Originally Published 28th August 2008
The Victorian Supreme Court has highlighted a number of issues that employers will need to consider before placing senior executives on garden leave during a period of notice.
"Garden (or gardening) leave" is a colloquial expression, referring to a situation where an employer directs an employee not to perform any duties during a period of notice, although the employee continues to be employed and paid during that period. It is often used as an alternative to (or in conjunction with) post-employment restraints as, during a period of garden leave, an employee cannot work for a competitor or otherwise act against the interests of the employer.
In the recent case of BearingPoint Australia Pty Ltd v Hillard the Court had to determine an application by BearingPoint to effectively force Mr Hillard, an executive, to serve out the period of garden leave and not work for one of BearingPoint's competitors during that period.
By way of background, Mr Hillard was employed by BearingPoint in a senior management position. In December 2007, he advised BearingPoint that he had signed a draft letter of intent to accept an offer of partnership from Deloitte, one of BearingPoint's competitors. BearingPoint treated this as a resignation and wrote to Mr Hillard on 17 December 2007 putting him on garden leave for the duration of his six month notice period, directing him not to contact clients and requiring him to return his laptop computer. BearingPoint then applied to the Court for an injunction enforcing these requirements and preventing Mr Hillard from working for anyone else during his garden leave.
In respect of garden leave, the Court held as follows:
- Whether an employer may put an employee on garden leave depends on the terms of the employment contract. If there is an express term permitting it, then it is lawful.
- If the employment contract is silent on the issue, garden leave will be lawful provided that there is no contractual obligation on the employer to provide work as well as pay wages. Whether there is an obligation to provide work depends on the express terms of the employment contract. However, generally, there will be no obligation to provide work except where:
- the employee has particular skills or talents which the employee needs to keep in regular activity
- the employee occupies a unique position, or
- an aspect of the employee's remuneration depends on work being performed.
- In this case, BearingPoint had no contractual obligation to provide work and was lawfully permitted to put Mr Hillard on garden leave. The Court noted that Mr Hillard's:
- employment contract contained an express clause permitting BearingPoint to vary or modify Mr Hillard's duties, even to the extent of putting him on garden leave (even though the clause did not expressly deal with garden leave)
- remuneration would be the same whether he was on garden leave or not, as he was not paid on a commission basis and any performance bonuses were at the discretion of BearingPoint
- position, though senior and important, was not "special and unique"
- skills and expertise did not require frequent exercise during the notice period in order that they be enhanced and preserved, and the fact he was on garden leave did not preclude him from reading materials, attending seminars and workshops and communicating with experts in his field in order to maintain his skills and expertise.
Despite finding that BearingPoint had a contractual right to require Mr Hillard to go on garden leave, the Court refused to order an injunction enforcing the obligation. It held that this would be tantamount to ordering specific performance of the employment contract (which Courts have historically avoided).
The practical result is that if Mr Hillard breached his employment contract and left to work for a competitor during the six month notice/garden leave period, BearingPoint's only real option would be to sue Mr Hillard for damages for breach of contract. Even BearingPoint conceded that any such damages would be difficult to identify and quantify.
Implications for employers
This decision has three clear implications for employers:
- A garden leave clause should not be seen as a complete alternative to effective post-employment restraints. If a court would be reluctant to require the employee to serve out the notice period (albeit from home), the clause may be of little practical effect in terms of protecting the employer's business interests. The employer should ensure that the garden leave obligations are supplemented by enforceable contractual provisions restraining the employee's activities following the end of the employment relationship.
- That being said, employment contracts, especially those for senior executives, should always contain an express clause permitting garden leave. This will at least keep the employer's options open and preclude any argument that garden leave is not permitted.
- In any case, the employer should consider whether garden leave is a preferable alternative to having the employee work out the notice period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.