Garden Leave Provisions in Employment Agreements

Thomson Reuters Practical Law October 2020

Peter A. Steinmeyer and Lauri F. Rasnick, Members of the Firm in the Employment, Labor & Workforce Management practice, in the firm’s Chicago and New York offices, respectively, co-authored a Practice Note, “Garden Leave Provisions in Employment Agreements,” published by Thomson Reuters Practical Law.

Following is an excerpt (see below to download the full article in PDF format):

In recent years, traditional non-compete agreements have faced increasing judicial scrutiny, with courts focusing on issues such as the adequacy of consideration, the propriety of non-competes for lower level employees, and whether the restrictions of a non-compete are justified by a legitimate business interest or are merely a tool used to suppress competition.

Momentum continues at the state level to pass laws restricting non-competes in various ways. Several states have passed legislation essentially banning non-competes for low-wage workers. Other states have limited noncompetes for other categories of workers, such as technology sector workers and medical professionals. Massachusetts passed comprehensive non-compete legislation in 2018 that limits the enforceability of most non-compete agreement (see Statutorily Required “Garden Leave”). In other states, such as California, almost all post-employment non-competes are unenforceable (Cal. Bus. & Prof. Code § 16600-16602.5). ...

Against this backdrop, employers are seeking alternatives to traditional non-competes to protect their proprietary information and customer relationships. One alternative is the use of garden leave provisions in employment agreements. Garden leave provisions extend the employment relationship for a period of time during which the employee continues to receive a salary (and sometimes benefits) but cannot go to work elsewhere.

While garden leave provisions are not a panacea, they may serve as a helpful tool that employers can use to protect their legitimate business interests and prevent certain employees from immediately working for a competitor.

This Practice Note addresses:

  • The history and general characteristics of garden leave in the US.
  • Comparisons between traditional non-competes and garden leave provisions.
  • Advantages and disadvantages of garden leave.
  • Drafting considerations for employers that want to use garden leave provisions, including potential issues under:

–– Section 409A of the Internal Revenue Code (Code); and

–– the Consolidated Omnibus Budget Reconciliation Act (COBRA).

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