Terminations with Garden Leave – Here’s 18 Smart Steps to Guide You
“Complexity (at work) has opened a great divide between those who have mastered its requirements and those who haven’t.” — – Brink Lindsey, in his recent book, “Human Capitalism”
ACTUAL “CASE HISTORIES”: Carolyn contacted us when she was about to move from one employer to another. She sought our help going through her upcoming transition. Workplace transitions are our special area of experience and expertise. As we do for all of our clients, we asked Carolyn to send to our office all of her “workplace papers,” including offer letter, all agreements signed, employee handbook and benefit and equity plans and agreements, for review prior to our consultation.
Our review of Carolyn’s written materials revealed one potential problem: a “Garden Leave” provision existed in her Stock Option Agreement.
A “Garden Leave” provision says, in effect:
“You must give at least 90 days written notice of resignation. During that 90-day period, we have the right to have you stay at home (and ‘tend your garden,’ so to speak) and have no contact with employees or customers. Of course, you cannot work elsewhere during that period. During that period we will pay your salary and provide benefits, but not accrued vacation, sick days or bonus. We have the right to shorten that period if we wish, and let you go sooner.”
[Note that Garden Leave periods are commonly 30, 60, or 90 days, and sometimes even 120 or 180 days.]
Carolyn said that she was needed immediately by her next employer, and she was certain her next employer would not wait those 90 days for her to begin. From our point of view, having the freedom to work where and when you want to work is a valuable freedom, and should not be given up easily. We counseled Carolyn that, while she had signed an agreement, there was not very much her employer could do to her that should worry her all that much; if her next job was really important to her – and the right to take any next job in the future – she might decide to deliberately ignore the agreement, and then just deal with the “consequences” – if any.
After discussing the matter with us and her next employer, Carolyn decided to make her move to her next employer, and to take the risks of doing so. As it turned out, they were not all that significant: (a) she had to forfeit about $22,000 worth of stock options, (b) she did incur some legal expense, and (c) she seemed to have “burned a bridge” that was, to her mind, not that valuable a bridge to begin with. Oh, yes: she had a few sleepless nights, too.
In retrospect, Carolyn’s decision to ignore the Garden Leave agreement she had signed was a wise one. First, though she did receive a rather nasty letter from her employer’s General Counsel that threatened “legal action,” no such “legal action” ever took place. Second, though Carolyn did lose her unvested options, she was confident that the loss incurred would be more than made up by her anticipated increase in compensation from her future employer. Third, though the squabble with her employer did cause her to delay her start at her next employer by two weeks, that did not bother her next employer; Carolyn even enjoyed having some time off.
Looking back, Carolyn shared our view that, with a few exceptions, Garden Leave is not very enforceable, and agreed that “The only thing you have to fear is fear itself.”
LESSON TO LEARN: In the past ten years or so, employers have begun to use a new technique to protect themselves when employees depart, called “Garden Leave.” First, it acts to deter employees from leaving at once because (a) it makes the next employer wait 30, 60, 90 or even 120 days for them to start, something many employers will not or cannot do, and (b) by keeping the employee bound to them – and out of communication with clients and colleagues – they make it very hard to take clients and colleagues with them.
The idea behind Garden Leave is rather ingenious, some would say a bit evil, but in practical effect it is not iron-clad, that’s for sure. We have helped many of our clients navigate themselves around the difficulties imposed – or seemingly imposed – by Garden Leave provisions.
Garden Leave provisions usually, but not always, provide that you will continue to receive salary and benefits, but not receive or accrue (a) vacation, (b) sick days, (c) bonus, (d) commissions, (e) equity vesting, or (f) other payments, benefits or perquisites.
A Garden Leave agreement is a kind of contract. “So,” you might ask, “how can I just ignore it?” The answer is that, with a few exceptions, there is just nothing an employer can do to enforce it. Here’s the analysis:
a. Sue for damages? What damages?” The law provides two basic ways to obtain a remedy for a “wrong” that was done. The first is what most people usually think of, and call a “lawsuit for damages.” That is, someone suing someone else for, say, $100,000. This is the first thing that most employers’ lawyers will threaten, almost always as mere “hot air.”
It is quite rare for an employer to have actual financial damages that result from an employee’s departure. It is possible if, for example, the employee is an opera singer and the opera tickets have already been sold, or an investment banker whose absence is the direct cause of a deal not closing. But in the vast majority of employee departures, there are no direct causal damages. Without direct damages caused by the employee’s early departure, there is no legal basis for a lawsuit.
Think of it this way: if your car ever-so-lightly bumped into your neighbor’s car’s bumper, and there was no dent or scratch caused by the light bump, and no passengers were injured, there is simply nothing to sue about or for. (That is why they are called “bumpers,” you know.)
b. Injunction to be sought? To stop what? The second kind of remedy the law makes available to people who have been “wronged” is what lawyers call an “equitable” remedy, usually in the form of an “injunction” or sometimes called “injunctive relief.” This is not a lawsuit for money, but instead a lawsuit to ask a Judge to issue a Court Order demanding that someone stop doing something that is wrong. This is called an “injunction.”
If a labor union is striking in violation of law, a Court can Order the union – by issuing an injunction – to “stop the strike” and get back to work. Or, if a power plant is spewing forth toxic chemicals, a Court can Order the power plant to stop polluting the air, or even stop operating the power plant. But, if you are not working at your former employer, and not yet working for your new employer, what can the Court Order you to stop doing . . . watching TV? Playing golf? Spending time with your children? Hardly.
Sure, if you have transferred trade secrets or customer lists, or asked customers and colleagues to leave your former employer, those could be Ordered halted by a Court – maybe. But if you have not done those things, then there is nothing to “stop doing.”
In case you are curious, a Court cannot issue a Court Order to force you to work. Ever since this country outlawed slavery, that is simply not an option.
c. Threaten to sue your next employer? Possibly, but rarely more than a scare tactic. Your employer’s next attempt to “enforce” your Garden Leave agreement may well be by means of a threat – made to you and/or made to your next employer, if your present employer knows who that is – to sue your next employer for some vague offense, sometimes called “tortious interference.” This is almost always nothing but a baseless threat, without meaning or effect. While there is a kind of legal claim called “tortious interference,” it is not commonly accepted by Courts, and is even less commonly successful:
First, there is nothing in the world wrong with an employer offering a job to an employed person; every employer does that at least once a week, if not daily;
Second, almost every employee is what we call an “at will” employee, which employers are constantly reminding us means “Either the employer or the employee may end the employment relation at any time and for any legal reasons”;
Third, even if your former employer claims the next employer knows of your Garden Leave agreement, just as noted above, it is almost always an agreement without any damages for breach;
Fourth, if a lawsuit is begun by your former employer against your next employer, all the next employer has to do is simply end your employment relation to end any alleged “interference”; and
Fifth, the truth is that, if anyone is “guilty” of tortious interference, by writing a letter threatening your future relation with a new employer it is more your former employer who is the one who should fear being sued, and not a future employer, who has every right to say to someone, “Would you like to work for us?”
No one likes being threatened with a lawsuit, and no one likes being sued. It is the fear in the mind of your next employer that, if anything, can keep you out of work for the Garden Leave period, and thus must be addressed.
d. Make you forfeit past-earned monies? Yes, possibly. If you have deferred income, perhaps in the form of deferred bonuses, or unvested equity, such as unvested stock options, it is possible – though not necessarily the case – that the terms of your Garden Leave agreement or your bonus or equity “plan” provide that you will lose these monies if you (a) voluntarily resign, or (b) resign without honoring your Garden Leave agreement.
This is a potential “cost” of leaving an employer, and should be looked into before considering a transition. It should be noted that, under some plans and agreements, you lose your deferred income and/or your unvested equity even if you are laid off, without cause. Check your plans; this may be important, or perhaps even inapplicable, to you. And, too, consider how much the loss is worth to you.
Incidentally, there is a legal argument to be made that the employer, by establishing a forfeiture, has “set a price” on your ignoring your Garden Leave agreement, and thus cannot seek additional “damages” from you.
e. Might they claim you were fired? Rare and overblown; One exception: Form U-5. Any time you leave a relation – be it friendship, dating, marriage or employment – you run the risk of your former “relation-mate” bad-mouthing you. In the employment context, this can take the form of your former employer giving you an undeserved bad reference. In this situation your former employer could claim that “This person was fired for bad conduct,” referring – dishonestly – to your not complying with your Garden Leave agreement.
With one major exception, experience shows that bad-mouthing by former employers is not as much a risk as most people fear it might be. One thing is for sure: you cannot stay in an unproductive or unhealthy relation based on the fear – which might not even be real – of your former “relation-mate” saying bad things about you.
The one major exception is if you are a Registered Representative in the securities industry. In that case, when your employment terminates for any reason, your employer must, within 30 days of the termination, file a form called a Form U-5 explaining the reason(s) for your departure. It is not unheard of for a disgruntled employer to try to smear a former employee by filing a false, fraudulent and defamatory Form U-5. This possibility – however remote – is always to be taken into account and, as noted below, steps need to be taken to minimize the chances of this happening, and if it does, minimize the harm that might take place.
WHAT YOU CAN DO:
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