Garden Leave Provisions in Employment Agreements

Thomson Reuters Practical Law August 2018

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.

Although the Trump Administration’s view on non-competes is unknown, the Obama Administration took issue with them. Both the US Department of Treasury and the White House issued reports in 2016 that questioned the widespread use of non-competes and suggested that they hampered labor mobility and ultimately restrained economic growth (see US Department of the Treasury: Non-Compete Contracts: Economic Effects and Policy Implications (Mar. 2016) and White House: Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses (May 2016)). Some states have passed legislation essentially banning non-competes for certain categories of workers, such as low-wage workers in Illinois (820 ILCS 90/1) and technology sector workers in Hawaii (Haw. Rev. Stat. § 480-4(d)). 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 gaining rapid favor is the use of garden leave provisions in employment agreements. These 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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