Garden Leave at Indian Law - Lexology
This article explains garden leave and examines its enforceability in India.
At Indian law, contracts imposing non-compete restrictions or other restraints of trade are void to that extent, except where the restricted party has sold goodwill. Where employees are concerned, the courts have upheld reasonable non-compete restrictions on employees during their employment on the basis that such restrictions would not amount to a restraint of trade. However, courts have consistently held that non-compete restrictions on former employees are not enforceable irrespective of whether these restrictions are reasonable. Consequently, while garden leave is increasingly prevalent for key employees in India, the enforceability of a garden leave arrangement depends on how the arrangement is structured.
Garden leave at English law
Garden leave is well recognised in the UK and certain other Commonwealth jurisdictions, and employment contracts with garden leave provisions in those jurisdictions are not often contested. However, in these jurisdictions, garden leave restrictions will only be upheld if they are reasonable. English courts have held that garden leave provisions are subject to the same treatment as post-termination restraints.
In Evening Standard Co. Ltd. v. Henderson, an employer approached the court for an injunction against its employee who had sought to provide 2 months’ notice of termination instead of the contractually agreed 12 months’ notice. The employee contended that this period of notice would result in the employee being forced to work for the former employer, starve, or remain idle. As a workaround, the employer agreed to place the employee on leave for the duration and to continue paying the employee’s salary and provide all contractual benefits while the employee was on such leave. The Court considered the balance of convenience and accepted the employer’s undertaking and granted an injunction in favour of the employer.
While on garden leave, the employee no longer ‘works’ for the employer and does not have access to the employer’s clientele or their fellow employees. However, the employee continues to receive remuneration and, generally, remains on the rolls of the employer until the expiry of the garden leave period.
Garden leave is beneficial to both the employer and the employee:
a.The employer can ensure that the employee’s expertise, and commercial and trade secrets to which they were privy do not immediately become available to competitors; and
b.The employee is not financially disadvantaged.
Garden leave in India
In India, non-compete provisions which extend beyond the term of employment are invalid. The enforceability of garden leave provisions will, therefore, depend on whether they are considered post-employment restrictions. The Bombay High Court held that a garden leave clause intended to operate after the cessation of employment would prima facie fall foul of the Indian Contract Act, 1872 (Contract Act). The Court also observed that a restriction preventing a former employee from obtaining gainful employment elsewhere was neither fair nor proper.
The courts have, however, also viewed garden leave as a safeguard to prevent the disclosure of trade secrets by a former employee to their erstwhile employer’s competitors. In M/s. Kuoni Travel (I) Pvt. Ltd. v. Mr. Ashish Kishore, an employer sought to enforce a garden leave provision which was applicable for 3 months following the cessation or termination of employment. While the former employee argued that the garden leave restriction constituted a restraint of trade, the Bombay High Court observed that “…it is obvious that the "doctrine of restraint" on trade secret can be invoked even after the service or employment period has come to an end…” and held that the employer was entitled to restrain the former employee from competing during the garden leave period as:
a. The garden leave provision “…is nothing but invoking the “doctrine of restraint” in respect of trade secrets…”;
b. The employer was willing to financially compensate the former employee during the garden leave period;
c.The former employee was entitled to pursue employment provided that it was not with a competitor of the employer; and
d.The garden leave was for a period that was crucial to the employer’s business and, if the former employee was permitted to work with a competitor, it could adversely affect the employer’s business.
In summary
At law, any competent person may enter into a contract on such terms as they deem fit on their own volition.
Courts in the United Kingdom and the United States and other countries have recognised parties’ rights and upheld garden leave provisions so long as they are reasonable and the employee, or former employee, is compensated monetarily. Offering monetary consideration to a former employee to remain unemployed during their garden leave ensures that neither the employer nor the former employee is unfairly disadvantaged.
Indian courts agree with English and American courts that garden leave provisions will be enforceable only if reasonable. However, Indian courts do not ordinarily uphold garden leave provisions that purport to apply after the termination or cessation of employment (i.e., when the former employee does not remain on the employer’s rolls). The only exception thus far has been in the case of Kouni Travel where the court upheld a post-employment garden leave restriction based on the need to protect the former employer’s trades secrets and the consideration offered to the former employee.
The enforceability of a post-employment restrictive covenant in an employment agreement must statutorily be subject to the contracting parties’ will, the reasonability of the restraint, and the adequacy of the compensation offered to the person being restrained. Garden leave will likely be enforceable at Indian law if: (i) the stipulations are reasonable; (ii) the employee receives monetary compensation for the duration of garden leave; and (iii) the employee remains on the rolls of the employer until the expiry of the garden leave period.
source: https://www.lexology.com/library/detail.aspx?g=75c89613-e33f-4d4d-a755-5b5b25db32ef
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