Factors in drafting an effective garden leave clause

by Winnie Ng, Solicitor, Commercial & Securities Group, Baker & McKenzie

Article exclusively contributed by Baker & McKenzie

Nowadays, the difficulty in enforcing restrictive covenants has caused many employers to rely on so-called "garden leave" clauses as an alternative way of protecting themselves against competition from departing employees. By making use of such a clause, a company can prevent an employee from joining a direct competitor for a set period of time and require that there is no further contact with customers throughout the notice period. The primary objective is to stop the departing employee from taking immediate advantage of trade or corporate secrets and to break his or her links with the company's business partners or clients.

Nevertheless, employers should exercise caution when placing employees on garden leave. To do so without a specific clause about this being in the contract of employment may cause problems. Case law suggests that an employer is not entitled to impose garden leave on skilled employees or those who hold specific and unique positions unless there is an express contractual right allowing this.

The 1989 case of Provident Financial Group plc v Hayward illustrates the point. In this, the English Court of Appeal held that there is no implied obligation on an employer to provide work for employees generally. However, for senior employees with unique skills that require regular exercise, or employees whose earnings depend on their performance of work, the employer is under an implied duty to provide work. Without a garden leave provision in the employment contract, a failure to provide work for such employees during the notice period can be regarded as a repudiatory breach of the employment contract. This entitles employees to terminate without notice and claim constructive dismissal.

In Symbian Limited v Christensen in 2001, an injunction was granted to prevent the employee from doing other work during the period of garden leave, pursuant to an express provision in his employment contract. The English Court of Appeal held that, in ordinary circumstances, the arrangements for garden leave would terminate the employment relationship, but not the contractual relationship between the parties. Significantly, this decision suggests that an employee on garden leave owes no duty of fidelity and good faith to the employer, and may do other work, including with a competitor, unless provisions in the employment contract clearly prevent this.

These decisions are not binding in Hong Kong, but local courts are likely to adopt the reasoning until they are overruled. To make a garden leave clause effective, companies should ensure contracts of employment, particularly for senior and skilled employees, contain the following:

  • the employer has no duty to provide the employee with work
  • the employer has the power to withdraw duties and exclude the employee from the premises during the notice period
  • the employee has a contractual duty of good faith and fidelity (i.e. duty not to compete) throughout the term of the contract, including the garden leave period
  • other contractual or implied duties and obligations continue to apply during the garden leave period

    In Hong Kong, however, the Employment Ordinance allows staff to terminate their employment contracts by making a payment in lieu of notice (even after they have served a termination notice). This statutory right cannot be overridden by any contractual provision, including a garden leave clause. Hence, the effectiveness of a garden leave clause can be significantly undermined.

    Q&A on garden leave clauses in employment contracts
    Q1 How useful is a garden leave clause for an employer?
    A1 It can help in keeping confidential information, trade secrets, customer lists and similar information from a departing employee who will join a competitor. This reduces the risk of damage being done to the employer's business during the notice period. It can be particularly useful when the departing employee has a good relationship with customers or is likely to work in direct competition.

    Q2 What is the downside of placing a departing employee on garden leave?
    A2 The employer must continue to pay the employee full wages and benefits in accordance with the terms and conditions of the employment contract, even though the employee is doing no work for the company.

    Q3 If the employee is in breach of a garden leave clause, is there any remedy?
    A3 The employer can apply for an injunction to restrain the employee from, for example, working for a competitor during this period. This would require the employer to show an express provision in the contract imposing a restriction, and that the restriction had been breached to the employer's commercial detriment. Damages might be claimed for such a breach.

    Q4 What risks are there for the employer if the clause is not properly drafted?
    A4 According to the decision in Symbian Limited v Christensen, placing an employee on garden leave effectively terminates the employment relationship but not the contractual relationship. Hence, a departing employee may take up employment elsewhere during the period unless this is expressly forbidden in the contract. Thus, the extent to which a departing employee is free to compete during the garden leave period will depend on how carefully the terms of the employment contract are drafted.

  • Taken from Career Times 17 March 2006

    (Last review date: 23 August 2013)

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