Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Given the difficulties many businesses encounter in preventing former employees and executives from competing through enforcement of restrictive covenants, more companies should consider using “garden leave” provisions. The garden leave concept, which arose in England, most typically takes the form of a clause in an employment contract under which a resigning employee must provide a certain period of notice of separation during which the company pays the employee to remain home, i.e., tend his/her garden, while the company transitions responsibilities and customers to other personnel. Such clauses offer the business an opportunity to effect such a transition before the resigning employee has emerged at a competitor ready to compete. In this entry, we will explore the various ways a garden leave clause may benefit the employer. In subsequent entries, we will consider issues of timing and enforcing garden leave provisions.
Inasmuch as the resigning employee has a duty of loyalty to the enterprise by which she is still employed, a garden leave provision may compel the resigning employee to refrain from advising customers as to the identity of her prospective employer. Even if that is not the case or the resigning employee breaches that obligation through some form of “off the record” communication, the enterprise has a better opportunity to maintain business than is the case in the ordinary restrictive covenant setting because the resigning employee remains in suspense and not immediately settled in at her new employment. While there may be situations in which a customer chooses to redirect business to the resigning employee’s prospective employer pending the resigning employee’s arrival, more often than not a customer will be reluctant to put its business in the care of complete strangers when the familiar face upon which it has relied is absent. Instead, customers will be more likely to stick with the company for which the resigning employee worked, which has some familiarity with the customer, and which has demonstrated a commitment toward transition of the customer to one of the resigning employee’s colleagues.
The other key instance in which a garden leave clause makes sense is when a manager or executive has familiarity with the company’s strategic plans. Although the higher salary that managers or executives earn can be a deterrent to using garden leave clauses, it makes sense to sideline a manager or executive despite the substantial cost of doing so if that delay in her commencement of employment with a competitor can be the difference between the company’s success and failure in the marketplace. Although former personnel are bound by a duty of loyalty to refrain from disclosing the company’s confidential, proprietary information, common sense suggests that this is one of the greatest perils of executive turnover. Moreover, as we previously discussed here, in most jurisdictions, there are considerable obstacles to enjoining competition by way of the inevitable disclosure doctrine. As a result, a garden leave clause may be the best tool for delaying a competitor from availing itself of a resigning employee’s knowledge and expertise.