garden leave in an employment contract, the employer is insisting that:
- The employment continues;
- The employee remains employed; and, –
- The employer continues to pay the employee!
That the employer continued to pay the employee helped persuade the court to make the injunction.
Best advice – keep the employment contract under review
Employers should have appropriate garden leave and restrictive covenant clauses in the employment contract for key staff and regularly review these clauses.
Employees, if they are thinking of leaving, should understand their potential obligations and ensure that they do not open themselves to injunction proceedings.