Thomson Reuters Practical Law has released the 2024 update to “Garden Leave Provisions in Employment Agreements,” co-authored by Peter A. Steinmeyer and Lauri F. Rasnick, Members of the Firm in the Employment, Labor & Workforce Management practice, in the firm’s Chicago and New York offices, respectively.
The 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 non-competes for low-wage workers. Other states have limited noncompetes 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 noncompete legislation in 2018 limiting the enforceability of most non-compete agreements (see Statutorily Required “Garden Leave”). In other states, such as California, and more recently Minnesota, almost all post-employment non-competes are unenforceable (Cal. Bus. & Prof. Code § 16600-16602.5; Minn. Stat. Ann. § 181.988). Illinois, Colorado, and the District of Columbia also have enacted or amended their non-compete statutes to limit the enforceability of non-compete covenants, although the Illinois law expressly excludes garden leave clauses from its definition of covenants not to compete (820 ILCS 90/5, 90/10 and 90/15, as amended; Colo. Rev. Stat. Ann. § 8-2-113; D.C. Code §§ 32-581.01 to 32-581.05).
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. For a 50-state comparison of non-compete laws and requirements generally, see Quick Compare Chart: State Non-Compete Laws.
Against this backdrop, employers have been 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.
- Case law addressing 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: "Garden Leave Provisions in Employment Agreements—2024 Update"