Tending the Garden: Restricting Competition via 'Garden Leave'

30 Pages Posted: 16 Jan 2016 Last revised: 5 Feb 2016

Date Written: January 13, 2016

Abstract

American employers have rarely paid for the noncompetition agreements they require of many employees, at least if “payment” is defined as anything above normal compensation. That is clearly changing – at least in some sectors of the economy and for at least some employees. A version of the common English practice of offering “garden leave” has been adopted by many firms in the financial services industry for higher-value workers, and it is spreading to other sectors.

Garden leave is essentially a paid sit-out restriction, and while well-established in England, there is relatively little law on such provisions in the United States. To complicate matters, American firms have typically departed from the defining characteristics in England so that even the predicates of garden leave there are not necessarily applicable here. Most importantly, while English firms generally retain workers as employees during “garden leave,” thus looking to the employee duty of loyalty as a justification for the restraint on competition during this period, American employers generally use garden leave as a postemployment device, require employees terminated, whether or not voluntarily, to refrain from competition during a restricted period.

One inquiry, therefore, is simply how well American garden leave fits within the normal doctrinal analysis for noncompetition agreements. This embraces the question of whether such provisions may be used to end-run judicial limitations on postemployment restraints. It also raises issues about the respective rights and duties of the employer and former employee during the period of garden leave.

Finally, of course, garden leave provisions raise in stark relief the long-submerged tension between the two interests that have traditionally been raised in opposition to the employer’s interest in restraining competition. Thus, such provisions reduce the costs to employees and may tend towards narrower and shorter restraints, precisely because the employer now has “skin in the game”; this clearly mitigates, if not eliminates, concerns about undue hardship. Nevertheless, the public interest in free competition continues unabated; indeed garden leave would seem to exacerbate the effects of postemployment restraints in that regard.

Keywords: garden leave, noncompetition, preliminary injunction, severance pay, employee mobility, attorney ethics, financial sector

Suggested Citation

Sullivan, Charles A., Tending the Garden: Restricting Competition via 'Garden Leave' (January 13, 2016). Berkeley Journal of Employment and Labor Law, Vol. 37, No. 2, 2016, Seton Hall Public Law Research Paper, Available at SSRN: https://ssrn.com/abstract=2714967

Charles A. Sullivan (Contact Author)

Seton Hall Law School ( email )

One Newark Center
Newark, NJ 07102-5210
United States
973-477-7121 (Phone)

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