In this entry, we discussed the ways a garden leave clause, or paying a departing employee while transitioning their clients and business to new employees, may benefit an employer. Below, we discuss when garden leave clauses may be most effectively used and how employers can enforce the provisions in court.
If a resigning employee refuses to abide by the terms of a garden leave provision and commences employment with a company’s competitor prematurely, a company can seek to enforce the garden leave provision under the same principles that govern any restrictive covenant lawsuit. The advantage of a garden leave clause is that an employer’s prospect of success in a lawsuit for enforcement of such a provision is meaningfully heightened.
By way of example, a company seeking to prevent a resigned employee from competing before the notice period established in the garden leave provision has expired has a much greater likelihood of success in establishing that the balance of harms tips decidedly in its favor since the clause provides for it to continue paying the resigning employee during the period of her garden leave. While the employer must still be able to establish that it will suffer irreparable harm from the resigning employee competing, if it can make that showing, there is little or no chance of the resigning employee defeating the injunction application because she is suffering harm too. Income continuation powerfully undercuts such an argument. While the resigned employee can assert that the effect of the garden leave is to disconnect her from her customers and will adversely affect her relationship with the customers and her future income, the garden leave concept eliminates the sympathy factor in favor of the resigned employee and makes it far more likely that a court will recognize the legitimate interests that a company seeks to protect through the restrictive covenant.
A garden leave clause does not materially enhance a company’s prospect of establishing the other two elements of an injunction application that are typically most critical, specifically, probability of success on the merits and irreparable harm. For this reason, some may argue that the cost of paying a resigning employee, who no longer contributes revenue or productivity, renders a garden leave provision unattractive.
So when should companies consider using garden leave provisions? It will make sense to use a garden leave clause when the long-term revenue associated with the customer base meaningfully exceeds the salary paid to the resigning employee during the separation period. The touchstone for using it is that successful transitioning of customers depends upon sidelining the resigning employee for several months. That courts will enforce such agreements because the company continues to pay the resigning employee during her separation period means that successful transition of customers can become a reality.