Garden Leave Clause: A Win-Win Scenario

[By Aparajita Marwah and Saavni Kamath]

The authors are students at the National Law Institute University, Bhopal.

Introduction

Gardening Leave is a measure taken by the employer when an employee is terminated or tenders resignation and denotes the period of time between service of notice of termination and actual termination. A garden leave clause may be effected at any stage of an employee’s course of employment, but is largely restricted to being imposed during the notice period. In such a scenario, companies generally take steps to ensure that during this period, the employee undergoing the process of termination is no longer an active part of their workforce and has no access to clients, co-workers, or sensitive information pertaining to the organization, while still being paid a regular salary with benefits. During such leave, the employee would bound by the employment contract nonetheless and would have to refrain from any act that could hamper the interests of the employer.

The reasons for imposing a gardening leave clause upon an employee are manifold. Firstly, these clauses prevent an outgoing employee from being employed by a rival organization during that period, thereby effectively restricting the sharing of any confidential information. Secondly, limiting the employee’s access to company data, clients, or other employees during this transition period, reduces the threat of any possible informational leak once the employee is free from their contract.

Further, in terms of the etymological roots of the expression, it essentially means that the employee in question would bide this period by engaging in hobbies such as gardening or could also be negatively perceived in the sense that the employee in question could not even be considered fit to garden. It is imperative to point out that employers may not place an employee on garden leave without such a clause as a part of their employment contract. In the event there is an existing clause, wrongfully place such employee under leave without any wrongdoing on the latter’s part.

Alternative to Non-Compete Clauses

While both Garden Leave and Non-Compete Clauses are invoked during the termination of employment in order to prevent the employee from engaging with another employer for a period of time and essentially seek to serve the same end, the means used are vastly different. The latter is utilized when employment is terminated and prohibits the employee, for a stipulated period, from being employed with a rival company or engaging in a rival practice. Non-Compete Clauses are also harsher in terms of the conditions set forth and employees are not provided with salary or bonus benefits throughout this duration, resulting in stricter judicial scrutiny regarding the fairness of these terms.

In comparison, Garden Leave clauses provide greater leeway and are not particularly disadvantageous to the employee being terminated. Although the employees’ access to the market is restricted during this period, they still owe a fiduciary duty to the employer and enjoy salary benefits. This subsists until the employee in question has not been terminated. Additionally, it is pertinent to distinguish between paid non-compete periods from garden leave clauses as there is a tendency to consider the two as the same. Paid non-compete periods begin only after the termination of employment and share the same advantages that a garden leave clause might grant.

Judicial Perspective within the Indian Spectrum

Garden Leave Clauses along with Non- Compete Clauses are generally considered within the ambit of restrictive covenants. As a result, they are often subject to rigorous judicial scrutiny, to determine whether these clauses prohibit the freedom of trade and business granted to the employee, by way of Article 19 of the Indian Constitution. Moreover, contracts that impose restrictions upon the person’s freedom to trade or business are rendered void.

While there has been no statutory recognition accorded to Garden Leave Clauses in any Indian legislation, there have been several judicial decisions discussing its validity and applicability. One of the first judgments regarding the application of Garden Leave Clauses was tendered by the Bombay High Court in VFS Global Services Private Limited v. Suprit Roy. The case was filed in lieu of execution of an agreement which contained a Garden Leave Clause. However, the errant drafting of the clause wrongfully imposed garden leave upon the employee, after the termination of employment was considered void within the ambit of Section 27 of the Indian Contracts Act, 1872. The Court added that Garden Leave Clauses themselves are not restrictive of trade and if applied in the manner prescribed, could prove to be beneficial for both the employee and the employer. In subsequent judgments such as that of Niranjan Shankar Golikari v. Century Spg. & Mfg. Co. Ltd. and Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr., the Court distinguished between garden leave and non-compete clauses, and established that the employee may be restricted during the term of employment but not after termination. Further, the Court by its decision in Kouni Travel Pvt. Ltd. v. Ashish Kishore and Tapas Kanti Mandal v. Cosmo Films Ltd., upheld the validity of Garden Leave Clauses and affirmed that they can be invoked to ensure the protection of trade secrets, as long as the employee in question is remunerated during the specified period.

Effect of the COVID-19 Pandemic

The ongoing health crisis has exacerbated the process of decline of both the economy and the job market. It has triggered a string of consequences including reductions in employee remunerations and large-scale layoffs. With employment rates at an all-time low, the question of applicability of restrictive covenants such as garden leave clauses is a poignant one.

There are two diverging opinions with regard to whether or not a Garden Leave Clause, as a part of an employment contract, should be invoked during the current scenario. The first opinion and more widely asserted contention against invoking Garden Leave Clause is the fact that tough exit clauses make it all the more difficult for employees to seek employment elsewhere, in lieu of the current environment. Considering such clauses are widely used by industries in the banking and retail sectors, firms across the country are now looking to restructure these clauses by reducing the leave period and providing early exits, in order to make it easier for outgoing employees to seek alternative employment opportunities. Additionally, a lot of these firms are also providing outplacement opportunities for laid-off personnel, through an external consultant, in order to ease the process of pursuing replacement jobs.

Alternatively, it is also strongly asserted that Garden Leave Clauses can be considered as a boon during the existing climate and may be utilized in a way beneficial to both employees and employers. While employers have no general obligation to grant Garden Leave to employees, they may invoke the provision as part of the employment contract, specifically for employees who may be infected with the virus in order to avoid further contamination and risk to other employees within the workplace. This would also help fulfill the employer’s obligation of providing a safe and healthy workplace to its employees, while also granting a period of recuperation for affected employees.

Critical Analysis

Consider the following circumstances: What happens when an employee who has been given leave under the garden leave clause quits his job. Effective immediately, he would no longer be an employee. So would the restriction still have a binding effect?

Case law has stated that these clauses are effective only during the employment, not upon termination. Due to the partial protection conferred by these clauses, they are often deemed to be insufficient by themselves. Moreover, this clause creates several enforcement hurdles as it requires that employees remain employed against their will, more so when the employee is obliged to perform his duties at that time. The logistical challenges of electronic access when there are transactional functions to be performed are also areas of concern, relevant especially in the context of a pandemic.

While these clauses are an aid to protect the confidential information of the employer (by virtue of their restrictive nature), garden leave clauses are a partial measure and should be undertaken alongside other measures. They are not a straight-jacket formula for protecting a company’s confidential information; and parallel mechanisms such as internal policies, supervising the employee’s computer usage, restricting their access to the common server as well as recording exit interviews are a few (of many) measures that should be used. Lastly, stronger alternatives such as non-compete and non-disclosure clauses should be employed in cases where it is appropriate, rather than using a garden leave clause as a rule-of-thumb.

The endgame for these clauses is to preclude the loss suffered by an employer on account of an exiting employee. And this is achieved by ensuring suppression of the information and know-how acquired by an employee during the course of employment. The bottom-line being that employers should not blindly rely on a garden leave clause to be their one-stop solution, they should consider alternative and additional measures to ensure a watertight retention of information.

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