You may or may not have read the news about Tim O'Toole’s garden leave after standing down from his position of chief executive at FirstGroup – a public transport giant. Even when the group posted a £327 million annual loss, Tim was expected to receive eight equal monthly payments amounting to a maximum possible sum of £699,167 in relation to the unexpired period of his notice under the garden leave clause. He is also set to receive the deferred bonuses announced during his tenure, except for the long-term incentive plan awards that may lapse when his contract ends. What is he getting paid for and why?
What exactly is “Garden Leave”?
This colloquial term – ‘Garden leave’ is used by an employer who does not require the exiting employee to attend his workplace but is still paid his usual remuneration post his resignation. When the employee has resigned and the contract of employment contains a clause allowing garden leave, the employee is required to stay at home and not attend work. You remain an employee throughout the period of garden leave. And the employee is still contractually part of the organization, hence cannot join anywhere else. This is a sort of a paid leave to ensure that the employee does not possess or share any sensitive information that may be potentially used by competitors.
Three immediate benefits of garden leave from employer’s perspective are:
- You can prevent poaching
The garden leave clause has a direct effect on poaching philosophy. It does not allow the separated employee to join any organization during this period. Hence, competitors will be barred from poaching your HiPos through this strategy. Earlier, this was used for top executives and leaders in financial roles, specifically in BFSI sector. But now is been picked up by other industries for various niche roles and highly specialized skilled employees.
- Used as a retention tool
As per a garden leave clause, an employee cannot join another company for a specific period as per the contract terms. This clause has been used earlier mainly to retain top management, especially in financial sectors. But nowadays, tech and consumer companies are also using it as a retention tool by ensuring a good time lag between timelines to join the next organization. These clauses once enforced are generally non-negotiable and hence are being used by leaders in the organization for retaining their top employees.
- Safeguarding the company’s sensitive information
These clauses enable the employer to remove the resigning employee from his active duties. And this minimizes various communication channels with their clients; restrict access to sensitive data and company’s documents etc., till the information in his possession goes out of date. All of these helps to prevent data breach issues with respect to sensitive information that can otherwise be passed on even unintentionally.
Legality of ‘Garden’ leaves in the Indian context
There can be two types of garden leave clauses. One remains effective only during the notice period and the other one extends beyond the term of employment.
So far, there is no statutory provision that directly bars organizations from using garden leave. However, the garden leave clause is legally enforceable only during the notice period required to be served by the employee in accordance with the employment contract in the Indian context. So, any garden leave continuing post completion of the notice period may not be enforceable under Indian law.
During the Bombay High Court landmark case of VFS Global Services Private Limited, Mr Suprit Roy's, validity of ‘garden leave’ clause came into consideration. It was argued that the garden leave clause extending beyond the term of employment is prima facie in restraint of trade and therefore hit by Section 27 of the Indian Contract Act 1872. The effect of the clause is to prohibit the employee from taking up any employment during the agreed period post the cessation of the employment. In case the restriction is for a duration extending beyond the notice period; such clause cannot be enforceable. This implies that in case of resignation of an employee if the employer enforces the garden leave clause in the employment contract and instructs the employee to be on garden leave for a period extending beyond the term of employment; such clause will not be enforceable.
Therefore, while drafting the employment contracts, caution needs to be exercised to ensure that the garden leave clause is limited only till the date of completion of the employment and must not extend beyond the term of employment.
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