Gardening leave can prevent a former employee from exploiting trade secrets, but HR should be wary of certain traps.
When a senior employee of Qantas’ loyalty scheme recently accepted the position of CEO at Virgin Velocity, Qantas enforced a gardening leave clause in an attempt to delay the employee’s start date.
Qantas argued that the employee broke his contract by failing to adhere to a six month gardening leave period, which is typically enforced to protect sensitive information that an employee has access to during their time with the company.
To make matters more complicated, the original employment contract was signed in Singapore where the employee also applied for anti-suit protection in order to prevent Qantas from enforcing a period of gardening leave.
On two separate occasions, Australian courts ruled that the feud between the two rival airlines should be heard in Singapore.
In April, the High Court of Singapore issued a last-minute injunction, thereby ensuring the employee remains on gardening leave until a final hearing takes place this June or July which will determine an outcome.
Off the back of the Qantas-Virgin battle, HRM spoke to Michael Byrnes, partner at Swaab, about gardening leave provisions, and how they can act as an effective method of protecting the business interests of an employer.
How do gardening leave clauses work?
Let’s suppose an employee is on a six-month notice period, during which time they have no access to the company’s customers or confidential information.
Once the employee commences in their new workplace, it’s thought that sufficient time has lapsed such that the confidential information they were privy to in their old workplace will no longer be relevant or useful. It may be that the information is now in the public domain, or has “lost its currency due to the passing of time”, says Byrnes.
“If you have an employee who is going to a competitor at the end of the notice period, gardening leave freezes them out and it does so legally.
“It prevents them from contacting clients and having access to confidential information, and by deferring a start date, the company can be more confident that when the employee starts their new job, they’ve had a period out in the wilderness.”
Byrnes adds that gardening leave clauses, which require an employee to remain effectively on suspension from work while receiving all entitlements, have many advantages over post-employment restraints. The latter can prevent an employee from establishing a rival business or taking a company’s clients, but the restrictions will only be upheld if a court deems the restraint provisions to be reasonable.
“You have far greater control over an employee who is serving out their notice leave than you do an employee during the post-employment period when enforceability of restraints is always a live and highly contested area,” says Byrnes.
“Courts will almost always uphold a notice period and gardening leave.
“It also gives the employer a greater opportunity to firm up client relationships by giving breathing space to implement a retention strategy before the employee commences work with the competitor,” he adds.
“Clients still need work done during the employee’s gardening leave – that gives the employer the chance to introduce the replacement to them and minimise the potential damage caused by the employee’s departure.”
What’s the downside?
From the employer’s perspective, one pitfall of gardening leave is the requirement to continue paying the employee’s full entitlements during the notice period.
Unless otherwise specified in the contract, these entitlements include remuneration and the usual rights extended to employees such as sick leave and holiday leave.
Failure to grant these entitlements can give an employee license to argue that the employment contract has been broken.
“For example, if the employer fails to provide a motor vehicle or mobile phone or something that is a benefit to which the employee is entitled, the employee might argue the employer has repudiated the contract. The employee may then be relieved from the notice period and any post-employment restraints,” says Byrnes.
“That’s a trap for employers. They might have gardening leave in the contract but insist on the motor vehicle coming back or don’t provide full pay.”
This situation transpired in Actrol Parts Pty Ltd v Coppi when a company directed one of its employees to take four weeks of gardening leave, during which time the employee commenced working at a competitor company.
The employer continued remunerating the employee, but retrieved the company car, mobile phone and iPad that the employee had been using. The court found that although the gardening leave was “reasonable and equitable”, the employer had rejected the contract by withdrawing certain entitlements, and the employee was allowed to work for the competitor company before their gardening leave was up.
Given such a finding, Byrnes’s advice for companies is to “be very careful during the notice period”, and ensure the employer’s entitlements are being honoured.
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What should HR do now?
In situations where an employee has access to customer connections and confidential information, Byrnes urges organisations to include a gardening clause in the employee’s contract upon commencement of employment, which should cover the following non-exhaustive list:
- Right not to provide work
- Right to provide direction that the employee not attend the workplace
- Right to cut the employee off from IT systems (if the employee retains a company phone during gardening leave, it may be wiped so that the phone can only be used for personal use)
- Right to direct employee not to contact or have any professional dealings with customers of the business
“It is useful for an employer to reserve these rights in the contract so it minimises the risk of the employee successfully arguing repudiation,” says Byrnes.
Gardening leave is typically between three and six months, but the timeframe for will vary depending on the seniority of the employee in question.
“The employee’s level will often dictate the two main relevant key factors, which are access to confidential information, and customer or client connection,” says Byrnes.
“The more senior the employee, the greater access to confidential information and access to customer and client connections, so generally a longer period will be necessary in order to ensure both of those areas are protected.”
However, if a gardening leave clause isn’t included in a contract, employers needn’t despair.
“There is a principle that employers are not obligated to provide work to employees, but they are obligated to pay them. So there might be an implied right that they can put an employee on gardening leave in the absence of an express term,” says Byrnes.
But where possible, explicitly including a gardening leave clause in a contract, especially for senior talent, is going to be the best way of protecting your company’s trade secrets.