Restrictive Covenants and Garden Leave Guide

  1. Garden Leave – Overview
  2. Restrictive Covenants – Overview
  3. Restrictive Covenants – General position
  4. Restrictive Covenants – Legitimate business interests
  5. Restrictive Covenants – Types of restriction
  6. Restrictive Covenants – Reasonableness

Garden Leave – Overview

A garden leave clause is a specific clause in an employment contract that allows an employer to require an employee to remain away from the office during their period of notice. Without such a contractual right it can be very difficult to lawfully prevent an employee attending the office.

Garden leave arguably provides much greater protection than post termination restrictive covenants. As the employee is still employed he is still subject to the remaining provisions in his/her contract such as implied and express duties of good faith, and is also required to carry out reasonable management instructions. Therefore if the employee is instructed not to communicate with clients or other members of staff, yet they breach that instruction, it is a relatively simple claim against them for damages and an order (an injunction in urgent matters) preventing them from benefiting from that breach.

The employment contract continues throughout gardening leave and the employer remains under an obligation to perform all the terms of the contract including the payment of salary and the provision of all contractual benefits. There is debate whether certain benefits can be excluded during garden leave (such as bonus) if there is specific provision in the contract. The danger is that such a provision will put the employee at a detriment and the employee will then claim that there has been a breach of trust and confidence entitling him/her to resign and claim constructive dismissal. In these circumstances the protection of garden leave is lost and the enforceability of the restrictive covenants is brought into question.

Restrictive Covenants – Overview

Restrictive covenants, in an employment contract, are specific clauses designed to protect the employer’s business during employment and/or after employment. Primarily, restrictive covenants are designed to protect confidential information, the employer’s business contacts, and the employer’s workforce.

The existence of implied terms such as fiduciary duties and/or the duty of fidelity within the employment relationship means the need for restrictive covenants during employment is not always essential. However, as soon as the employment relationship terminates so do those obligations (other than the proprietary right to confidential information). Therefore on the termination of employment unless the employer has the benefit of enforceable post termination restrictive covenants, the employee is free to compete with the employer, solicit/deal with its clients/customers, and approach its remaining employees in a bid to secure their departure. Restrictive covenants cannot indefinitely prevent these problems but properly drafted restrictions can give the employer a period of time in which to make arrangements to mitigate the damage when it does happen. If an employer is given six months without competition, or approaches to its clients and/or workforce, it can usually strengthen and secure relationships with clients and staff.

Restrictive Covenants – General position

A restrictive covenant is, on the face of it, unenforceable as it is a restraint of trade and not inconsistent with public policy. The clause only becomes enforceable if the employer is able to show that:

  1. It is seeking to protect a legitimate business interest; and
  2. the provisions of the clause go no further than is necessary to protect that legitimate business interest.

Restrictive Covenants – Legitimate business interests

The employer is only entitled to protect certain specific business interests. These fit into three broad categories:

  1. Trade connections (with clients, suppliers, distributors and possibly potential clients, suppliers, distributors);
  2. the employers workforce; and
  3. trade secrets (confidential information).

Only if the restrictive covenants seeks to protect the company from damage to one of these three categories, will the court move on to assess whether the clause is reasonable in the manner it seeks that protection.

Restrictive Covenants – Types of restriction

As the law has developed there are now standard means by which an employer seeks to protect each of the legitimate business interests. These are:

  1. Trade connections are ordinarily protected by means of non-solicitation (non-poach) and/or non-dealing with clients clauses. Only in very specific circumstances would a non-competition clause be used;
  2. the workforce is ordinarily protected by a non-solicitation (non-poach) of employees and/or non-employment of employees clause;
  3. trade secrets are ordinarily protected by a non-competition clause where a standard confidential information clause is deemed insufficient.

It should be noted that the courts will not restrict a departing employee from using his skills, experience and personal traits.

Restrictive Covenants – Reasonableness

The courts will only uphold a restrictive covenant if it is a reasonable means of protecting a legitimate interest. It is important therefore that the restrictive covenant is drafted carefully and tailored to the individual employee (or class of employee) in question. It is also advisable to err on the side of caution when considering the scope of a draft restriction. The following are examples of what courts often look at:

  1. The length of time of the restriction;
  2. the geographical remit of the restriction;
  3. whether there is a personal next service between the employee and the business connection (i.e. was this a client the employee had a relationship with);
  4. whether a less draconian clause would have been sufficient (e.g. would a confidentiality clause protect the company so that a non-compete clause was not necessary);
  5. are the restrictions proportionate to the period of notice;
  6. whether the clauses relate to competitive activity (e.g. is the employee only prevented from working with that client in a competitive field and not just across the board); and
  7. whether a properly drafted garden leave clause would have been sufficient to protect the company’s legitimate business interests.

This publication is intended for general summary guidance. It is not and should not be considered legal advice. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.