The following article was originally published on ACC Docket online.
Many countries require employers to pay for the privilege to restrict an employee’s ability to compete following their employment. By contrast, in the United States, if employers want to include a noncompete clause in their employment contracts that restricts employees from joining competitors following the workers’ departure, the employers can do so without cost (beyond the legal fees required to enforce their noncompete).
However, the US state of Massachusetts adopted an international practice in its October 2018 legislation governing noncompete agreements. The legislation now requires that compensation be paid to an employee for a noncompete to be enforceable. Specifically, Massachusetts General Law c. 149, section 24L sets out the required noncompete compensation. The law includes a UK term called “garden leave” and states:
The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement. To constitute a garden leave clause within the meaning of this section, the agreement must (i) provide for the payment, consistent with the requirements for the payment of wages …, on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.
However, the definition of “garden leave” in this Massachusetts law does not entirely align with the practice of garden leave used elsewhere.
The roots of garden leave
Before explaining garden leave, it’s best to clarify that in most jurisdictions outside the United States, employment at will does not exist. As a result, employers (and employees) have specific notice obligations in connection with terminating the employer-employee relationship.
These notice periods are set by statute (which may be increased in duration by a contractual agreement) and typically increase over time with the duration of an employee’s employment. As a result, there is a set wind-down period built into the employment relationship.
Garden leave (or “gardening leave”) is the practice of an employer paying an employee to sit out their notice period at home — ostensibly to spend time in the garden — while receiving full pay and benefits of employment.1
The key to understanding this traditional notion of garden leave is that employees retain their employment status during this garden leave period and receive all the benefits of employment without having to work. An employer’s motivations for enacting garden leave include:
- Keeping the employee away from sensitive company information during this wind-down period;
- Avoiding a negative impact on company morale (e.g., if the employee is very senior); or
- Preventing the employee from working for another employer.
Non-compete period v. garden leave
While the concept of garden leave may have become popularized in the United Kingdom, the nation does not require employers to compensate employees for their contractual post-employment noncompete period. However, several other countries do require employers to compensate employees with a portion of their salary to enforce a post-employment restricted.
For example, during the noncompete period, employers are required to pay 25 percent of salary in Poland, 30 percent of salary in France, and 50 percent of salary in Germany. Spain and Portugal also require compensation during the noncompete period, but the payment requirement is not specifically detailed by the law. Instead, the requirement is that the compensation be “reasonable” or “adequate” to justify the restrictions.
This is where the terminology gets confusing. Under the traditional notions of garden leave, an employee receives full pay and benefits and retains employment status. However, what Massachusetts adopted in its legislation is a paid restricted period during which an employee will receive only 50 percent of pay — though they may accept employment elsewhere, as long as it is not with a competitor.
A noncompete by any other name
Regardless of what you call it, Massachusetts, clearly inspired by international norms, now requires some form of compensation for a noncompete agreement to be enforceable. However, what is unclear is how Massachusetts employers will interpret this domestic version of garden leave.
Many lawyers are doubtful that the leave can be enforced. Employment attorney John Bauer from Boston’s Lawson & Weitzen asserts that the garden leave provision is “smoke and mirrors.” Bauer continues: “No employer will provide garden leave. Not one.”
Why the skepticism? First, employers currently have the option of providing other mutually agreed upon consideration under the Massachusetts noncompete law. Second, no one quite knows what garden leave means yet in the United States. That undefined “consideration” may cost employers less than the garden leave payments required under international laws.
Other noncompete considerations
Whether your business employs people in Massachusetts, the United Kingdom, Germany, or elsewhere in the world, employers should evaluate whether a noncompete is essential and enforceable in the jurisdiction where the employee is located.
In general, the requirements for such an agreement to be enforceable insist that the noncompete is sufficiently narrow in scope, protects an employer’s legitimate business interests, and has an impact on the employee that is justified in court.
If within a jurisdiction where an employer must pay for the noncompete, an employer should consider whether the restriction is worth the associated cost. If the business can obtain sufficient protection of the company’s interest using less restrictive — and less expensive — means, an alternative to garden leave might be prudent.