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).

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry_100x100 1
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Bereavement Leave Confirmed for Miscarriages and Stillbirths 
New Zealand has become the second country in the world to pass legislation that provides bereavement leave for mothers and their partners after a miscarriage or stillbirth.
26.03.2021 Posted in Business Advice & Employment Law
Court of Appeal Overturns Employment Court’s Decision in Tourism Holdings
Tourism Holdings Limited v A Labour Inspector of the Ministry of Business, Innovation and Employment (Tourism Holdings) is the first decision in which the Employment Court considered section 8(2) of the Holidays Act 2003 (Act). The Court of Appeal has recently overturned this decision.
26.03.2021 Posted in Business Advice & Employment Law
Guarantees must be in writing and signed to be enforceable
For a guarantee to be enforceable, the requirements set out in section 27 of the Property Law Act 2007 (Act) must be strictly complied with.  This is what the NZSC held in Brougham v Regan. The key i...
19.03.2021 Posted in Business Advice
UK Supreme Court Delivers Decision on Uber Driver Employment Status
The distinction between employee and independent contractor can be complex, particularly where the nature of the business model blurs the lines of standard employment practices.
16.03.2021 Posted in Business Advice & Employment Law
Holidays Act Overhaul – Taskforce Recommendations
There have been calls for an amendment of the Holidays Act 2003 (Act) for some time.
16.03.2021 Posted in Business Advice & Employment Law
Unwanted Land Covenants and Easements: Seeking a Court Order
The Supreme Court recently considered an application by Synlait Milk to modify a land covenant restricting the burdened land use to farming, grazing and forestry operation to protect the ability of the benefited land owner to develop a quarry.  This article looks at the circumstances in which the courts might give relief to parties in an application to extinguish or modify a covenant or easement.
15.03.2021 Posted in Property Law
New ICC Arbitration Rules 2021 come into force
The revised International Chamber of Commerce (ICC) Arbitration Rules for 2021 (2021 Rules) have now come into force and apply to all ICC arbitrations begun after 1 January 2021.  While the new Rules...
10.03.2021 Posted in Litigation & Dispute Resolution
Send us an enquiry
For expert legal advice, please complete the form below or call us on (09) 375 8700.
  • This field is for validation purposes and should be left unchanged.
-->