Garden Leave: A Welcome Alternative to the Non-Compete

Traditionally, non-compete agreements were used to prevent employees from leaving a company and taking clients and important business information, including trade secrets, with them. In recent years, however, legislatures and courts have taken an increasingly hostile stance toward traditional non-compete agreements, and garden leave provisions are gaining popularity as a helpful alternative.

The Decline of Non-Competes for Low-Wage Workers

Multiple states, including Illinois, Maryland, Massachusetts, Missouri, New Hampshire, New York, Oregon, Pennsylvania, Vermont and Washington have proposed legislation that would ban or void non-competes for low-wage workers.  In Maryland, non-competes would be ineffective for employees earning less than $15 per hour or $31,200 per year, and in New York, they would be banned on employees earning under $40,560 per year. In Illinois, non-compete agreements signed by employees earning under $1 million per year would be void.

Nevada recently enacted A.B.N. 276, which voids non-compete agreements unless they (i) are supported by “valuable consideration”, (ii) do not impose any restraint that is greater than required for the employer’s protection, (iii) do not impose any undue hardship on the employee, and (iv) impose restrictions that are appropriate relative to consideration provided. The statute also mandates that judges “blue pencil” overbroad non-competes so they are enforceable.

Two federal bills limiting non-competes have also been proposed: LADDER Act H.R. 2873 and MOVE Act S.1504.  The LADDER Act (Limiting the Ability to Demand Detrimental Employment Restrictions Act) would (i) prohibit employers from entering into non-compete covenants with low-wage employees (those making less than the greater of $15 per hour or the state minimum wage) engaged in commerce or in the production of goods for commerce, and (ii) require an employer of such employees to post notice of that prohibition in a conspicuous place on the employer’s premises.  The MOVE Act (Mobility and Opportunity for Vulnerable Employees) provides the same terms, except that it defines “low-wage employee” as an employee who earns less than (i) $15 per hour, (ii) the state or local minimum wage, or (iii) $31,200 per year. 

The Rise of the Garden Leave

Garden leave provisions require an employee to provide notice in advance of his or her resignation (often 30 – 90 days), during which time the employee does not work but continues to earn a salary.  Though the employee is free to simply “tend the garden” during this time, he or she is still on the employer’s payroll and therefore still owes a duty of loyalty, which means the employee cannot work with or for a competitor during this time.

There are a number of considerations in drafting a garden leave provision, which may be included not only in employment agreements but also in offer letters and stock option plans. Employers must determine who will be subject to the garden leave provision, how long the notice period will be and the compensation that will be paid (often, an employee will continue to receive his or her regular salary but will no longer be entitled to certain fringe benefits). The provision may allow the employer to shorten or waive the provision at its discretion.  Most importantly, the provision should reserve the employer’s right to exclude the employee from performing work, potentially including a restriction on the employee’s access to the workplace.

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