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Garden leave could add value as noncompete alternative

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Companies outside the United States have been using garden leave-type agreements for some time as a way to keep outgoing employees from taking what they know to a competitor or using their knowledge to start a rival business. Now it’s likely to gain traction in the U.S. as the Federal Trade Commission’s ban on noncompetes nears.

“It’s a fairly common concept outside of the U.S.,” Evan Gibbs, an employment law partner at Troutman Pepper, said in a podcast hosted by the law firm. “But in the U.S. … it’s very uncommon.”

Massachusetts might be one exception. Lawmakers in the state passed a law in 2018 that limits noncompete agreements to 12 months and requires them to have either a garden leave clause or something else that compensates an outgoing employee for not competing against the company.

The clause also tends to be more familiar in New York, where financial services companies will sometimes use them. 

“In New York, it’s much more common,” Tracey Diamond, a partner at Troutman Pepper, said in the podcast. 

Under garden leave, employees are paid a portion of their compensation for a period of time after exiting in exchange for them not leveraging what they know to compete against their former employer. Under the Massachusetts law, the pay must be at least half of the employee’s recent base salary. 

Value-add approach

The agreements are often thought of as an expensive remedy because companies are essentially paying former employees to do nothing.  

When you include what the company is paying to bring in the replacement, the outlay is even more. 

“You’re probably double paying for the same job to get done,” said Diamond.   

But the agreements don’t have to be structured that way; they can be structured to turn the outgoing employee, at least for a portion of the agreement term, into a resource that helps create a smooth transition as a replacement comes on board. 

“Employees [could be made] available during their garden leave period to answer questions and help transition their duties to the incoming person that’s going to be taking over their job,” said Diamond.  

“Having the employee there, especially somebody who’s got a bunch of historical organizational knowledge, can be really helpful,” said Gibbs. “Having them around for the transition is what I’ve seen…. Somebody’s been at a company for 10, 15, 20 years and they’re leaving. I mean, they can really leave a void, just a big knowledge gap, if there wasn’t legacy planning in place, which is often the case.”

At the same time, without an agreement formalizing their role as a helper in the transition, a company is unlikely to get much cooperation out of them. 

“If they’re not contractually obligated in some way to cooperate … you call them up and ask them questions [and] they could tell you to pound sand,” said Gibbs. “‘I don’t work for you any more, buddy. There’s no way I’m sharing all this with you.’” 

What’s more, if the company is under investigation, or in litigation, and the former employee has relevant knowledge, the agreement can help keep the interests of employee and company aligned. 

“Having them on garden leave, or some form of transition period where they’re required to cooperate with you and still have the duty of loyalty of a current employee, could be really important,” said Diamond.

Terms are key

The role former employees play in transitions would have to be structured carefully, though, because it could mean they would have continued access to potentially sensitive information and systems. 

“Should the employee continue to have a company computer, for example?” said Gibbs. “Should they continue to have access to all the files and data that they had when they were an employee? You’ve got to think through those practical ramifications.”

Whether they stay looped into the company’s internal communications is another consideration. “Are you going to cut them off from their email access?” said Diamond. 

It can be “hard to understand exactly what [their] status is,” said Dan Sieck, a Troutman Pepper partner. “Even being in Massachusetts, where there are requirements to at least consider it, I think we still aren’t seeing all that much garden leave, in part, perhaps, because people just don’t fully understand it.”

Exposure risk

There are also liability issues, so the company would want to ensure the outgoing employee signs a release of claims. 

“If you structure it [as] a consultancy relationship, then you’d want to have … a release at the point where their employment ends,” said Gibbs, “so that you capture all those claims, and then have another [release], perhaps, at the end of the consultancy…. That’s how I’ve done it in the past: two separate releases. One, at the beginning of the garden leave and then another at the end so that you make sure you capture all of the possible claims.”

Or a company could use a transition letter agreement, entered into when the employment ends and the consultancy period begins, in place of two releases, said Diamond. 

“The carrot and the stick” are laid out, she said. “If you stay available to us and transition your duties, then at the end of the transition period you’ll then be eligible for x amount of severance in exchange for a release of claims.”

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