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Garden Leave Provisions Can Help Protect Customer Relationships, Trade Secrets and Other Proprietary Information

By:  Dan Cohen 8/14/14

          You are probably asking yourself what the heck is “garden leave.” I found myself asking that same question when recent research uncovered a line of authority on the East Coast involving “garden leave” policies. As I dug deeper, I learned they are prevalent in England and Europe and are a relatively recent import to the U.S. They have become quite popular in the financial services sector in New York and Boston. The general premise of a garden leave policy is to require a departing employee to sit idly on the sidelines for a period of time tending to his/her garden rather than transitioning clients and trade secrets to the competition.

          In practice, “garden leave” provisions are established by contract and require departing employees to provide mandatory notice of resignation (60, 90 or even 120 days). The employee remains employed throughout the notice period and is paid his/her full salary and contractual benefits. The employee is not required to perform any further duties (or limited duties) during the notice period and agrees to stay home rather than commence employment with the new employer. Significantly, during the “garden leave” period, the employee remains an employee and would continue to owe a duty of loyalty to his then-employer (even though he is not actively working).

          There is not much case law testing the enforceability of garden leave policies. State and federal courts in New York and Illinois have upheld such provisions for periods ranging from 30 days to six months. According to one of the most recent cases out of New York, the fact that the employee was still being paid rendered “virtually nonexistent [the] concern that the former employee could lose his livelihood.” On the other hand, Massachusetts courts have on at least two occasions stricken similar provisions against highly compensated brokers. The Courts in those cases reasoned that the provisions were buried in compensation plan documents, could deprive clients of their brokers of choice during difficult financial times (e.g. the cases were decided in 2008 during the height of financial meltdown) and because enforcement “would be to force [the employee] to submit to Bear Stearns whim regarding his employment activity in the near future.”

          The analysis in Michigan would focus on the “reasonableness” of the provision just like the analysis of other restrictive covenants, including non-compete and non-solicitation agreements. Michigan courts would require the employer to establish a protectable interest: either customer relationships or access to confidential, proprietary or trade secret information. Obviously, “garden leave” provisions are not for everyone and not for every class of jobs. Nor should they be thought of as a substitute for more traditional restrictive covenants, including non-compete, non-solicitation and confidentiality agreements. However, in the right circumstance, they can be an effective way to augment your overall arsenal for protecting your business from unfair competition. For one, they prevent unexpected departures to the competition. They also restrict access to confidential information. And, they provide you with an opportunity to transition clients from the departing employee back to the company. In fact, I think it would be extremely beneficial to require the departing employee to fully cooperate with the Company’s efforts to retain business during the “notice” period.

          I can envision using a garden leave provision for certain key employees like executives, directors of entire divisions, perhaps even for sales managers. I would also use a “garden leave” provision whenever an executive negotiates a notice provision in an Executive Employment Agreement. I cannot, however, see them put to use for the entire sales force, for example. Quite frankly, such a broad use would be cost prohibitive.