Don't be a gnome

Andy Millmore sheds light on the complex employment issue of garden leave

IT IS common practice for employers to tell employees who have handed in their notice not to come to work for some or all of their notice period.

In such a situation the employee is placed on "garden leave" to keep him away from clients, contacts and sensitive commercial information. Many service contracts include restrictive covenants which apply after the employment has ended, and which prevent the employee from working for the same clients.

But experience shows such covenants are not always easy to enforce. An employer therefore often decides that it would rather have the employee out of the way rather than having him work out his notice period, during which he could continue to maintain and develop his contacts. Service contracts for senior employees are now typically drafted so as to give the employer the contractual option (via a "garden leave clause") to exclude the employee from the workplace or from its business during the notice period.

Last week, the Court of Appeal answered a question which has been debated for some time: what happens if the service contract contains no provision expressly permitting the employer to withdraw work from the employee during the notice period? Many employers and advisers have taken the view that it is open to the employer to put the employee "in the garden", save perhaps in certain limited cases where the employee's skills will be impaired if he is not permitted to keep working and using those skills or where his earnings will fail.

Not so, held the Court of Appeal in William Hill Organisation v Tucker, where the employing William Hill company sought to keep Mr Tucker, its senior dealer in its spread betting business, away from its business (but still in its employment, and hence unable to take up a position with his proposed new employer) for the six months of his notice period. His service contract contained no garden leave clause. The Court found that a proper interpretation of his service contract imposed on the employer not only an obligation to remunerate him in accordance with its terms, but also an obligation to let him work. It was therefore not open to the employer to exclude him from working, in the absence of an agreement that he could do so.

Mr Tucker was a senior and to some extent "unique" employee, which was part of the Court's reasoning in finding in effect an implied obligation to let him work if work was there to be done. It seems clear, however, that many senior employees would be found equally "unique", and the other terms of his contract (which served to support the argument that his employer was legally committed to do more than simply pay him) were not at all unusual. The conclusion therefore is that an employer should be careful about trying to send a resigning employee home, unless his service contract spells this out as an option. The risk of getting it wrong is that the employee will be able to treat the contract as at an end immediately, enabling him to join the competition.

It is likely there will be similar difficulties for professional advisers which are organised as partnerships rather than limited companies, and where the departing senior executive is a partner in the firm, rather than a director/employee. Can a departing partner be put in the garden?

As with the employer/employee relationship, the question should be answered by the terms of the contract between the parties: here, the partnership deed. Many modern-day partnership deeds contain garden leave clauses, but many do not.

The duties and obligations between partners are complex, and will not necessarily be the same as the analogous position between an employer and employee. However, the likely result is it will be even harder for a partnership to exclude a partner who has given notice of an intention to leave or retire from continuing to work for clients, and from participating otherwise in the management of the firm (particularly if his income is directly linked to the amount of profitability of the work which he carries out, or for which he is responsible).

The message is therefore the same to any business which is about to employ someone or take him into partnership. If there is any prospect that the employer or partnership would at any time in the future want to isolate him from clients or to exclude him from the workplace if he gives notice of an intention to leave, that ability should be addressed at the outset in the service contract, or partnership deed.

The William Hill decision helps employees; it also has a further sting in the tail (and an indication that the whole question of garden leave and restrictive covenants will continue to develop through the courts) when Judge Morritt commented at the end of his judgement that: "It seems to me that the court should be careful not to grant interlocutory relief to enforce a garden leave clause to any greater extent than would be covered by a justifiable covenant in restraint of trade previously entered into by an employee."

In other words, even if there is an express garden leave clause, and even if the employer decides to rely on this rather than relying on any post-termination restrictive covenants, it might still not be possible to keep the employee in the garden or otherwise away from the business for the full period that the parties originally agreed.

Andy Millmore is a litigation partner at City solicitors Macfarlanes.