Garden leave clause upheld by the High Court

Garden leave: 12 month restriction upheld by High Court

The recent decision in JM Finn & Co Ltd v Holliday demonstrates that garden leave clauses can be a very helpful tool for an employer dealing with an employee who wants to join a competitor.

What is a garden leave clause?

Garden leave clauses are commonly found in employment contracts, particularly those of senior employees, and expressly allow an employer not to provide the employee with any work and to require them to stay away from business premises and customers during any notice period. This should be coupled with an exclusive service clause which prevents an individual from working for anyone else during their employment with the employer.

Without such an express power to isolate an employee in this way an employer’s action in not providing them with work may be regarded as a breach of contract entitling the employee to resign and claim constructive dismissal.

The employee remains bound by all the terms of their employment contract during their time on garden leave. The employer also remains bound by the terms of the contract and so must continue to provide full pay and benefits to the employee.

While the contract continues the employee cannot work for another employer but, as their current employer does not require them to perform their duties, they are otherwise free to pursue their leisure time (in the garden if they wish!).

Are garden leave clauses better than restrictive covenants?

Like restrictive covenants, garden leave clauses can only be enforced by an employer seeking an injunction. Not only is this expensive, it is also a discretionary remedy which a Court may or may not grant so the position is never certain. As the Court in this case confirmed, the doctrine of restraint of trade applies equally to both types of restriction in order to prevent abuse by employers. This means that an employer must be able to show it has a legitimate business interest to protect – in this case its customer connections – and that the injunction sought goes no further than is necessary to protect that interest.

Where there may be greater flexibility from the courts when it comes to garden leave clauses is that they may be willing to “whittle down” the terms or duration of such a clause. In contrast, a court will not re-write a restrictive covenant in the same way in order to make it enforceable.

The facts

Mr Holliday worked as an investment adviser for JM Finn from 1999 and had built up significant client relationships. In 2008 he signed new terms of employment which saw his salary rise significantly in return for an increased notice period of 12 months (from 3 months), a garden leave clause and a non-solicitation covenant which applied during any period of garden leave.

Mr Holliday resigned his employment with JM Finn in July 2013 following a job offer from another stockbroking firm. He was immediately placed on garden leave and reminded that he was obliged to give 12 months’ notice. His employer immediately sought to shore up relationships with the client base he had managed for them.

When JM Finn refused Mr Holliday’s request to carry on receiving market briefings prepared for its brokers he claimed this was a repudiatory breach of his employment contract which he accepted as terminating their relationship immediately. He sought to start work with his new employer in August 2013.

JM Finn sought an injunction to enforce the garden leave clause in Mr Holliday’s contract and hold him to his 12 months’ notice.

Decision

The High Court granted an injunction for the whole of Mr Holliday’s 12 month notice period and rejected his argument that he had been constructively dismissed.

The Court was influenced by the fact that Mr Holliday had taken legal advice when he entered into his new employment contract in 2008 and that he would suffer no financial loss while on garden leave as he would continue to receive his salary and benefits. In addition, the Court did not think his skills would atrophy while on garden leave as he would still be able to maintain his market knowledge. It also rejected the contention that being placed on garden leave would lead to reputational damage as this was a common practice.

The Judge accepted that JM Finn’s remaining investment managers would need a significant amount of time to forge relationships with Mr Holliday’s client base.

Comment

These cases are highly fact specific but this decision is a helpful example of the extent of protection which an employer may be able to achieve by including a garden leave clause in its contracts of employment. These may be helpful not just for very senior employees but any key employees with significant client connections or knowledge. Garden leave clauses need careful drafting in order to ensure all the elements work properly together with other terms of the employment contract. Where an employee’s notice period is longer than six months an employer should carefully consider what length of protection it actually requires to protect its business interests.