9.05.2018

Garden leave intertwines with post-termination restraint of trade

It is the nature of business that employees often resign in order to take up jobs with competitors.  In some cases, these employees are privy to valuable business information which soon-to-be ex-employers are keen to protect.  While many employers may see an option in the employment agreement to place the employee on garden leave as the obvious choice in this situation, a recent Employment Court decision confirms that there is a caveat that should be considered by any employer making this decision „Ÿ namely, in placing an employee on garden leave, the employer may be trading off their ability to enforce a post-termination restraint of trade.

The case – Air New Zealand Ltd v Kerr

Mr Kerr started his career with Air New Zealand Limited (“Air New Zealand”) in the role of International Cargo Operations Manager after being approached by an executive search company in 2004.  In 2007, Mr Kerr was appointed General Manager of Eagle Airways and was later offered the position of General Manager of Air Nelson in 2009 (both Eagle Airways and Air Nelson were subsidiaries of Air New Zealand), where he remained for the remainder of his tenure at Air New Zealand.  In consideration of an increase in salary and benefits which were bestowed upon him along with the role of General Manager of Air Nelson, Mr Kerr entered into a new individual employment agreement which increased his notice period and restraint period respectively from three to six months each.

It appears that, for all intents and purposes, Mr Kerr was happy during his time at Air New Zealand, describing Air New Zealand as “a fantastic company with many very good and talented people”.  However, as can happen in business, in mid-December 2012 Mr Kerr was approached by an executive search company yet again, this time for a role at Air New Zealand’s competitor, Jetstar Airways Limited (“Jetstar”).  After discussions with the search company and Jetstar, including a change in the nature of the role after Mr Kerr initially rejected the proposition, Mr Kerr decided to accept Jetstar’s offer to become Head of New Zealand.

Upon Mr Kerr resigning and informing Air New Zealand that he intended to start work with Jetstar on 5 August 2013, Air New Zealand made the decision to invoke a provision in Mr Kerr’s employment agreement allowing the company to place him on garden leave for his six-month notice period up until 4 August 2013.  Mr Kerr agreed to remain on garden leave until this date.  However, he advised Air New Zealand that he did not intend to comply with the six-month post-termination restraint of trade clause in his employment agreement, because he had received legal advice that it was unenforceable.  In response to this, Air New Zealand sought an injunction enforcing the restraint.

This was troublesome for Mr Kerr.  According to Mr Kerr, if the restraint was enforced, he would not be in receipt of any income for the next six months and the financial impact on him would be significant.  Mr Kerr told the Court that he had a mortgage and he would need to dispose of assets very quickly.

As such, Mr Kerr claimed that the restraint was unreasonable in terms of its duration (six months), geographical area (New Zealand and Australia) and scope (restraining him being in any way involved “in any business or activity which was in any way in competition with [Air New Zealand]”).  In respect of the restraint’s duration, Mr Kerr’s counsel was of the view that the Court needed to take full account of the six months’ garden leave Mr Kerr had already taken.  Air New Zealand’s counsel, on the other hand, was of the view that Mr Kerr’s garden leave should not be treated as a restraint as he continued to be paid during this period and he continued to receive benefits as an employee.

The Court’s conclusion

The Court agreed with Mr Kerr’s counsel in relation to the duration issue, stating that “the correct approach to be adopted is that a garden leave provision should be taken into account by the Court when considering the reasonableness of the duration of any post-employment restraint covenant.

In this case, the Court was satisfied that the six-month period that Mr Kerr had already spent on garden leave was of sufficient duration to provide Air New Zealand with all the protection it needed in respect of its confidential information (which was the proprietary interest that the restraint was designed to protect).  As such, the restraint was unenforceable.  Given this conclusion, the Court did not consider the reasonableness of the scope and geographical area of the restraint, however the Court did comment that it was likely that both restraints would have been upheld (although, had it been relevant, it was likely that the Court would have been prepared to modify the geographical area to exclude Australia).

Our view

While there is no precise formula for determining the reasonableness (and therefore legitimacy) of a restraint’s duration, we now know that any garden leave period already taken will be considered by the Court in deciding such reasonableness.

We recommend that employers consider the implications of placing an employee on garden leave where the employer also wishes to enforce a restraint of trade, including considering whether there are other options allowed for in the relevant employment agreement which would be more appropriate.

This case involved the employee’s complete removal from the relevant industry and his workplace for the garden leave period.  It may be that the outcome would have been different had, for example, Mr Kerr been directed to perform alternate duties of a lesser status and responsibility during his notice period (which his employment agreement allowed for as an alternative to garden leave).

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