Garden leave clauses – better than restrictive covenants? Tax (Law), England

Most directors and senior staff in the UK are familiar with restrictive covenants, which generally prevent the employee from competing, or seeking to poach clients for a period after the employment terminates.  These restrictive covenants can be enforced by an injunction but, crucially, only in so far as they go no further than is reasonably necessary to protect the legitimate interests of the employer (for more detail see http://www.gannons.co.uk/expertise/employer-legal-advice/disputes/restrictive-covenants-in-employment-contracts-and-enforcement/).

The UK law relating to restrictive covenants can be contrasted with another contractual provision often seen in senior executive contracts: the garden leave clause.  This entitles the employer, after notice has been given by either party, to require the employee to stay at home and not work or contact clients (thus giving him time to look after his garden, hence the name!).  Without this clause, the employer is probably not entitled to keep the employee at home, as the employee has a right to work.  In many situations, especially where the employee has crucial and transferable client relationships, the employer will want to enforce a garden leave clause to enable it to get alongside the clients before the employee leaves to retain them as clients.

A recent UK employment law case has illustrated the similarities and differences between the two.  The employee was an investment manager.  He had agreed to a twelve month notice period a garden leave clause.  He handed in his notice and intended to join a competitor.  The employer put him on garden leave for the 12 months but he purported to terminate the employment for constructive dismissal (which, if correct, would have negated the garden leave clause) and was about to join the competitor when the employer obtained a temporary injunction to stop him.  When the case came to a full hearing, the court decided that the alleged constructive dismissal was nonsense and just constructed by the employee to try to get out of the contract.

The court decided that the rule for garden leave clauses was essentially the same as for restrictive covenants – they will be enforceable if they go no further than is reasonably necessary to protect the employer’s legitimate interest.  Here, the interest was preserving the client relationships, and the judge decided that 12 months was a reasonable period for that in the circumstances.

However, the judge made clear that there is a very significant difference between restrictive covenants and garden leave.  If the restrictive covenant goes too far – for example it is too long in time – then it is wholly unenforceable.  This if it purports to restrict competition for 12 months and the court feels that only 6 months would be reasonable, the covenant will not be enforced at all.  The time for looking at whether it is reasonable is the time it is entered into.  Either it was reasonable or it was not.

But it is different with garden leave clauses.  The time to see whether it is reasonable or not is the time of enforcement.  The court can then decide the extent to which it can be enforced.  So in the example above, the court could decide to give an injunction to enforce the garden leave just for 6 months.

The consequence is that it is often better for an employer to rely on a garden leave clause than restrictive covenants, especially if there may be a question as the reasonableness of them.

It is not all bad news for employees, however.  Because in enforcing the garden leave the employer is insisting that the employment continues and the employee remains employed, the employer does have to keep paying the employee!  (This is in itself a factor which will help persuade the court to make the injunction.)

It is very important for employers to have the right garden leave and restrictive covenant clauses in the contracts of key staff and to keep them under regular review.  For employees, it is very important that if they are thinking of leaving, they understand their potential obligations and ensure that they do not open themselves to injunction proceedings.

Gannons is a London based commercial law firm which specialises in advising employers and employees on garden leave and restrictive covenants.  We act for employers based both in the UK and outside of the UK with UK operations.