In the Weeds With a New Noncompete Strategy: Garden Leave
By David Pardue and Shalanna Pirtle
Some businesses in the Southeast have begun adopting a new strategy to deter their employees from leaving to join the competition – or, at the very least, to gain greater control of that transition. It is often called garden leave, and it essentially means paying the departing employee to do nothing for a period of time. As expensive as that sounds, some companies say it can make business sense when you factor in the risk and cost of litigation involving a key employee’s departure.
A Concept From Across the Pond
Garden leave is a term from the U.K. and plays off the idea of giving employees time to “tend to their gardens.” Traditionally, it is a brief period, often 90 days after an employee gives notice of resignation, where the employee does no work yet remains employed and still gets paid as part of his or her employment agreement, and therefore, per the terms of the garden leave agreement, cannot go to work for a competitor during that period. Even if the employee joins a competitor afterward, it gives the company more time to transition that employee’s clients and responsibilities.
Garden leave was first utilized in the U.S. by the financial services industry, likely after Wall Street firms learned about it from their peers in London, according to a Thomson Reuters analysis of the concept. In recent years, it has begun catching on in other industries as a way to restrict competition on its own or in combination with noncompete and non-solicitation agreements.
Garden leave technically involves the worker still being employed, but some American judges and litigators have used the term to also describe a noncompete agreement where the worker is paid but no longer employed.
A Georgia State Court Goes Into the Weeds
Recently we encountered a paid salary provision as part of a noncompete and non-solicitation agreement in which the employer agreed to pay the employee for two years so long as they did not work for a competitor. The employee in question intended to go work for a competitor of the employer. Without the garden leave, the noncompete and non-solicitation provisions probably would have been held unenforceable under the two states whose law was in question, South Carolina and Georgia. Courts in those states and North Carolina have become increasingly skeptical of noncompete and non-solicitation agreements, especially broad ones.
In this case, however, a Georgia state court focused almost exclusively on the fact that the noncompete was paid. The court granted an interlocutory injunction ordering the employee not to work for the competitor within the restricted territory so long as the employer paid the fee called for in the noncompete, which was base salary plus 25 percent (but no commissions or benefits). This ruling effectively prevented the employee from working for the new employer for two years while being paid by the former employer as the litigation moved forward. Ultimately the case settled and the employee went to work for the new company.
How Other Courts Have Viewed Garden Leave
There is no case law in South Carolina or Georgia about the effect paid garden leave or paid noncompete provisions have on the general law of enforceability of noncompetes. However, given the major problems the terms of the noncompete had without the payment provision in the case mentioned, the clear lesson is that courts may be willing to enforce a for more onerous restriction on post-employment competition if the employee is getting paid to sit out the restricted period.
Courts in New York and Florida have also concluded that payment during the restricted period weighs in favor of enforcing it. That said, courts in New York and the Midwest have limited or refused to enforce paid noncompetes that cover too long a period or too broad a geography, according to the Thomson Reuters analysis. For example, the 8th Circuit Court of Appeals has found that a one-year noncompete could cause “undue hardship” even if it were paid.
Takeaways for Businesses
The business pointer is that if an employer wants to ensure that its noncompete will be enforced, it could consider paying the employee during the restricted period. Obviously, this is a costly option and the business must carefully consider the value of the departing employee and the expected losses in customers and revenues to a competitor if the employee leaves for a competitor. However, the noncompete may cost less to enforce if litigation is necessary given the apparent strong impression made on a Georgia court by the fact that, unlike a normal noncompete, the departing employee suffers less loss of income, or maybe gains income, while sitting out the restricted period. While the Georgia court upheld a two-year restricted period, businesses should consider a shorter period that they may have an easier time defending based on rulings in other states.
If a company is hiring an employee with a paid noncompete, it should weigh carefully the risk of litigation. Just as the employer making the paid noncompete agreement must weigh value, the hiring company must as well. The anticipated gain in revenue from the new hire must outweigh the risk of litigation cost and the opportunity cost if the court enforced the noncompete and, therefore, the employee cannot come to work or must cease work for the new company.
In exploring these options, businesses should also take into account the clarity of their states’ laws on noncompetes, as well as the consistency of prior court rulings in their jurisdictions. Multistate businesses should bear in mind that, absent a choice of law provision in the noncompete, the law where the employee resides will usually govern. In many cases, they can still achieve a high degree of certainty that their noncompete will be enforced without paying departing employees to “tend their gardens.” It can be valuable to partner with attorneys in assessing which option is the best fit for each business.
David Pardue is a partner in Parker Poe’s Atlanta office, and Shalanna Pirtle is a partner in the firm’s Charlotte office. They can be reached at [email protected] and [email protected].