“Gardening Leave” Should Not Involve Lunching or Other Social Activities with Your Former Colleagues

While the term “gardening leave” or “garden leave” is thought to be an English import to the New World, some U.S. fund managers and other financial institutions have been using gardening leave provisions in their employment agreements in all but a name.  Under a “gardening leave” clause the employee is required to give the employer a certain notice prior to departure from the firm following which the employee is placed on a salaried leave of absence and is forbidden to work for competitors and to engage in certain other activities.  The name for this contractual device originates in the idea that the employee is paid to stay at home and tend to a garden rather than engage in a conduct the employer might find objectionable.  One basic distinction between gardening leave provisions and restrictive covenants following separation is that the terminated employee (whether by his or her own volition or by the employer) technically remains in an employment status during the period of the leave and continues to be compensated as before but is subject to greatly reduced (if not completely eliminated) job duties and lack of access to the employer’s offices, facilities, and personnel.

A case involving just this kind of clause is currently pending before the London High Court.  The employee in that case is Fahim Imam-Sadeque, the former head of sales for the UK, Middle East and Australia for BlueBay Asset Management, one of Europe’s largest specialist managers of fixed-income credit and alternative products, managing assets of more than £24billion.  Mr. Imam-Sadeque reportedly left the firm in December 2011 after having signed an agreement that was said to contain a gardening leave for a period of six months from the date he gave notice in July 2011 after he had accepted an offer to join a competitor, Goldbridge Capital Partners, as head of sales and marketing from January 2012.  As a reward for staying home in his English garden, during the term of the leave he was entitled to continued salary and to other compensation, including fund shares worth £1.7million.  While he continued to be a BlueBay employee, he was subject to a range of the common restrictive covenants, such as non-competition, non-solicitation and non-poaching.  It is the latter restriction that Mr. Imam-Sadeque reportedly violated in the course of having lunch with a current BlueBay employee, Damian Nixon, whom he sought out in a number of emails.

While we do not know what actually transpired during this December lunch, BlueBay clearly interpreted it as more than an exchange of season’s greetings and refused to turn over the accrued compensation, including deferred fund shares to Mr. Imam-Sadeque, claiming a breach  of the anti-poaching provisions of his contract.  BlueBay also claimed Mr. Imam-Sadeque had allowed Goldbridge to issue inaccurate and misleading references to himself and other BlueBay staff, with Goldbridge saying he no longer worked for BlueBay when he did so.  Not surprisingly, Mr. Imam-Sadeque has brought suit against BlueBay claiming that he did nothing wrong by having lunch with Mr. Nixon, and that BlueBay is wrongfully withholding his deferred compensation.

The lesson of this pending case, regardless of its outcome, which is more likely than not will turn on the employer’s ability to secure Mr. Nixon’s (its current employee) cooperation as a witness, is that gardening leaves serve a useful purpose for both the employer and the employee but should not be abused by either.  Employers can obtain a stronger legal protection by way of restrictive covenants when they continue paying the departing employee and in exchange get the privilege of counting him or her as a current (if not active) employee during the term of the leave because most legal challenges to the validity and enforceability of such restrictive covenants lose their potency precisely due to continued consideration being paid by the employer and the unambiguous employment status of the departing employee.  Furthermore, gardening leaves can offer greater protection against misappropriation of the employer’s confidential information and trade secrets because employees on leave are effectively kept away from the most current information, being denied access to the employer’s offices, files or networks as well as its employees, suppliers, customers, investors, and other counter-parties and as current employees are generally subject to greater control by the employer than former employees.  Employees also benefit by having a paid leave with full insurance coverage and often other benefits once they serve a termination notice on their employer before they completely sever the ties with the old employer and get to start with a new employer (or a new career in gardening or elsewhere).

However, once either party overreaches, the bargain of certainty and predictability is lost, and the courts are liable to step in with their own vision of what is just and fair in a given fact pattern.  U.K. courts have generally enforced gardening leave provisions with both injunctions against prohibited employee conduct and by upholding the employer’s right to withhold contractual compensation in the event of a material breach by the employee.  A typical U.K. Service Agreement for investment fund professionals and managers uses a fairly broad language for its anti-poaching clause of the garden leave provisions, such as:

“The Employee covenants with the Company that the Employee will not directly or indirectly on Employee’s own account or on behalf of or in conjunction with any person for a period of __ months after the Termination Date induce or attempt to induce any employee to whom this paragraph applies to leave the employment of the Company (whether or not this would be a breach of contract by such employee).”

It may also be possible to use more specific language prohibiting any contact by the employee who gave termination notice with any of the employer’s employees, directors, officers, investors, customers, suppliers, and service providers, re-defining the employee’s duties and obligations and so on.  It is unknown at this point whether the BlueBay employment agreement in question contained such language, but conceivably even the less-specific language reproduced above may subject the former employee to liability when sufficient evidence is introduced as to his or her attempts to poach the company’s employees or to violate the no-contact provisions of the contract.  What is clear is that any employee who voluntarily signs a contract with such provisions should steer clear of the employer’s business and employees until the gardening leave is over to protect his or her entitlement to deferred compensation and to avoid litigation.

In the U.S., gardening leave clauses are used more rarely than in the U.K. and almost exclusively with executive management and professional positions, including those in the financial services industry.  They are sometimes called “sitting out” clauses.  As in the U.K., courts in the U.S. generally find them valid and enforceable because the continued compensation dispenses with the challenge based on the lack of a “safety net” for the employee and gardening leave provisions are therefore a safer bet for the employer than pure post-separation restrictive covenants where no additional compensation is paid to the severed employee.  However, the reasonableness test still applies, and the period of the leave as well as the need for and the scope of the employer’s protection may still be scrutinized by a court.  U.S. employers rarely go beyond the 6 months term, and 2-3 months terms are more typical.  In addition, a number of cases raise special concerns with the availability of specific performance to enforce the garden leave which provides for some limited services to be continued to be performed for the benefit of the former employer during the transitional period (as opposed to an injunction against an employee who accepts an employment offer from a competitor and attempts to commence new employment during the period of the garden leave) as an involuntary servitude.  Money damages (including a setoff of deferred compensation) are much less controversial as a legal remedy and should serve as sufficient deterrent against potential violations on the part of competitors and former employees alike.  New York courts consistently rejected plaintiffs’ arguments that the employment exclusion effect of properly drafted garden leaves may make it difficult to resume work due to lost skills.  In addition, the scale of compensation typically granted hedge fund and private equity fund executives makes it very difficult for the executives in between jobs to get the sympathy of a judge or a jury in the absence of a truly despicable conduct on the part of the employer.

It should be remembered that there has been limited guidance from U.S. courts on the pure U.K.-style gardening leave provisions, and U.S. employers should exercise caution in including such provisions into U.S. employment or separation agreements and seek advice of U.S. counsel on their effect under local state law.  We have been involved in preparation, negotiation and litigation of such agreements on behalf of both hedge and private equity fund employers and their employees and would be pleased to assist you with your legal needs in this area.