Gardening Leave Clause and Non-compete Arrangement

In this article, Swati Garg, an Advocate and an LL.M. graduate from Gujarat National Law University discusses how to Combine Gardening Leave Clause and Non-compete Arrangement.

Gardening leave

Gardening leave refers to the period between the employee is given a notice of termination and his actual termination. During this period, the employee is not allowed to continue working either at the workplace or work from home or any another location. He is entitled to his salary for the notice period but he is not allowed to work for his current employee or his new or any other employee.  

Purpose of gardening leave

The concept of gardening leave is very beneficial for an employer in the following ways:

  1. Termination is bound to make every employee unhappy. Gardening leave prevents an employee from indulging in any detrimental behaviour such as creating a scene at the workplace during his notice period.
  2. An employee can be uncooperative and unprofessional during the notice period as they are already being terminated. This may affect the environment of the workplace.
  3. An employee may try to persuade the clients to follow him to his new job if he is permitted to come and work.
  4. Moreover, if an employee is permitted to continue his work, he will have access to company’s database which he can misuse for his own benefit.

Rights and obligations of the employer during gardening leave

  1. An employee is not allowed to work at the workplace, or work from home or from any other station. He is prevented from accessing the company’s data or contacting the people with whom company deals (clients, suppliers, distributors etc.).
  2. An employee is entitled to his salary or any other benefits. But he may not be allowed to use and may be asked to return company’s vehicle, smartphone, laptop, or any other product.
  3. However, employee cannot work with another employer during the gardening period. He has to remain available in case his current employer needs him.

Non-compete agreement

Non-compete agreements became popular as a strategy used by the companies to discourage their employees to leave their company. This kind of agreement prohibits an employee from joining a company directly in competition with his current company. For example, an employee working at ola, leaving Ola to join Uber. These agreements restrict employees to share the information crucial to their organisation. These agreements restrict the employees for a specified time and/or within a specified geographic area.

By joining a company which is in direct competition with the current company, an employee can use the trade secrets and confidential information such as client list, business strategies of his current company. This may lead to other company gaining a competitive advantage.

Validity of garden leave and non compete agreement in India

In India, non-compete agreements and garden leave are known as restrictive covenants. Prima facie they are considered as a restriction on employee’s freedom of trade and business as given in Article 19 of Indian constitution. Moreover, under section 27 of Indian Contract Act, any restriction imposed on a person for exercising his choice of trade or business is void.

In the case of Niranjan Shankar Golikari v. Century Spg & Mfg Co. Ltd., ((1967) 2 SCR 378.) the Supreme Court in this case explaining the difference between the garden leaves and non-compete agreements emphasised that the employer has a right to restrict the employee during the contract term but after termination restrictions can be put on non-disclosure to another company but employer can not restrict employee from joining another company in similar trade.

The supreme court reiterated its position in the case of Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr. (AIR 2006 SC 3426.) that non-compete agreements extending beyond the contract are unenforceable.

Sample of non-compete clause

Illustration 1: Non-compete clause (Employer: Bank)

1.1) Employee agrees that for a period of two years after the earlier to occur of (i) the end of the Primary Term of this Agreement or (ii) the termination of Employee’s employment with Employer, Employee shall not, directly or indirectly, individually or as an employee, consultant, partner, officer, director or shareholder or in any other capacity whatsoever:

  1. solicit the banking business of any customers of the Bank;
  2. acquire, charter, operate or enter into any franchise or other management agreement with any financial institution,
  3. serve as an officer, director, employee, agent or consultant to any financial institution, or
  4. establish or operate a branch or other office of a financial institution,
  5. knowingly recruit, hire, assist others in recruiting or hiring, discuss employment with, or refer others concerning employment, any person who is, or within the preceding twelve (12) months was, an employee of the Bank; provided, however, that nothing in this Section 1(a)(iii) shall apply to employment other than with a financial institution.

1.2) As consideration for Employee’s covenant not to compete herein, Employer shall pay to Employee an annual payment equal to the sum of [ amount ] plus the average annual bonus received by Employee during the term of this Agreement (the “Non-Compete Payment”). Such payments shall be made in equal semi-monthly instalments after termination of employment.

2. If any court of competent jurisdiction should determine that any term or terms of non compete covenants are too broad in terms of time, geographic area, lines of commerce or otherwise, such court shall modify and revise any such term or terms so that they comply with applicable law.

Illustration 2: Garden leave

2.1) Executive will provide a Notice of Termination to the Company no less than [number of days] prior to any termination of Executive’s employment (whether for Good Reason or without Good Reason) during the Term of Employment, and the Company will provide a Notice of Termination to Executive no less than [number of days]  prior to any termination of Executive’s employment for Cause or without Cause during the Term of Employment; provided that the Company may elect to terminate the Garden Leave (as defined below) and Executive’s employment at any time during the Garden Leave if Executive is terminated for Cause.

2.2) During this [number of days] notice period (the “Garden Leave”), Executive will

  • continue to be an employee of the Company and will make himself available to provide such services directed by the Company that are reasonably consistent with Executive’s status as a senior executive of the Company and
  • continue to be paid his Base Salary and to be eligible to participate in the Company’s benefits programs, but will not be eligible to earn any annual bonus with respect to a calendar year that ends after the commencement of the Garden Leave.

2.3) During the Garden Leave, the Company may require Executive to resign from any position with the Company and/or remove any or all of Executive’s duties or responsibilities, which will not constitute Good Reason or otherwise be a violation of this Agreement.

2.4) Executive agrees that he will not commence employment with any entity during or in connection with the commencement of the Garden Leave.

2.5) During the Garden Leave, Executive will take all steps reasonably requested by the Company to effect a successful transition of client and customer relationships to the person or persons designated by the Company.

2.6) Notwithstanding the foregoing, the Company in its sole discretion may waive all or any portion of the [number of days]  notice requirement by providing written notice to Executive accelerating the last day of the Garden Leave period; provided that the Company’s exercise of its right to waive all or any portion of the [number of days]  notice requirement and accelerate the last day of the Garden Leave period will not be treated as a termination of Executive’s employment by the Company without Cause or as giving Executive any basis for terminating his employment for Good Reason.

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