In an article first published by Thomson Reuters Accelus, Managing Associate, Annabel Mackay considers the pros and cons of incorporating a garden leave clause in the employment contract, and the principles that the courts will apply when considering the enforceability of such provisions.
In Provident Financial Group plc and another v Hayward the Court of Appeal noted that garden leave is: "a weapon in the hands of employers to ensure that an ambitious and able executive will not give notice if he is unable to work at all for anyone for a long period of notice."
A garden leave clause significantly restricts an employee's freedom during the notice period. Employees can be prevented from contacting clients, prospects or colleagues in the run-up to their departure. If their notice periods are lengthy, this "weapon" creates a buffer during which the employer can put in place alternative arrangements to transition clients and prospects to new points of contact within the company.
A garden leave clause also ensures that employees behave appropriately during their notice period. As the contract of employment remains in place, the departing employee remains bound by their express and implied obligations to their employer, including their obligations of fidelity.
The only downside for employers is that the employee must still receive their full pay and contractual benefits for this period of enforced idleness. Employers must also counter challenges to the enforceability of the garden leave restriction. The relevant clause must be clear and tailored to the employer's business objectives.
As the Court of Appeal noted in Provident, "the practice of long periods of 'garden leave' is obviously capable of abuse" and employers may have "somewhat exaggerated views of what will or may affect their businesses." Where an employee challenges the validity of the garden leave period, the courts will examine whether the employer has a legitimate interest to protect.
This could encompass preventing an employee from enhancing the profitability of a competitor before the expiry of their period of notice. Employers may also have concerns about the employee's continued access to confidential information.
In each case, the court must consider the detriment that the employer would suffer if the garden leave clause was not enforced. Where the employee plans to join a business that has "nothing whatever to do with the business of the employers" a court will not exercise its discretion to grant an injunction. As with other restrictions, the courts will assess whether the garden leave period goes no further than is necessary to protect the employer's legitimate business interests.
In addition to relying on conventional restraint of trade principles, employees may challenge a garden leave restriction on the basis that they have a contractual right to work. In the Provident case, the "right to work" of a financial director of an estate agency was one of the factors that influenced the decision not to grant an injunction to enforce the garden leave period. However, the right to work is not automatic. In William Hill Organisation Ltd v Tucker, the Court of Appeal confirmed that the test is whether the employer's obligation is not limited to payment of agreed remuneration but also includes the requirement to provide work.
The court will examine the nature of the employee's role and the relevant contractual provisions in order to determine whether or not the employee's skills must be exercised frequently in order that they do not atrophy. The way in which an employee is paid may also influence whether or not the courts accept that there is a right to work. Where an employee's remuneration is linked to the employee being able to perform their role (for example, because there is a significant commission element) the courts are more likely to find that there is a right to work than if the employee simply receives a basic salary.
Employees engaged in generalised roles whose remuneration does not contain a variable element linked to performance will find it harder to demonstrate that they must be actively working in order to remain marketable. In Christie v Johnston Carmichael, the Employment Appeal Tribunal rejected the suggestion that a senior client relationship manager who was engaged in a generalist role would be de-skilled as a result of a period of garden leave. The Employment Appeal Tribunal noted that qualified professionals would often take sabbaticals and periods of leave in blocks of week and would not necessarily damage their skill levels as a result.
Even where an employee establishes that there is a right to work, that does not mean that an employer's attempts to enforce a garden leave clause will fail. The right to work is not unqualified and depends on whether or not the employee is "ready and willing" to work. If the employee demonstrates through his behaviour that they have no intention of being bound by their employment contract, an employer may be able to put the employee on garden leave even in the absence of an express garden leave clause.
In SG & R Valuation Service Co v Boudrais & Others, the departing employees' email traffic demonstrated a specific wish to damage their employer's business and a plan to use their notice periods to steal as much confidential information as possible. The court noted how colleagues were "unwittingly enlisted in the acquisition of [client] contact information" and that some of the emails exchanged between the departing employees were entitled "Project chaos" and evidenced an express intention to damage their employer.
Against that backdrop, the court considered whether there was a right to work and, if so, whether their employer nevertheless require them to remain away from work.
The employees in that case had significant skills and "any dissociation from the market for a substantial period would result in those skills becoming stale." Their remuneration also contained a discretionary bonus element which would be adversely impacted if they were deprived of work. However, the right to work was not "an unqualified right."
The court found that the right was subject to the qualification that the employees had not by their own wrongdoing, "rendered it impossible or reasonably impracticable for the employer to provide them with work." The employees had demonstrated that they were not willing to work by the hostility that they had displayed towards their employer, with the result that they had forfeited any right to work.
Previous case law had demonstrated that an employer was not required to find work if there was none available or none which could be done profitably. It followed that where employees were engaged in wrongdoing, there was nothing unreasonable in the employer withholding work, even in the absence of a garden leave clause.
As the Court of Appeal noted in another case, Standard Life Health Care Limited v. Gorman & Others, where the defendants purported to resign en mass without giving proper notice, the "obligation to provide work [is] interdependent with the obligation of the employee to act loyally."
It is important to understand the principles associated with the enforceability of garden leave as it remains an attractive option where employees resign to set up in competition or to join a new employer. The garden leave period may scupper attempts by departing employees to use their notice period to move their contacts to a new employer or to capitalise upon continued access to their employer's resources. The way in which garden leave can frustrate the best laid plans is precisely why employers may find that employees object to being paid to stay at home.
Employers must be ready to explain why garden leave is important to protect its legitimate business interests and why the employee has no right to be provided with work in a particular case. As the Court of Appeal stated in Provident: "It is not enough just that the employee has contracted in certain terms and will not starve if the terms are enforced against him while the employer continues to pay him in full. The employee has a concern to work and a concern to exercise his skills." Employers should anticipate these challenges when they draft letters putting employees on garden leave and ensure that they justify any garden leave period in the clearest possible terms.