Inside: Cultivating a valid “garden leave” clause

Unless carefully crafted, garden leave clauses can leave an employer without realistic enforcement options

Over the last decade, the so-called “garden leave” clause has begun to appear with increasing frequency in employment agreements in this country. Long seen and generally accepted in Europe, the clause, in its pure form, has met significant enforcement challenges here.

A garden leave provision is one in which the employee is required to give a certain period of notice prior to terminating employment. The garden leave clause provides the employer the right to change the employee’s duties or effectively suspend the employee for the balance of the notice period. During the notice or garden leave period, the employee remains an employee, subject to the direction and control of the employer and receiving at least base salary compensation. The commonly articulated rationale of employers seeking enforcement of the clause is that placing the employee in the garden before joining a competitor serves to protect the employer’s trade secrets and good will with clients and provides an opportunity to implement a seamless transition of employee responsibilities free from interference from the departing employee. In some industries, the clause was attractive to employers as it, at first blush, appeared less onerous than a non-compete provision, while at the same time providing the possibility of very similar protection to the employer.

When used to keep an employee out of the work environment, the clause operates much the same as a classic non-compete agreement and has been recognized and scrutinized as such by the courts. Thus, an employer seeking enforcement will be required to show that good will, trade secrets or other legitimate interests of the employer are at stake, along with other requirements for enforcement of non competes such as the reasonableness of its scope and its consistency with public policy.

The clause presents another more fundamental challenge where equitable enforcement is sought. Because the clause specifically provides that the employee remain employed during the notice period, specific performance of the clause would require a court to order the employee to remain an employee for the duration of the notice period and courts almost uniformly will not grant equitable relief to compel such a result. In other words, while courts may, and often do, direct an employee to refrain from certain activities, they will not direct an employee to work for a particular employer.

In the absence of other contract language to rely on, the inability to seek specific performance leaves an employer seeking equitable relief enforcing a garden leave clause to ask a court for an injunction prohibiting the employee from working for a competitor during the notice period. If this relief is not specifically provided for the agreement, it leaves the courts to, in effect, imply a non-compete clause where none exists. Courts naturally are loathe to do this. Typical indicia courts scrutinize to determine the reasonableness of a non-compete clause, such as the geographic scope or types of activities or competitors precluded, are not present in the garden leave clause. In that respect, the clause could be viewed as overbroad (for lack of geographic or other limitations) and courts likely will resist granting relief that essentially rewrites the parties’ agreement.

Drafting solutions exist to protect employers who wish to utilize on a garden leave provision. The garden leave provision could be paired with a non-compete clause or non-solicitation clause triggered on termination. Those provisions can potentially provide immediate equitable relief preventing competition, if not the benefit of the employee’s bargain to serve out his notice period. Additionally, an express enforcement remedy can be provided in the event of a breach of the garden leave notice to avoid the problem of asking a court to enter an injunction beyond the terms of the agreement. This could include a non-competition remedy, or if the contract also provides in separate provisions for non-competition after employment ends, an extension of the non-compete agreement for the duration of the period that the garden leave notice period is violated.

While garden leave clauses are attractive because they appear less threatening on their face, unless carefully crafted they can leave an employer without realistic enforcement options. While monetary damages for breach may still be available, where good will or trade secrets are at stake, money may not fully compensate the employer for the impact of an employee’s immediate competition.

Contributing Author

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Lawrence F. Carnevale

Larry Carnevale is a partner at Carter Ledyard & Milburn LLP. Mr. Carnevale is the chair of the firm’s Litigation Department and Trade Secrets, Business...

Additional Contributors: Judith A. Lockhart

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