Source: http://www.dakassociates.com/garden-leave-study-june-2012/
Timestamp: 2019-04-20 01:21:29+00:00

Document:
Section I — Definition and History of Garden Leave.
Garden Leave provisions originated in the U.K., and are prevalent across broad industry. Within Financial Services, Garden Leave policies have long been utilized by Global Banks, Investment Banks, Private Equity Firms, Hedge Funds, and Proprietary Trading Organizations due to the nature and confidentiality of their respective businesses.
As a firm that exclusively specializes within Financial Services and works across a multitude of organizations and infrastructures, DAK is privy to the policies and procedures of our clients, as well as the market place at-large. From time to time we see trends emerge that we are compelled to investigate further and report to our clients. As such, we have noticed a marked increase in the number of U.S. based organizations who are implementing Garden Leave provisions within their employment agreements and practices.
DAK contacted “Top 100” Financial Services organizations and other select participants. This included both domestically domiciled firms, as well as the U.S. arms of internationally based holding companies. The study group included traditional long-only Asset Managers, Hedge Funds, Insurance Companies, large Broker-Dealers, and Financial Services “Supermarket” organizations. Most of the participants are name-brand, market-leading and omnipresent institutions. The collective AUM for the study group participants surpassed $8.5 Trillion (excluding several top insurance companies and broker-dealers).
Do you employ a Garden Leave policy now?
If no, are you thinking about employing a Garden Leave policy now?
If yes, what duration are you contemplating?
How long ago did you install your Garden Leave policy?
How did you go about implementing your Garden Leave with existing employees? Was a signature required?
80% of our participants responded with a “signature required”, 20% of our participants responded with “electronic acknowledgement”. Many organizations included Garden Leave provisions within Severance Agreements, Long Term Incentive Plan (LTIP) Agreements, Confidentiality/Non-Compete Agreements, Employment Agreements, and Equity Reward Agreements. Some of the organizations that chose electronic acknowledgement methods did so with existing employees, but require signatures for new employees going forward.
What compelled you to enact a Garden Leave policy?
How is your Garden Leave policy applied?
60% of our participants responded with “Special Situation and/or case-by-case”, 30% of our participants responded with “Senior Executive/Officer positions only”, and 10% of our participants responded “Across all exempt employees including sales”. Within the “Special Situation” group, the policy was mostly applied to all employees VP and above, all senior executives and officers, and any recipients of deferred compensation or equity awards.
What is the duration of your Garden Leave policy?
What is your compensation arrangement during a Garden Leave period?
50% of our participants responded “Base salary only”, 30% of our participants responded “Base salary plus bonus and/or pro-rated bonus”, 20% of our participants responded “Other”. Responses from the “Other” camp mostly centered around the inclusion of benefits.
What measurable benefits, if any, have been realized as a result of your Garden Leave policy?
60% of our participants responded “Other”, 20% of our participants responded “Higher employee retention”, and 20% of our participants responded “Deterrent from having employees recruited”. 60% of responses from the “Other” camp overwhelmingly were tied to a longer and orderly transitioning of employee responsibility, and 20% of responses were tied to the limiting of compensation claims from terminated employees. The remaining 20% responded that it was too early to tell and/or the benefits could not be measured.
Do you find Garden Leave to be a useful tool as a deterrent to employee departures and/or confidential confirmation concerns?
Overall, do you envision Garden Leave policies continuing to become more commonplace here in the US?
While it is clear that organizations have implemented Garden Leave provisions for a variety of reasons, it is also clear that there is an upward trend in adoption rates among US Financial Services organizations particularly over the last three years. The next biggest trend is the comprehensive use of Garden Leave across the exempt employee population, not just the executive suite. Furthermore, organizations are subjecting their sales professionals to Garden Leave policies at a much higher historical rate. A surprising area that has seen explosive adoption is the Financial Advisor/High-Net-Worth realm. Specifically, the Private Banks and Major WireHouseshave been subjecting their elite advisors and teams to Garden Leave policies in an effort to mitigate against household client loss in the aftermath of advisor departures and transitions to new firms or operating platforms.
American employers have begun including garden leave provisions in the employment contacts of key employees. However, as garden leave is a relatively new phenomenon, there is limited case law addressing enforcement. In Baxter International, Inc. v. Morris, one of the first cases to examine the enforceability of a garden leave provision, the Eighth Circuit affirmed a district court ruling, refusing to stop a research scientist from working for a competitor even though his previous employer was willing to pay him during the duration of his one year noncompeteagreement. The court held, “if [Morris’ previous employer] paid Morris’ salary for the year he would be forbidden to work by the covenant, Morris would suffer undue hardship.” Baxter International, Inc. v. Morris, 976 F.2d 1189, 1197 (8th Cir. 1992).
Since Baxter, several cases involving garden leave have arisen in New York courts. These courts have upheld noncompetes with safety net clauses as well as noncompetes with provisions remarkably similar to traditional English garden leave provisions.
A New York court found the restrictive covenant reasonable “on condition that plaintiffs continue to receive their salaries for six months while not employed by a competitor.” Maltby v. Harlow Meyer Savage Inc., 633 N.Y.S. 2d 926, 930 (N.Y. Sup. Ct. 1995).
A New York court upheld a six-month restrictive covenant, placing significant reliance on the employee’s full compensation of salary and payment of health and life insurance premiums. Lumex Inc. v. Highsmith and Life Fitness, 919 F. Supp. 624, 629-36 (E.D.N.Y. 1996).
The Second Circuit, applying New York law, upheld a six month noncompetition agreement that did not contain any post-employment payment provision. The court held the employer’s provision of the employee-salesman’s annual compensation of $600,000, contingent upon the employee-salesman’s agreement to abide by his contractual post-employment restrictions, was equivalent to the post-employment payments in Maltby, thereby alleviating the policy concern that noncompete provisions prevent a person from earning a livelihood. Ticor Title Insurance Co. v. Cohen, 173 F. 3d 63, 71 (2d Cir. 1999).
A New York court upheld a 30-day notice provision which was combined with the 90-day non-compete provision, holding that the safety-net payment provision made, “virtually nonexistent [the] concern that the former employee could lose his livelihood.” Natsource LLC v. Paribello, 151 F. Supp. 2d 465, 472 (S.D.N.Y. 2001).
Finally, a New York court upheld a restrictive covenant containing a “sitting out” clause. The court granted the employer a five-month enforcement period of the restrictive covenant, holding that the risk to the former employee-executive of a loss of livelihood was mitigated by the continual payment of his salary. Estee Lauder Co. Inc. v. Batra, 430 F. Supp. 2d 158, 182 (S.D.N.Y. 2006).
In Bear, Stearns & Co., Inc. v. Sharon, the U.S. District Court for the District of Massachusetts refused to issue a preliminary injunction to enforce a contractual provision requiring an employee to provide 90 days’ notice of termination of employment. Bear, Stearns & Co., Inc. v. Sharon, 550 F.Supp. 2d 174 (D. Mass. 2008).
Here, Sharon resigned from Bear, Stearns (Bear Stearns) on March 17, 2008, and immediately accepted employment with Morgan Stanley. Bear Stearns alleged that: 1) the terms of Sharon’s employment required that he give 90 days’ prior written notice before resigning; 2) Sharon misappropriated Bear Stearns’ confidential information; and 3) Sharon wrongfully induced employees (and clients) of Bear Stearns to leave and become employed by (or customers of) Morgan Stanley.
The court denied the request for preliminary injunction enjoining Sharon from being employed during the 90-day garden leave period for three reasons: Bear Stearns could not establish irreparable harm because its harm could be recompensed by money damages; the hardship to Bear Stearns of permitting Sharon to resume his employment with Morgan Stanley was outweighed by the risk to Sharon’s “professional standing and the inability to advise his clients in times of economic turmoil”; and specific performance of the 90-day garden leave provision would require Sharon to continue an at-will employment relationship against his will.
Court decisions can assist employers drafting garden leave provisions. However, many courts apply subjective standards to the enforcement of any restrictive provision. To protect long-term business interests, employers must recognize the practical, economic and legal implications of including garden leave provisions in employment contracts. Because Employers must pay the salary to their employees during the garden leave period, careful determination of the type of employee that necessitates a garden leave provision, how many employee contracts will include a garden leave provision, and the likelihood of one or more employees being on garden leave at any one time, should be considered prior to including a garden leave provision in any employment contract.
Terminology enjoining the employee from engaging in employment with any other employer for the duration of the garden leave.
A properly executed garden leave provision may safeguard an employer’s proprietary information and allow the employer to effectively transition the business, thereby protecting the interests of the company. Employers would be wise to insure that garden leave provisions are specifically tailored to limit the employee’s responsibilities during leave and that they are reasonable in duration. Even if all factors are met, a garden leave provision will still be subject to an equitable, somewhat subjective, test by the court, concluding with whether the agreement is enforceable.
DAK Associates, now in its 33rdyear, is a “Top 100” national retainer-based executive search and consulting firm that exclusively serves the broad-based Financial Services community spanning Asset Management, Wealth Management, Insurance& Retirement, Broker-Dealer, and Asset Servicing. The firm has pioneered a number of innovations including DAK Intelligent Search, DAK Diversity Mapping, and DAK Direct, in addition to a number of industry contributions within Financial Services.

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