How to create a watertight garden leave clause

Garden leave clauses help employers protect their business interests. Lindsey Cartwright cuts to the chase of what they should contain.

Introduction
Rogue leavers
Garden leave clause essentials.


KEY POINTS

  • Garden leave clauses should state the employer is not obliged to provide work
  • They should state that employees on garden leave cannot take employment with a competitor
  • Policy should make it clear that individuals serving their notice on garden leave should resign other directorships
  • Staff on garden leave are entitled to salaries and benefits
  • The use of garden leave should not simply be considered at the end of an employment relationship. Where a business has recruited an individual from a competitor and both the employer and employee are being threatened with injunction or interdict, garden leave may provide a means of resolution. The employer concerned about its bargaining position may wish to suggest it places the individual on garden leave to stave off imposition of an injunction or interdict. This would need to be implemented with the agreement of the employee in order to avoid a breach of contract argument.

Common law states that employees have a right to work so failure to provide it could, in the absence of a carefully drafted garden leave clause, be treated as a breach of contract. An employee may resign or tear up their contract - which may contain restrictive covenants, intellectual property provisions or confidentiality agreements - leaving an employer with no redress.

Rogue leavers

However, following a recent High Court decision this year, all may not be lost. When two senior employees resigned from SG & R Valuation (SGR) Service, giving three months' notice, the company uncovered evidence of apparent wrongdoing. E-mail trails, referring occasionally to 'Project Chaos', appeared to reveal the pair's intention to join a competitor company, misappropriate confidential information and damage SGR's business.

Discovering this, the company asked both employees to remain on garden leave until their notice periods expired. However, as there was no express clause permitting this, the employees sought to resign with immediate effect, arguing they had a right to work and not providing work was a fundamental breach of contract. This prompted SGR to apply for an injunction preventing the employees from working for the competitor, effectively forcing them to remain on garden leave.

The court determined both employees had a right to work, given their seniority, specialist skills and the fact a substantial part of their remuneration package was entitlement to a performance-related bonus. However, it found the right to work was not absolute, rather, that employees must demonstrate readiness and willingness to work in accordance with their contract.

Given the evidence, the court considered it "impossible or reasonably impracticable for the employer to provide work" and upheld the company's right to insist on garden leave being enforced until the end of the notice period.

Despite the ruling, it remains unusual for a court to impose garden leave where there is no express right in the contract. Companies in a similar situation to SGR may not be able to find such damning evidence of wrongdoing. Therefore, the importance of a well-drafted garden leave clause cannot be overstated.

Garden leave clause essentials

The clause should state there is no obligation on the part of the employer to provide work and clearly prohibit staff from setting up in competition, or entering employment with, a competitor while on garden leave. In addition, the employee's duty of fidelity and good faith should be expressly stated to continue. It must also be made clear when an individual serves their notice period, any held directorships must be resigned. Otherwise, the employee will be entitled to attend board meetings and receive board papers while on garden leave, negating any enforced detachment set out in the clause.

During garden leave, the employment relationship continues and contractual obligations such as salary and benefits must be met. However, requiring an employee to take accrued but unused holidays during a notice period can lead to cost savings and should be stated in the contract. The employment cost can also be mitigated by express provision for certain benefits to cease once a notice is served, with particular attention being paid to the tight drafting of clauses relating to bonus entitlements.

When considering the length of a garden leave period, the same principles apply as for restrictive covenants; the longer the period, the more scrutiny the clause will receive should the employer seek to rely on it. The courts are likely to enforce garden leave more readily since, unlike post-termination restrictions, the employee is receiving pay. To increase the chances of enforceability, particularly where post-termination covenants are lengthy, the duration of any garden leave period should be offset against the duration of the covenants.

Investing time in drafting effective contracts can substantially increase the employer's bargaining position when faced with a disaffected senior employee. A garden leave clause should not be drafted in isolation and, when combined with restrictive covenants, limitations on benefits and directorship provisions, a business can better protect itself against unscrupulous employees.

Lindsey Cartwright is a partner at Maclay Murray & Spens LLP