Garden leave – what is it?
Gardening leave is often used by employers wanting to protect themselves against competition or poaching of customers, clients, or staff by an employee (often senior) who has given notice or is to be dismissed.
Garden leave is commonly used within the terms of an employment contract, an agreement between employer and employee stating the exact nature of their business relationship.
Human resources issues regarding garden leave
Garden leave clauses are increasingly common in employment contracts. They do not so much replace restrictive covenants as reinforce them.
One of the biggest advantages of the garden leave arrangement is that the employer holds the purse strings while the leave continues.
Garden leave can also benefit an employer because an employee in that situation is still covered by any contractual duties, for example a duty of confidentiality, until the end of the notice period. They can also be brought back to work if needed.
David Royden, employment solicitor and partner at Laytons law firm provides case laws on garden leave including William Hill Organisation Ltd v Tucker (1998), Symbian Ltd v Christensen (2001) and Clark v Nomura International (2000).
He concludes that employers need to ensure that they have appropriately drafted clauses in their contracts of employment and that they exercise their right to place employees on garden leave carefully.
Emplaw also provides an example of when an employer may have difficulty in imposing ‘gardening leave’ if there is no specific contractual provision giving him the right to do so.
Employers’ Law magazine also provides advice on how you can you protect your business when key employees decide to leave under the title Handle departing employees: When the grass is greener
It points out challenge a company might face and where garden leave may come into play. The challenge: A company has lost confidence in a senior manager. It needs to decide whether to put the manager on garden leave or pay them off. There is a Payments in Lieu of Notice (Pilon) clause which allows the employer to pay salary in lieu in full and final settlement of all claims. There is also a garden leave clause and restrictive covenants. Elaine Aarons & Robbie Gilbert weigh up the issues.
Both options being considered involve a dismissal. Most garden leave clauses only apply when notice has been given. Equally, paying the manager off will involve a dismissal. Although the Pilon clause is stated to be in full and final settlement of all claims this will not prevent the employee bringing an unfair dismissal claim.
The company therefore needs to decide whether it is prepared to accept the risk of having to pay off any unfair dismissal claim. If not, unless there are grounds for summary dismissal it is not advisable for the company to proceed with either option.
The choice for the company between garden leave and paying in lieu involves balancing the cost. The Pilon permits the company to pay salary alone. In contrast, during garden leave the employee will be entitled to salary and all contractual benefits. A close examination of any discretionary bonuses which become payable during the garden leave period will be needed (particularly given recent case law) in order to see whether they are included within contractual benefits. The same is true of share options and any other “discretionary” benefits. At the end of the garden leave period the manager may be able to claim bonus for the year in which dismissal occurs.
Having said this, if payment is made in lieu, the company will only have the protection of the restrictive covenants. Garden leave clauses are often easier to enforce than covenants. In order to decide if it is an option only to rely on the covenants, the covenants need to be read very carefully to decide how enforceable they are.
Moreover, unless the period of the covenants is reduced by the period of garden leave served, the company would inevitably have a shorter period of restriction if it relies on the covenants alone as compared to having the benefit of garden leave as well.
Even if placed on garden leave, there is no guarantee that while “at home” the manager will not be in touch with “her” or “his” or clients.
The company can probably summarily dismiss and not pay under the Pilon but this is unlikely to be attractive. No post-termination restrictions will apply. Damages for breach of contract will be payable but it is unlikely these will be less than the sum payable under the Pilon. It depends on how much the manager could claim in respect of bonus for the part of the year worked and the notice period, and how quickly they will find alternative employment.