The importance of well-drafted garden leave period clauses

By Abraham Ash

12 Oct 2017

Review employment contracts to ensure employers are expressly entitled to direct an employee to take a period of garden leave during a notice period.

When an employee resigns to join a competitor, can an employee be directed to take garden leave in the absence of an express garden leave clause?

The Supreme Court of New South Wales has recently considered this issue in Grace Worldwide (Australia) Pty Limited v Stephen Alves [2017] NSWSC 1297.

Mr Alves was employed by Grace Worldwide (Australia) Pty Ltd and gave notice that he would be leaving his employment to take up a new position as the CEO of one of Grace's principal competitors. Grace directed Mr Alves to go on garden leave during his three months' notice period. Mr Alves contested Grace's right to place him on garden leave, asserting that the direction was unlawful, and that Grace had therefore repudiated its contract of the employment, the effect of which, he submitted, was that Grace could no longer rely upon the post-employment restraints.

In the absence of an express right in the employment agreement, Grace argued that it had a right to send Mr Alves on garden leave because the term was implied into the employment agreement and that, it had an obligation only to pay the agreed remuneration, without also permitting Mr Alves to actually work.

The court agreed that the issue was a "vexed one", and that the question in each case is one of construction of the contract. Recognised cases in which employees are entitled to be provided with work (rather than only remuneration) are employees who are contracted to work in, for example, theatrical engagements and, where employees would be deprived of remuneration (for example, by way of a bonus) if he/she could not work. In the Grace Decision, the court ruled that under the relevant bonus plan, Mr Alves would not have been employed for the required period which was a condition of earning a bonus and, accordingly, being placed on garden leave did not impact upon Mr Alves' remuneration.

The court ruled that in these circumstances, Grace did have an implied right to direct Mr Alves to take a period of garden leave, ruling that the term was "reasonable and equitable and necessary to give business efficacy to an employment contract so as to avoid contact between an employee and a competitor".

Lesson learned

Defending arguments such as that run by Mr Alves can be avoided if there is an express term in employment contracts, expressly entitling an employer to direct an employee to take a period of garden leave during a notice period. Employment contracts should be reviewed to ensure that this right is expressly recorded.

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