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Smell the Roses! Garden Leave Provisions in Employment Agreements and Restrictive Covenants

April 23, 2024 (3 min read)

Employers sometimes require employees to provide a specific amount of notice before resigning. This is likely set forth in the terms of an employment agreement. During the notice period, employers may instruct the employee not to come to work, but the employer keeps the employee on its payroll. This practice is often referred to as garden leave.  

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Related Content

  • Garden Leave Clause (Employment Agreement)
    See how garden leave provisions can provide an incentive to keep key employees from immediately taking up employment with a competitor after leaving a company. They are often used in this way to bolster or supplement more traditional restrictive covenants and covenants not to compete. 
  • Executive Terminations Benefits and Compensation Considerations
    Consider the impact of I.R.C. Section 409A in the context of garden leave provisions. If there is a "separation from service" for Section 409A purposes, an employer would have to pay out nonqualified deferred compensation triggered by that separation from service based on when the executive ceased working rather than when the garden leave ends. If the payment(s) was made based on the end date of the garden leave, there could be an impermissible delay in payment that violates Section 409A.

Practical Guidance Updates 
Featuring the latest updates from your Practical Guidance account.      

  • Employee Benefits & Executive Compensation Key Legal Developments Tracker (Current)
    Stay informed on new developments.
    • Retirement Plans. DOL’s EBSA division finalized amendments to Class Prohibited Transaction Exemption 84-14 (Qualified Professional Asset Manager Exemption or QPAM) which permits various parties related to employee benefit plans and IRAs to engage in transactions involving plan and IRA assets, provided they satisfy specified financial standards. 89 Fed. Reg. 23090 (April 3, 2024); DOL News Release.
    • Health and Welfare Plans. Agencies issue final rule Patient Protection and Affordable Care Act, HHS Notice of Benefit and Payment Parameters for 2025; Updating Section 1332 Waiver Public Notice Procedures; Medicaid; Consumer Operated and Oriented Plan Program; and Basic Health Program. 89 Fed. Reg. 26218 (April 15, 2024).
    • Health and Welfare Plans. DOL's EBSA division releases FAQ regarding implementation of certain provisions of the Affordable Care Act including the Prohibition on Lifetime and Annual Limits and Annual Limitation on Cost Sharing. FAQ Part 66.
  • Generative Artificial Intelligence (AI) Resource Kit is a frequently updated collection of current Practical Guidance materials on generative AI, ChatGPT, and similar tools.
  • For related Practical Guidance content on important recent trends, please review these easy-to-use Resource Kits on a variety of emerging topics:


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