challenge: A company has lost confidence in a senior manager. It needs to
decide whether to put him on garden leave or pay him off. There is a pay 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
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 him bringing an unfair
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 "his" 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 he could
claim in respect of bonus for the part of the year worked and the notice
period, and how quickly he will find alternative employment.
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. This does not give the
employer absolute control over the individual’s activities but in hard
practical terms it has a better chance of protecting its interests than if it
relies on restrictive covenants alone.
No stigma is attached to putting someone on garden leave and so it should not
damage future job prospects to impose garden leave on the person concerned
(except to the extent a competitor is only interested in the employee for his
contacts or confidential information which is precisely what the garden leave
is to guard against).
The company needs to decide how commercially valuable the manager’s contacts
are in order to decide whether to impose garden leave. Garden leave is clearly
the more costly option and therefore needs to be worthwhile. Not only are there
the costs of salary and benefits but there are also potential legal costs and
lost management time. If the employer has to resort to litigation to enforce
the garden leave period this becomes all the more acute.
The value of keeping the employee on garden leave should be reviewed regularly
particularly where a long notice period is involved. Often the time taken to secure the employee’s contacts is shorter
than originally anticipated.
Even if it is decided to pay in lieu of notice negotiations will have to be
conducted with a view to reaching a suitable compromise agreement to prevent an
unfair dismissal claim. The company may want to enforce a period of garden
leave even though the ultimate intention is to pay the employee off.
When meeting the employee to inform him he is to be given notice and put on
garden leave or paid off, have two people present on behalf of the employer so
that one can act as a witness for the other. It is recommended that the
individual is given a letter setting out the proposed course of action to avoid
Plan the communications exercise in advance.
It is important to explain the position to employees and customers.
Also, plan the process by which the company is to retain work that would
otherwise be lost to a competitor.
Elaine Aarons, partner, and Robbie Gilbert, HR consultant, Eversheds