Garden Leave Clauses in Employment Contracts
What is Garden Leave?
Garden leave clauses are aimed to restrain the exiting employee from engaging in competing activities (including employment) for a certain period of time after he serves notice of his resignation. These clauses enable the employer to remove the resigning employee from his active duties; exclude him from the work place; minimize or cut off his communication with the staff, customers or clients; restrict his access to the company’s computer system, e-mails, documents etc., till the information in his possession goes out of date. However, the employee continues to receive his salary.
The garden leave clauses can be of 2 types - one which remains effective only during the notice period and another which extends beyond the term of employment.
Legal Position in India
In India, there is no express statutory provision barring the garden leave clauses. When the validity of ‘garden leave’ clauses came for consideration before the Bombay High Court in the landmark case of VFS Global Services Private Limited v Suprit Roy , it was argued that the garden leave clause extending beyond the term of employment is prima facie in restraint of trade and therefore hit by Section 27 of the Indian Contract Act 1872. The effect of the clause is to prohibit the employee from taking up any employment during the agreed period post the cessation of the employment.
The Bombay High Court, while accepting the above argument, held that obstructing an employee who has left the service from obtaining gainful employment anywhere else is not fair or proper. In order to arrive at this conclusion, the court relied on the judgments of the Supreme Court of India in Percept D'Mark (India) Private Limited v. Zaheer Khan and Niranjan Shankar Golikari vs. The Century Spinning and Mfg. Co. Limited , where it was held that the legal position with regard to post contractual covenants or restrictions has been consistent, unchallenging and completely settled in India… while construing provisions of Section 27 of the Indian Contract Act 1872, neither the test of reasonableness nor the principle of restrain being partial is applicable and therefore, an appellant seeking to enforce a negative covenant which survives the expiry of the agreement is impermissible as such a clause is prima facie void under Section 27 of the Indian Contract Act 1872.
On the basis of above judgments, it can be concluded that in the event a restriction is for a duration extending beyond the notice period, such restriction will not be enforceable. For example – in case of resignation of an employee, if the employer enforces the garden leave clause in the employment contract and instructs the employee to be on garden leave for a period extending beyond the term of employment, such clause will not be enforceable.
Since the judgments only prohibit the restrictive covenants extending beyond the term of employment, it can be inferred that the garden leave clause in the employment contract applicable only during the notice period of termination / resignation of an employee may be enforceable. For example – in case of resignation of an employee, if the employer enforces the garden leave clause in the employment contract and instructs the employee to be on garden leave during the notice period, such clause may be enforceable.
Therefore, while drafting the employment contracts, caution needs to be exercised to ensure that the garden leave clause is limited only till the date of termination of employment (i.e. during the reasonable notice period) and does not extend beyond the term of employment.
Conclusion
As seen above, though garden leave clauses aim to protect the circulation of sensitive information of the employer, it shall be held to be in restraint of trade and in contravention of Section 27 of the Contract Act if stipulated to be in effect beyond the term of employment. Therefore, while the employer may set out a garden leave clause in the employment contract, it should only be implemented during the notice period and not beyond that.
The article is authored by Mr. Anshul Prakash , Partner and Mr. Parag Bhide, Principal Associate from Khaitan & Co
