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13 September 2018
Garden leave or restrictive covenant clauses – we are often asked which of these is best.
Some employers think the clauses are exclusive – but they are not in fact. Including both a garden leave clause and post termination restrictive covenants in an employment contract gives employers two ways in which to protect their interests. To help employers understand how to maximise their position we explain some of the basics.
Garden leave clauses are typically found in a senior employee’s employment contract. The clause entitles the employer, after notice has been given by either party, to require:
Where the employee has valuable and transferable client relationships, employers can use garden leave to align themselves with clients before the employee leaves and the clients follow. Thus employers can better retain clients and protect their business interests. A comprehensive garden leave provision can be one of the most valuable tools in the employer’s toolkit when it comes to terminating employment.
The employee has a right to work. In the absence of the garden leave clause, an employer cannot place an employee on garden leave. Isolating an employee or failing to provide them with work, without the express power, may be regarded as a breach of contract. This entitles the employee to resign and claim constructive dismissal on account of the employer’s breach of contract.
The danger is any post termination restrictions will be unenforceable by the employer if the employer is found to have breached the employment contract.
The advantages of garden leave are that:
The key disadvantage is that the employer needs to continue to provide all contractual pay and benefits during the period of garden leave. The employer can expressly exclude the obligation to provide benefits in the employment contract.
Employees often acquire confidential information and knowledge of sensitive business interests. These include the identity of key clients and their requirements, pricing and profitability, supplier details, and future strategic and marketing information. It can be tempting for employees to use information acquired through their employment after their employment has terminated, either in business for themselves or to further the interests of their new employer who may be a competitor.
Restrictive covenants protect an employer’s business by preventing ex-employees:
for a defined period of time.
Advantages of restrictive covenants are that:
Where an employees refuses to comply, both restrictive covenants and garden leave clauses can only be enforced with a court injunction. This is expensive. The remedy is also discretionary and therefore there is no certainty that the court will grant the injunction.
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. The duration of garden leave tends to be for the period of notice. For senior employees and company directors notice periods can be up to 12 months.
As with garden leave clauses, restrictive covenants are more likely to be enforceable providing they go no further than is reasonably necessary to protect the legitimate interests of the employer. Drafting the restriction too widely is likely to lead to it being unenforceable. The duration of restrictive covenants vary and also often mirror the length of the employee’s notice period.
Tailoring restrictive covenants and garden leave clauses to suit roles and seniority is essential. This maximises the chances of enforceability, minimises the risk of employees ignoring them and importantly ensures that they actually do protect the business. A significant difference between restrictive covenants and garden leave to bear in mind when drafting is relates to the point in time when the court decides the clause is reasonable. Failing to appreciate this could leave your business unprotected and exposed to risk.
The reasonableness of a restrictive covenant clause depends on when the covenant was entered into. For example, a junior employee makes it up the ranks to Director. His one and only contract although suitable for a Director was signed many years ago when he was the office junior. Any restrictive covenant will be judged accordingly to a junior employee and not a Director. Onerous restrictions such as a lengthy duration are unlikely to be enforceable, even though it may now be appropriate.
The reasonableness of a garden leave clause will be judged on at the time of enforcement, i.e. when the employee is leaving. 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.
Employers should have appropriate garden leave and restrictive covenant clauses in the employment contract for key staff and regularly review these clauses. Reviews should especially take place when the employee moves to another role or is promoted.