By Nic Hart
The Queen’s Bench Division of the High Court have held in Square Global Limited v Leonard that the absence of a garden leave set-off clause will not be fatal to a non-compete post termination restriction, touching on a the widely debated relationship between garden leave and non-compete clauses in employment contracts.
The case involved an employer’s attempts to enforce periods of garden leave and subsequent non-compete restrictions on an employee consecutively. The employee in question had resigned and in response claimed constructive dismissal on the basis that his employer had destroyed or seriously damaged the necessary relationship of trust and confidence between the parties, in breach of the implied term in the contract of employment. The High Court held on the facts that the employee was not entitled to resign summarily and by doing so, he had failed to give six months’ notice of termination and was in breach of his employment contract.
The employer sought to enforce a period of garden leave reflecting the six months contractual notice from the date of resignation, in addition to a further six months’ protection from the end date of that notice period on 11 May 2020 under the non-compete clause in the employee’s contract. This would effectively afford the employer a total of 12 months protection. The High Court were satisfied that the six month non-compete clause was pursuant to the employer’s legitimate business interests capable of requiring protection by restrictive covenants, and was reasonable, going no further than necessary to protect the employer’s legitimate business interests.
The High Court then went on to assert as follows:
“The garden leave clause which is included in the contract exists to cater, among other matters, for a situation where [the employer] has concerns about an employee’s conduct (e.g. harvesting client information, or engaging in deceptive behavior), and so chooses to restrict the employee’s duties during the notice period. On the assumption that such concerns have reasonable foundation, it would not then be unreasonable to enforce the full period of the post termination restrictions.” (Paragraph 191)
As a result, the employer was entitled to enforce both the six months’ garden leave for the employee’s contractual notice period, and a further six months’ protection under the non-compete clause.
Restrictive Covenants and garden leave set off clauses
It has been common to see employers providing that any time on garden leave is set-off against any post-termination restrictions, mindful of the obiter comments in the case of Armstrong Credit Suisse Asset Management Ltd v Armstrong. While this may not seem strictly necessary, especially following subsequent judgments in Tullett discussed below, and now the judgment in Square Global Limited v Leonard, it has nevertheless become a common practice.
In Armstrong similarly to Square Global Limited v Leonard, the employer sought to enforce garden leave for six months and a restrictive covenant for a further six months. The employees argued that the restrictive covenant should be offset by the six months spent on garden leave, and reduced to nothing. The Court of Appeal upheld the grant of an injunction enforcing the restrictive covenant, saying that there was no principle of automatic offset, but commented that, in an exceptional case, where a long period of garden leave had already elapsed, a court might be justified in declining to grant any further protection based on restrictive covenants.
In Tullett, the High Court took garden leave periods into account when deciding to what extent to enforce post-termination non-competition covenants against brokers, but held, as in Square Global Limited v Leonard that a non-compete clause will not be held unreasonable simply by virtue of that fact that it does not take account of a period of garden leave. Rather, in deciding whether to give effect to the covenant, and the extent to which it should be given effect, the court will take account of garden leave. Here, after imposing the relevant reasonableness standards on the non-compete covenant, the court concluded that it would be enforced:
“for such period as will provide a total of 12 months taken with [the] time on garden leave, but not thereafter.”
The effect of Tullett and now Square Global Limited v Leonard is that periods of garden leave and periods in which the employee is subject to non-compete restrictions may run consecutively, effectively allowing an employer the ability to stop the employee from harming its business from the start of the garden leave period until the end of the non-compete restriction, but only where those covenants satisfy the stringent enforceability tests applied under English law.
It does however remain the case that a court may be less likely to enforce post-termination restrictive covenants where an employee is put on garden leave during the notice period if, for example, it is felt that this will result in keeping the employee out of the market for too long. It is key to note that whilst it is possible to run these periods of protection consecutively, this will only be enforceable in instances where the circumstances legitimately warrant it.
As is always the case when drafting restrictive covenants, a cautious approach is recommended in light of the scrutiny such clauses are subjected to on judicial examination. It remains the case that in order to stand the greatest chance of being enforceable, post termination restrictive covenants should be drafted with as limited a scope as is necessary to protect the legitimate business interests of the employer. Whilst the above discussed cases assert that the absence of a garden leave set-off clause will not in itself be fatal to a non-compete restriction, in deciding whether to give effect to such a clause and the extent to which it is given effect, the court will take account of garden leave.
For More Information
For more information on the matters discussed in this blog, please do not hesitate to get in contact with Nic Hart or another member of your Duane Morris London Team.