What are garden leave clauses?

Popular in England for many years, garden leave clauses are increasingly being used in the United States.  Typically, these clauses are inserted in an employee’s employment contract and are designed to extend an employee’s duty of loyalty beyond the employee’s desired term of employment by requiring the employee to remain with the company in a reduced or often nonexistent role. [1] This is accomplished by either requiring the employee to give notice well in advance of departure (ex. three to six months) or by requiring the employee to remain with the company for a  period of time after expressing his or her wish to leave. During these periods the employee remains on the payroll, but no longer participates meaningfully in the operation of the business and may even be told to stay away from the business altogether, giving the employee leave to “tend their garden” instead.

Why are garden leave clauses useful to employers?

From an employer’s perspective there are numerous advantages to garden leave clauses.  These clauses can:

• Delay the start date for employees who depart for competing companies.
• Quarantine departing employees by keeping them from learning new information and delaying their possible disclosure of information they’ve already obtained. This quarantine can be especially important if the departing employee was exposed to time sensitive information such as product launch dates, marketing strategies, and business acquisition targets.
• Mitigate the disruptive impact of employee departure. Employees under garden leave cannot leave suddenly but instead must remain available to properly transition out of their roles.  Importantly, this reduces the risk of client flight by providing an opportunity to transfer clients and business accounts away from the departing employee.

Garden leave clauses are still a relative new phenomenon in the United States so there are few examples where courts have ruled on their enforceability.  California courts have never ruled on this issue but given California’s unequivocal public policy against restrictive covenants, employers interested in utilizing garden leave clauses should do so carefully.

Employers must ask: Does the clause restrict my employee from practicing his or her profession after they leave?

Following the California Supreme Court’s decision in Edwards v. Arthur Anderson, the first question an employer must ask when assessing the enforceability of an employment clause is whether the clause will restrict their employee from practicing his or her profession upon leaving the company.

There are several instances, for example, where New York courts have enforced garden leave clauses after concluding that the livelihood of the departing employee would not be impaired during the garden leave period because the employee would continue to receive full compensation and benefits.  (See Natsource LLC v. Paribello, 151 F. Supp. 2d 465, 472 (S.D.N.Y. 2001); Estee Lauder Companies Inc. v. Batra, 430 F. Supp. 2d 158, 182 (S.D.N.Y. 2006).  By contrast, a California court is not going to consider an employee’s livelihood or the amount of compensation he or she receives, but will simply analyze whether the agreement restricts the employee’s ability to work.  Keeping this in mind it is difficult to imagine a garden leave provision that doesn’t in some way restrict a departing employee’s ability to work.

Additionally, California is an at-will employment state, meaning the employer or employee is generally free to terminate employment whenever they choose.  A contract which requires an employee to give notice a certain length of time in advance, whether it be two weeks or twelve weeks, would arguably force the employee to remain with the company against his or her will.  This conclusion was reached by the federal court for the District of Massachusetts when it refused to enforce a garden leave clause that required a Bear Stearns employee to give 90-days written notice before leaving.  The clause also stated:

“Once notice is given, for the ensuing 90 days … Bear Stearns will pay your base salary, during which time you may be asked to perform all, some or none of your work duties in Bear Stearns’s sole discretion.”

The court concluded that requiring an employee to perform work duties beyond the date the employee requested to leave, in effect, forced the employee into involuntary servitude.  Additionally, the court found that the garden leave provision was against public policy because it kept the employee from doing meaningful work, which deprived the public of the benefits of the employee’s services.

How should an employer structure a garden leave clause to maximize its enforceability?  

To maximize the chances that a California court will uphold a garden leave clause, employers should structure the clause as an optional incentive rather than a mandatory penalty.  For example, an employer could insert a clause that establishes an optional transition period.  During the transition period the employer would reserve the right to require the employee to stay home or aid the transition process.  Meanwhile, the employee would have the option of remaining with the company in this transitional role in exchange for some sort of transition compensation.  This transition compensation could take several forms, including:

• continued salary and benefits
• cash bonuses that increase in value the longer the employee stays after giving notice
• stock options that are awarded when the employee gives notice but do not vest until the end of the transition period

Importantly, employers should make clear that the transitional compensation applies only to the employee’s service during the transitional period, and is not part of the employee’s standard compensation or severance package.  Doing so reduces the risk that if the employee leaves immediately and forfeits the transitional compensation, a court will view the forfeiture as an effort by the employer to restrict the employee’s efforts to work.

Beyond this optional transitional period, it is difficult to envision a mandatory garden leave clause that a California court would enforce.

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[1] In California, an employee’s duty of loyalty requires the employee to refrain from:

• competing with their employer and from doing things on behalf of or otherwise assisting their employer’s competitors.
• using their position to do things that entitle them to receive material benefits from a third party
• using or communicating the employer’s confidential information for the employee’s own purposes or those of a third party

See Huong Que, Inc. v. Luu, 150 Cal. App. 4th 400 (6th Dist. 2007).