Employment Contracts: The History of Non-Compete Agreements and the Future of Garden Leave Provisions
Loyola University Chicago School of Law, JD 2023
Non-competes are a traditional approach for employers seeking to place a restrictive covenant on an employee post termination or resignation. Recent studies show as high as 39.8 percent of all private sector employers are requiring non-competes, regardless of age or position. These agreements are typically signed by an employee near the date of hire, or over the course of employment, and typically limit the employee from working for or with competitors post-employment; sometimes even placing further restrictions regarding geographical areas or time periods.
Non-competes are increasingly disfavored
Due to the nature of the limitations these agreements impose on employees, they are typically viewed as placing too much of a restraint on commerce. As a result, there has been a trend of legislative tightening disfavoring non-competes. Not only have many states started to prohibit the use of non-competes entirely, namely California, North Dakota and Oklahoma, but on the Federal level President Biden issued an Executive Order on July 9, 2021 calling for the FTC to curtail the use of unfair non-competes and other restrictive covenants in employment contracts. Notably, most states ban non-compete agreements for low-wage workers out of unfairness to the employee. Yet, each state has a varying salary at which an employee is considered “low-wage.” In Illinois, someone who makes less than $75,000 a year is considered low wage in the context of non-competes. In Maine, “low-wage” is any employee making less than $54,000 a year, while in Washington it is anyone making less than $107,000 a year.
Due to these heightening legislative and judicial restrictions, employers have started implementing new forms of restrictive covenants called “garden leave” provisions, used mainly in the financial and banking sectors. These provisions originate from financial industries across the U.K., Australia, and New Zealand. During a “garden leave period,” an employee is still technically employed and remains on the payroll, however, they cease to work or affiliate with the company. In this time period, because the employee is still technically employed, a duty of loyalty exists and the employee is not permitted to work elsewhere or commence other employment. During this time, employers will take steps to protect confidential or proprietary information the employee had access to and eliminate the employees ties with the company and its customers and/or competitors.
Garden leave provisions in the United States
Some states legislatures have recognized garden leave provisions by incorporating them into state law, with Massachusetts passing a law requiring non-competes to be no longer than a year and have either a garden leave clause or other mutually-agreed upon consideration to benefit the worker post-employment. New York businesses and courts have seen a considerable increase in the use of garden leaves and corresponding litigation, arising from its position as one of the world’s major financial hubs and home to forty-five Fortune 500 companies. However, due to the nature of these agreements being shorter than most non-competes, paid, and beginning to be commonly accepted in the financial industry, the case law is other states is sparse. Further, when litigation does arise, courts are reluctant to enforce garden leaves in some states because it requires an employee to persist in an at-will relationship against their will. Therefore, it becomes increasingly important for those writing these policies to cover all the bases.
Drafting a garden leave
Important factors to consider when writing garden leave provisions are: (1) who the employee is and what job duties they have within the company; (2) the hardship to the employee versus the desire of the employer to reasonably limit unfair competition; (3) whether benefits or bonuses will continue to be paid out to the employee; and (4) how to preserve flexibility for the employer to decide not to implement the garden leave period post-employment. It is also relevant for an employer to decide which types of employment contracts to include garden leaves in – they are typically found in offer letters, employment agreements, stock option plans, bonus agreements, equity award agreements, severance agreements, long-term incentive plans, retirement plans, or stand-alone non-competes, non-solicits, or confidentiality agreements. Further, to avoid litigation, it is imperative that these provisions be conspicuous and clear so that employees signing them acknowledge and understand the terms and conditions of what they are agreeing to.
In considering how long a garden leave period should last, it is best to have the duration dependent on the employee’s role within the company. For example, an appropriate garden leave period might be 30 days for a vice president, 60 days for a director, and 90 days for a managing director. Some garden leaves even go so far as setting a garden leave period of 12 months. However, the longer the garden leave, the higher the cost of the retention of that employee, thus, a period should only be as long as necessary to protect an employer’s legitimate business interests. Importantly, employers should consider reserving the right to exclude employees from not only the workplace, but from work related email and communication systems, access to clients, and confidential or proprietary information during the garden leave period as well.
While employees may be tempted to avoid traditional non-competes because of the potentially harsher restrictions, garden leaves are more likely to be abided by. Employees are less likely to breach a restrictive covenant when they know they will be paid a fair salary for a certain amount of time. Consequently, garden leaves are an attractive new form of employment restrictive covenants that will likely continue to see an upward trend in nationwide implementation and recognition.
Thus, transactional lawyers in the employment law area seem to increasingly be guiding companies in the banking and financial industries to implement these provisions. Considering the preceding discussion, companies should consider how to best draft these into agreements and use them as a safety net against the increasing disdain towards non-competes.