Last month we looked at ending the employment contract via notice periods and PILON payments. Another possible exit method is the use of garden leave, but, as we explore in this article, there are advantages and disadvantages to this approach.

What is garden leave?

The term garden leave is to a large extent self-explanatory. It describes a situation where, during the notice period, a decision is made to retain the employee in employment receiving their normal pay and benefits but to keep them away from the office, effectively giving the employee the opportunity to spend the notice period in their garden.

The right to place employees on garden leave is often included in the employment contract. This could either be by way of a stand-alone garden leave clause setting out the right to place an employee on garden leave or dealt with more simply as part of the general drafting of the notice provision.

Garden leave is often confused with payment in lieu of notice (PILON). However it has significant differences. Whereas (as we considered last month) a PILON payment will immediately end the employment relationship, during a garden leave period the employee remains in employment. This has both advantages and disadvantages.

Advantages of garden leave

As the employee remains in employment during the garden leave period, they continue to be entitled to their normal monthly pay and benefits. For an employer with cash flow constraints, the ability to stagger the notice pay is likely to make garden leave a more attractive option than a lump sum PILON. There may also be tax benefits for the employee if the notice period crosses two tax years.

As the employment continues, this also means that the employee remains subject to the provisions of their employment contract including both express and implied terms, in particular the implied term of good faith towards the employer.

Garden leave can therefore be an effective way of taking the employee out of the market place for a period of time, which could be important where the employer has no post termination restrictions and/or the enforceability of such restrictions is uncertain.

As the employee will still be in receipt of their normal contractual payments during the garden leave period, the courts are less likely to view this type of restriction of the employee's activities as unduly onerous on the employee and are therefore more likely to uphold such restrictions compared to traditional post termination restrictions. The garden leave period has a similar effect to a post termination restriction in that the employee can be prevented from contacting co-workers and clients. The employee is kept away from the business and any information about the business, such as pricing approaches and business strategies, and any information which they do have is likely to be less sensitive by the time they enter the market place. The employee will also be kept away from key clients allowing colleagues to make contact and build up their own relationships.

However, in circumstances where the employer also wishes to rely on post termination restrictions it is important that any period of garden leave is set off against the restricted period as otherwise the post termination restrictions on top of a garden leave period could be seen as an unreasonable restraint of trade and therefore unenforceable.

There is also the advantage that the employee remains on hand to assist with handover of their matters which would be useful where the employee has been involved in an on-going project.

Disadvantages of garden leave

As stated above, during the garden leave period the employee remains in employment and in receipt of not only their salary but also their benefits such as pension contributions, car and health insurance. They will also continue to accrue their holiday entitlement which will increase any payment in lieu of untaken holiday on termination, although to counter this an employer can include in a garden leave clause the requirement for the employee to take accrued annual leave during the garden leave period.

This does mean that in total the employee could receive a greater termination package than would be the case under a PILON, particularly where the employment contract limits PILON to basic salary only.

What if there is no right to place on garden leave in the employment contract?

Case law has supported the right of an employer to keep employees out of the workplace even where there is no express right in the employment contract to do so. In particular, older cases have suggested that there is no implied contractual right to work, simply a right to be paid, so that as long as an employer maintains an employee's pay, not providing them with any work to do would not be a breach of contract.

This position has been challenged more recently by employees arguing that there is a contractual right to work in order to allow employees to keep up to date, hone their skills and avoid such skills atrophying.

Without an express right to place on garden leave therefore any attempt by an employer to ask an employee to stay away from the workplace could amount to a constructive dismissal allowing the employee to argue that their contract has been breached by the employer and meaning that the benefit of any post termination restrictions are lost. Although this argument has been successful in some situations it is limited to employees with highly skilled and unique roles.

However, for the sake of certainty, if an employer wants the ability to enforce garden leave then the employment contract should specifically include a clear right to do so.

Drafting tips

Ideally a garden leave clause should apply during all or part of the notice period, whether that notice is served by the employee or the employer. The clause should give the employer the power to insist that the employee not attend the workplace unless requested to do so and should emphasise that the individual remains an employee during the garden leave period and is therefore subject to the normal responsibilities of an employee.

To avoid any disputes, which could themselves become an argument for constructive dismissal, it is recommended that garden leave clauses in a contract specifically set out the duties of the employee in this period. In particular it should state:

  • that the employee should not contact co-workers, clients or suppliers (unless requested to do so)
  • that the employee should still make themselves available for work, or to attend meetings if required. This allows the employer to require the employee to attend any important meetings and help with any handover of work
  • an obligation on the employee to take any unused holiday during the garden leave period thereby reducing the costs
  • what happens at the end of the period, for example in relation to the return of company equipment especially if there is a company car, laptop, mobile and other sensitive information which may be in the employee's possession
  • a right to make deductions from the notice pay in case there is a need to claw back sums such as training costs, relocation costs or the overpayment of bonus or commission.

Summary

While it is never pleasant to think about the end of an employment relationship in the excitement of offering a new role, what this article and the previous article in this series show is that it is worth employers putting some thought into what protection they need on termination to ensure this is drafted into the employment contract.