Enforceability of restrictive covenants: is the absence of a garden leave set-off clause fatal?
To be enforceable a restrictive covenant must be designed to protect a legitimate business interest (such as goodwill, trade secrets or confidential information) and must be no wider than reasonably necessary to protect that interest (so will usually be limited by reference to restricted activities, duration and geographical extent).
If an employee is put on garden leave and is then restricted by a covenant, they will be out of the workplace for a long time. This could potentially affect the enforceability of the restrictive covenant. Sometimes restrictive covenant clauses include a provision which reduces the duration of the restrictions by reference to time spent on garden leave (“set-off”).Square Global Limited v Leonard: the facts
Mr. Leonard was employed by Square Global Limited (“Square”) as a broker under a contract of employment which included a requirement for six months’ written notice and a non-compete clause. The contract also made provision for garden leave, however, there was no garden leave set-off clause.
Mr. Leonard resigned on 11 November 2019 without notice, at which point he had been in discussions with a rival business for over seven months. Following his resignation, he went to work for this competitor. He claimed that he had been constructively dismissed and, on that basis, was released from the requirement to give six-months’ notice and his obligations under the non-compete clause.
Square brought a claim to enforce Mr. Leonard’s notice period and post-termination restrictions. Mr. Leonard counterclaimed for constructive dismissal and disputed the validity and enforceability of the restrictions.Square Global Limited v Leonard: the decision
The High Court found in favour of Square and held Mr. Leonard to his notice period. It also decided that Square was entitled to an order prohibiting Mr. Leonard from engaging in employment with a third party for those six months; and enforcing the non-compete clause prohibiting Mr. Leonard from involvement in a competitive business until 11 November 2020. The question of damages is to be considered at a separate hearing.
The judge emphasised that a number of the events on which Mr. Leonard relied to establish his claim of constructive dismissal had to be judged against the background that someone in his position may have had an interest in creating a case for constructive dismissal in order to escape a twelve-month contractual prohibition on working for the prospective new employer.
The Court examined the non-compete clause and held that the clause was reasonable and went no further than necessary to protect Square’s legitimate business interests. This was the case despite the absence of a garden leave set-off clause. It was relevant that both Mr. Leonard’s previous contract of employment and his new contract with the competitor contained six-month non-compete clauses.
The Court also considered the fact that the garden leave clause was there to cater for the situation where Square had a concern about Mr. Leonard’s conduct, in particular harvesting client information or engaging in deceptive behaviour. Therefore, in the circumstances, Square could enforce both the six months’ garden leave, and a further six months’ protection under the non-compete clause.In practice
The enforceability of restrictive covenants is always very fact specific. In this case, there was evidence of legitimate interests to protect both during the garden leave period and for the six-months afterwards.
Covenants should always be tailored for each individual employee and reviewed regularly. In order to have the best chance of being enforceable, they should be drafted as restrictively as possible while still protecting legitimate business interests.
Although the absence of a garden leave set-off clause won’t necessarily be fatal to the enforceability of a covenant, the length of time an employee has been on garden leave (and therefore out of the marketplace) is a relevant consideration. Therefore, the length of any potential garden leave period should be factored in when drafting post-termination restrictions.
For more information on post-termination restrictions, or help with drafting, please get in touch with your usual Brodies contact. Workbox users are also able to access template contracts and more information on covenants.