Enforceability of Garden Leave Clause in an Employment Contract
Introduction
Garden leave clause is an extremely useful tool for employers to mitigate the impact of employees (usually a senior employee) exiting an establishment, by providing (a) transition period, to phase out the incumbent employee, and (b) bedding period for his or her replacement. It is common to find a garden leave clause in employment contracts of key employees of establishments who (a) have significant knowledge of day-to-today affairs of the establishments, or (b) are engaged in a highly technical industry (such as pharma, banking and financial services, biotechnology, etc.), or (c) possess significant trade secrets and confidential information. In practice, such a clause entails the employee in question being excluded from the workplace or being limited to a peripheral role, instilling a sort of Chinese firewall so as to minimize or eliminate their exposure to critical matters that impact the day-to-day affairs of the establishment. The garden leave clause is normally included in employment contracts and kicks in once the employee in question has begun serving his or her notice period. It remains effective for the entirety of the notice period, and in some instances may even extend beyond the contractual notice period.
While garden leave provisions have been widely accepted and are common around the world, there have been instances where Indian Courts have found such a clause to (a) fall foul of Section 27 of the Indian Contract Act, 1872 (“the Act”), and (b) be in disguise as a restraint of trade.
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Legal Position:
Articles 21 and 41 of the Indian Constitution protects every individual’s right to livelihood and work. Section 27 of the Act operates to protect this right by declaring any contract that restrains one from exercising a lawful profession, trade of business of any kind to be void, with one statutory exception being a non-compete clause executed pursuant to the transfer of the good will of a business. Historically, an agreement in restraint of trade has been identified as “one in which a party agrees with any other party to restrict his liberty in the future to carry on trade with other persons who are not parties to the contract in such a manner as he chooses”[1]. In Krishan Murgai Versus Superintendence Company of India[2],the Delhi High Court held that ‘Section 27 does not contemplate the reasonableness of a restraint, and therefore any restraint imposed on the employee after the term of employment would prima facie be void and unenforceable’. Conversely, in Niranjan Shankar Golikari Versus Century Spinning & Manufacturing Company Limited [3], the Supreme Court held that “restrictions that are to operate only while the employee is contractually bound to serve his employer are never regarded as being in restraint of trade”.
While there is no express statutory provision prohibiting the use of garden leave clauses, the Bombay High Court in the landmark judgement rendered in the case of VFS Global Services Private Limited Versus Suprit Roy[4]observed that ‘garden leave clauses operating post termination of an employee’s contract would fall foul of section 27 of the Act, and further held that (a) garden leave can only be enforced for the duration of the employee’s contract/ notice period and (b) can be enforced only if the employee receives additional compensation for the period of such leave’.
Duty of the Employers:
Consequently, employers must pay close attention to the language used while drafting the garden leave clause to ensure that, it (a) does not purport to subsist post-termination of employment; and (b) provides the employee with fair compensation in lieu of such garden leave, in order to ensure Section 27 of the Act is not triggered.
Employers should also pay attention to certain practical considerations when including garden leave clause in the employment contracts, such as ensuring that the notice period applicable to employees is long enough for any confidential information or know-how possessed by the employee to become ‘stale’, that is to say, the greater an employee’s exposure to an establishment’s critical confidential information, the longer that employee’s contractual notice period should be. Conversely, if such notice period and/or garden leave period is unusually long, it would be prudent for the employers to maintain evidence that demonstrates the real possibility of the trade secrets and/or the confidential information being disclosed to competitors, as the onus of proving the reasonableness of such a clause in the employment contract would rest with the party looking to enforce such a clause.
Conclusion:
To conclude, there is no doubt that garden leave clauses are extremely useful in preventing employees from disclosing sensitive information, significant trade secrets and confidential information of the establishment, for the duration of one’s employment. Such clauses are not a comprehensive remedy for the employers / establishments, and therefore the employers / the establishments must ensure to have effective systems and policies in place to mitigate the loss of such an employee, and the risk of them disclosing sensitive information, significant trade secrets and confidential information of the establishment.
The views and opinions expressed in this article belong solely to the author and do not reflect the position of TLH, Advocates & Solicitors.
[1] Petrofina (Great Britain) Ltd. vs Martin, (1966) Ch. 146
[2] 1980 SCR (3)1278
[3](1967) ILLJ 740 SC
[4] 2008 (2) BomCR 446