Garden Leave Provisions in Employment Agreements: 2020 Update

The 2020 update to our Practice Note, “Garden Leave Provisions in Employment Agreements,” is now available from Thomson Reuters Practical Law.  We discuss garden leave provisions in employment agreements as an alternative or a companion to traditional employee non-compete agreements.

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).

Download the full Practice Note in PDF format here.