Dec 2013

Section I — Definition and History of Garden Leave.

Garden Leave is a notice period whereby an employee who is departing an organization (and/or is on administrative leave) continues on the payroll for a prescribed period of time (3 months, 6 months, 1 year), and is instructed to stay away from the workplace as well as engage with clients and prospects, or divulge proprietary information of their current employer. The provision is typically in place to prevent departing employees from taking trade secrets, timely information, or other competitive information to a new employer whereby it can be immediately acted on or leveraged. There is a common belief that once a prescribed period of time has passed, much of the competitive information or data will have lost some of its value or impact.

Garden Leave provisions originated in the U.K., and are prevalent across broad industry. Within Financial Services, Garden Leave policies have long been utilized by Global Banks, Investment Banks, Private Equity Firms, Hedge Funds, and Proprietary Trading Organizations due to the nature and confidentiality of their respective businesses.

Section II — Basis for the Study

As a firm that exclusively specializes within Financial Services and works across a multitude of organizations and infrastructures, DAK is privy to the policies and procedures of our clients, as well as the market place at-large. From time to time we see trends emerge that we are compelled to investigate further and report to our clients. As such, we have noticed a marked increase in the number of U.S. based organizations who are implementing Garden Leave provisions within their employment agreements and practices.

Section III — Garden Leave Study Group

DAK contacted “Top 100” Financial Services organizations and other select participants. This included both domestically domiciled firms, as well as the U.S. arms of internationally based holding companies. The study group included traditional long-only Asset Managers, Hedge Funds, Insurance Companies, large Broker-Dealers, and Financial Services “Supermarket” organizations. Most of the participants are name-brand, market-leading and omnipresent institutions. The collective AUM for the study group participants surpassed $8.5 Trillion (excluding several top insurance companies and broker-dealers).

Section IV — Study Findings

Do you employ a Garden Leave policy now?

  • 43% of our participants responded “Yes”
  • 57% of our participants responded “No”

If no, are you thinking about employing a Garden Leave policy now?

  • Of the “No” population, 20% of our participants responded “Yes”
  • 80% of our participants responded “No”

If yes, what duration are you contemplating?

Of the “Yes” population, 60% of the participants

  • responded 60 days, 40% of the participants
  • responded 90 days

How long ago did you install your Garden Leave policy?

  • 60% of our participants responded “3 years or longer”
  • 20% of our participants responded “over 2 years”
  • 10% of our participants responded “over 1 year”
  • and 10% of our participants responded “just installed it”

How did you go about implementing your Garden Leave with existing employees? Was a signature required?

  • 80% of our participants responded with a “signature required”, 20% of our participants responded with “electronic acknowledgement”. Many organizations included Garden Leave provisions within Severance Agreements, Long Term Incentive Plan (LTIP) Agreements, Confidentiality/Non-Compete Agreements, Employment Agreements, and Equity Reward Agreements. Some of the organizations that chose electronic acknowledgement methods did so with existing employees, but require signatures for new employees going forward.

What compelled you to enact a Garden Leave policy?

  • Overwhelmingly 90% of firms actively employing Garden Leave stated concerns around “business disruption and business transition” just as equally as “confidentiality and non-compete enforcement”. For a small number of organizations, it was based on “Policy Enforcement” or other internal reasons (i.e. alignment with other affiliates or units)

How is your Garden Leave policy applied?

  • 60% of our participants responded with “Special Situation and/or case-by-case”, 30% of our participants responded with “Senior Executive/Officer positions only”, and 10% of our participants responded “Across all exempt employees including sales”. Within the “Special Situation” group, the policy was mostly applied to all employees VP and above, all senior executives and officers, and any recipients of deferred compensation or equity awards.

What is the duration of your Garden Leave policy?

  • For Executives, 50% of participants responded with “90 days”, 25% of participants responded with “greater than 90 days”, 20% of participants responded with “30 days”, and 5% of participants responded with “Other”. For Sales, 60% of our participants responded “60 days”, 20% of our participants responded “30 days”, 10% of our participants responded “90 days”, and 10% responded “other”. The majority of responses from the “other” camp shared that their Garden Leave policy was predicated on Titles (AVP-30 days, VP-60 days, SVP-90 days)

What is your compensation arrangement during a Garden Leave period?

  • 50% of our participants responded “Base salary only”, 30% of our participants responded “Base salary plus bonus and/or pro-rated bonus”, 20% of our participants responded “Other”. Responses from the “Other” camp mostly centered around the inclusion of benefits.

Have you ever NOT hired someone 

  • 90% of our participants responded “No”, and 10% of our participants responded “Yes”

What measurable benefits, if any, have been realized as a result of your Garden Leave policy?

  • 60% of our participants responded “Other”, 20% of our participants responded “Higher employee retention”, and 20% of our participants responded “Deterrent from having employees recruited”. 60% of responses from the “Other” camp overwhelmingly were tied to a longer and orderly transitioning of employee responsibility, and 20% of responses were tied to the limiting of compensation claims from terminated employees. The remaining 20% responded that it was too early to tell and/or the benefits could not be measured.

Do you find Garden Leave to be a useful tool as a deterrent to employee departures and/or confidential confirmation concerns?

  • 75% of our participants responded “Yes”, and 25% of our participants responded “No”

Overall, do you envision Garden Leave policies continuing to become more commonplace here in the US?

  • 50% of our participants responded “Yes, somewhat expect”, 35% of our participants responded “Yes, fully expect”, and 15% of our participants responded “No, do not expect at all”

Section V — Notable Trends and Takeaways

While it is clear that organizations have implemented Garden Leave provisions for a variety of reasons, it is also clear that there is an upward trend in adoption rates among US Financial Services organizations particularly over the last three years. The next biggest trend is the comprehensive use of Garden Leave across the exempt employee population, not just the executive suite. Furthermore, organizations are subjecting their sales professionals to Garden Leave policies at a much higher historical rate. A surprising area that has seen explosive adoption is the Financial Advisor/High-Net-Worth realm. Specifically, the Private Banks and Major WireHouseshave been subjecting their elite advisors and teams to Garden Leave policies in an effort to mitigate against household client loss in the aftermath of advisor departures and transitions to new firms or operating platforms.

Section VI — Legal Perspective Courtesy of Thomas Lewis, Esquire, of the Law Firm Stark & Stark

Garden Leave in American Courts

American employers have begun including garden leave provisions in the employment contacts of key employees. However, as garden leave is a relatively new phenomenon, there is limited case law addressing enforcement. In Baxter International, Inc. v. Morris, one of the first cases to examine the enforceability of a garden leave provision, the Eighth Circuit affirmed a district court ruling, refusing to stop a research scientist from working for a competitor even though his previous employer was willing to pay him during the duration of his one year noncompeteagreement. The court held, “if [Morris’ previous employer] paid Morris’ salary for the year he would be forbidden to work by the covenant, Morris would suffer undue hardship.” Baxter International, Inc. v. Morris, 976 F.2d 1189, 1197 (8th Cir. 1992).

Since Baxter, several cases involving garden leave have arisen in New York courts. These courts have upheld noncompetes with safety net clauses as well as noncompetes with provisions remarkably similar to traditional English garden leave provisions.

A New York court found the restrictive covenant reasonable “on condition that plaintiffs continue to receive their salaries for six months while not employed by a competitor.” Maltby v. Harlow Meyer Savage Inc., 633 N.Y.S. 2d 926, 930 (N.Y. Sup. Ct. 1995).

A New York court upheld a six-month restrictive covenant, placing significant reliance on the employee’s full compensation of salary and payment of health and life insurance premiums. Lumex Inc. v. Highsmith and Life Fitness, 919 F. Supp. 624, 629-36 (E.D.N.Y. 1996).

The Second Circuit, applying New York law, upheld a six month noncompetition agreement that did not contain any post-employment payment provision. The court held the employer’s provision of the employee-salesman’s annual compensation of $600,000, contingent upon the employee-salesman’s agreement to abide by his contractual post-employment restrictions, was equivalent to the post-employment payments in Maltby, thereby alleviating the policy concern that noncompete provisions prevent a person from earning a livelihood. Ticor Title Insurance Co. v. Cohen, 173 F. 3d 63, 71 (2d Cir. 1999).

A New York court upheld a 30-day notice provision which was combined with the 90-day non-compete provision, holding that the safety-net payment provision made, “virtually nonexistent [the] concern that the former employee could lose his livelihood.” Natsource LLC v. Paribello, 151 F. Supp. 2d 465, 472 (S.D.N.Y. 2001).

Finally, a New York court upheld a restrictive covenant containing a “sitting out” clause. The court granted the employer a five-month enforcement period of the restrictive covenant, holding that the risk to the former employee-executive of a loss of livelihood was mitigated by the continual payment of his salary. Estee Lauder Co. Inc. v. Batra, 430 F. Supp. 2d 158, 182 (S.D.N.Y. 2006).

Limitations to the Scope of Garden Leave

In Bear, Stearns & Co., Inc. v. Sharon, the U.S. District Court for the District of Massachusetts refused to issue a preliminary injunction to enforce a contractual provision requiring an employee to provide 90 days’ notice of termination of employment. Bear, Stearns & Co., Inc. v. Sharon, 550 F.Supp. 2d 174 (D. Mass. 2008).

Here, Sharon resigned from Bear, Stearns (Bear Stearns) on March 17, 2008, and immediately accepted employment with Morgan Stanley. Bear Stearns alleged that: 1) the terms of Sharon’s employment required that he give 90 days’ prior written notice before resigning; 2) Sharon misappropriated Bear Stearns’ confidential information; and 3) Sharon wrongfully induced employees (and clients) of Bear Stearns to leave and become employed by (or customers of) Morgan Stanley.

The court denied the request for preliminary injunction enjoining Sharon from being employed during the 90-day garden leave period for three reasons: Bear Stearns could not establish irreparable harm because its harm could be recompensed by money damages; the hardship to Bear Stearns of permitting Sharon to resume his employment with Morgan Stanley was outweighed by the risk to Sharon’s “professional standing and the inability to advise his clients in times of economic turmoil”; and specific performance of the 90-day garden leave provision would require Sharon to continue an at-will employment relationship against his will.

The court distinguished garden leave from a noncompetition or nonsolicitation provision, holding that a different result might be warranted if the provision were a “simple restrictive covenant against competition or the solicitation of clients.” Giving the garden leave provision full effect “would be to force Sharon to submit to Bear Stearns’ whim regarding his employment activity in the near future.”

Drafting Concerns for Employers

Court decisions can assist employers drafting garden leave provisions. However, many courts apply subjective standards to the enforcement of any restrictive provision. To protect long-term business interests, employers must recognize the practical, economic and legal implications of including garden leave provisions in employment contracts. Because Employers must pay the salary to their employees during the garden leave period, careful determination of the type of employee that necessitates a garden leave provision, how many employee contracts will include a garden leave provision, and the likelihood of one or more employees being on garden leave at any one time, should be considered prior to including a garden leave provision in any employment contract.

Once an employer has decided which employees should be afforded garden leave, the garden leave provision should include the following:

  1. A statement giving the employer the authority to place the employee on garden leave;
  2. A statement that reserves the employer’s right to exclude the employee from the workplace;
  3. A statement prohibiting the employee from contacting clients and accessing or using the company’s proprietary information;
  4. Terms indicating what, if anything, the employee is required to do while on garden leave (noting however, the court’s concern regarding involuntary servitude in Sharon –the less an employee on garden leave is required to do for their employer, the more likely the provision will be enforced); and
  5. Terminology enjoining the employee from engaging in employment with any other employer for the duration of the garden leave.

A properly executed garden leave provision may safeguard an employer’s proprietary information and allow the employer to effectively transition the business, thereby protecting the interests of the company. Employers would be wise to insure that garden leave provisions are specifically tailored to limit the employee’s responsibilities during leave and that they are reasonable in duration. Even if all factors are met, a garden leave provision will still be subject to an equitable, somewhat subjective, test by the court, concluding with whether the agreement is enforceable.

Section VII — About DAK Associates

DAK Associates, now in its 33rdyear, is a “Top 100” national retainer-based executive search and consulting firm that exclusively serves the broad-based Financial Services community spanning Asset Management, Wealth Management, Insurance& Retirement, Broker-Dealer, and Asset Servicing. The firm has pioneered a number of innovations including DAK Intelligent Search, DAK Diversity Mapping, and DAK Direct, in addition to a number of industry contributions within Financial Services.

Section VIII — Contact Information

For additional information about the study, please contact:

Steven M. Clark, President
D.A. Kreuter Associates, Inc.
555 North Lane, Suite 5020
Conshohocken, PA 19428
610-834-1100, ext. 104
sclark@dakassociates.com

To Contact Thomas Lewis of the Law Firm Stark & Stark:

609-895-7321
tlewis@stark-stark.com

 

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