Garden leave or restrictive covenant clauses?
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 the chances of enforcement we explain some of the basics. On the flip side, we work with plenty of directors and employees who are seeking to avoid the restrictions on activities.
We look at:
- Termination of employment – use of garden leave
- Termination of employment – use of restrictive covenants
- Garden leave or restrictive covenants – why you need both
- Best advice – keep employment contracts under review
Termination of employment – use of garden leave
Garden leave clauses are typically found in a senior employees or directors employment contract. The clause entitles the employer, after notice has been given by either party, to require:
- The employee to stay at home; and
- Not work or contact colleagues, clients and suppliers.
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.
Employee’s right to work during the termination period
The employee has a right to work. In the absence of the garden leave clause, an employer cannot place an employee on garden leave as a way of termination of employment. 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.
Risk for the employer
The danger is any post termination restrictions will be unenforceable by the employer if the employer is found to have breached the employment contract. This could happen if for example the employer tried to change the bonus provisions. The risk is employment litigation if the problem cannot be settled.
Advantages of a garden leave clause
The advantages of garden leave are that:
- the employee continues to owe all his contractual duties, including implied terms such as the duty of trust and confidence, to the employer;
- it can allow for a useful handover period;
- a paid period of non-competition may be more palatable to an employee than an unpaid period; and
- garden leave clauses are less likely to be challenged in terms of duration than restrictive covenants.
Disadvantages of a garden leave clause
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.
Termination of employment – use of restrictive covenants
Employees often acquire confidential information such as trade secrets 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:
- joining or operating a competing business
- soliciting customers, client and suppliers; and
- poaching staff
for a defined period of time.
The lack of adequate protection can make it more difficult to sell the business especially with technology companies.
Advantage of restrictive covenants
Advantages of restrictive covenants are that:
- they do not add costs as they apply after termination of employment;
- provided that are drafted well, they can include actual and prospective clients;
- for senior employees non-compete covenants can commence after a period of garden leave. The overall effect is that the business is protected for a much longer term.
Garden leave and non-compete covenants enforcement
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. There are alternatives to avoid litigation an employer can consider such as undertakings.
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 depending upon the facts.
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.
Garden leave and restrictive covenants – are they fit for purpose?
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.
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. Reviews should especially take place when the employee moves to another role or is promoted.