Thomson Reuters Practical Law has released the 2021 update to “Garden Leave Provisions in Employment Agreements,” co-authored by our colleagues Peter A. Steinmeyer and Lauri F. Rasnick.
This Practice Note discusses garden leave provisions in employment agreements as an alternative or a companion to traditional employee non-compete agreements. It addresses the differences between garden leave and non-compete provisions, the benefits and drawbacks of garden leave, and drafting considerations for employers that want to use garden leave provisions. This Note applies to private employers and is jurisdiction neutral.
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 noncompetes for low-wage workers. Other states have limited non-competes for other categories of workers, such as technology sector workers and health care professionals (see Health Care Non-Compete State Law Chart: Overview). Massachusetts passed comprehensive non-compete legislation in 2018 limiting the enforceability of most noncompete agreements (see Statutorily Required “Garden Leave”). In other states, such as California, almost all post-employment non-competes are unenforceable (Cal. us. & Prof. Code § 16600-16602.5). More recently, Illinois mended its Freedom to Work Act, effective January 1, 2022, limiting the enforceability of non-compete covenants (820 ILCS 90/10 and 90/15, as amended). For more on state law restrictions on non-compete agreements, see Practice Note, Non-Compete Agreements with Employees and Non-Compete Laws: State Q&A Tool.
Further, on July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy, which, among other things, directed the Federal Trade Commission (FTC) to explore regulating the use of restrictive covenants such as non-compete agreements.
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.