FTC Addresses Garden Leave Under the New Noncompete Rule

The new Federal Trade Commission (FTC) rule banning noncompetition agreements between employers and employees raises the issue of garden leave and when it is acceptable under the rule. While ongoing court challenges make the future of the rule uncertain, the FTC’s discussion of garden leave likely has many employers wondering about the features of this alternative to traditional noncompetes.

Broadly speaking, garden leave agreements limit an employee’s access to company information, facilities and workers for a defined period at the end of the employee’s tenure with an employer. The arrangements provide employers with protection against competition, but they are more beneficial to employees than standard noncompete agreements because the employee is paid during the garden leave period.

This Compliance Bulletin examines the topic of garden leave generally and in the context of the new FTC rule on noncompetes.

Highlights

• In the preamble to its new rule banning noncompete agreements between employers and employees, the FTC addressed the topic of garden leave agreements in relation to the rule.
• The FTC said garden leave agreements comply with the rule if they apply when the worker is still employed by the employer and receives their regular compensation and benefits.

Important Dates

• May 7, 2024: The final rule was published in the Federal Register.
• Sept. 4, 2024: The final rule is scheduled to take effect.

Action Steps

Employers contemplating adopting garden leave to avoid the federal ban on noncompetes should consider whether the agreements ultimately benefit the organization. Employers that decide to go forward with garden leave provisions should structure them carefully to ensure compliance with the rule.

Employers must also bear in mind that states have enacted laws curtailing or prohibiting the use of noncompetes, and garden leave agreements must also be acceptable under any state laws that apply.

Garden Leave in Employment Agreements

Common in the United Kingdom and Europe but less well known in the United States, garden leave refers to a period at the conclusion of an employee’s employment with a company during which the employer continues to pay the employee but curtails or completely ends the employee’s job duties and access to some or all of the employer’s information, facilities and workers.

Key to the concept is that the employee is prohibited from starting a new job with a new employer during the garden leave period. The term garden leave (or gardening leave) derives from the idea that the employee could be at home working in their garden for the duration of the leave.

For the employer, garden leave can:

• Protect against a departing employee taking current sensitive information to a new employer right away;
• Protect against a departing employee poaching clients; and
• Ensure a smoother transition by making the departing employee available to answer questions and provide information about their duties.

For their part, employees benefit from garden leave agreements because unlike under typical noncompetes, employees are compensated during the leave period, even though they are not working at their regular capacity or at all, depending on the agreement. However, this benefit of garden leave for the employee represents a major drawback of the agreements for employers, as it is expensive to pay an employee to do nothing. This is particularly true given that garden leave agreements are most often used with highly paid executives.

Provisions setting the length and compensation for garden leave vary. The length of the leave is typically shorter than standard noncompetes, ranging from one to six months. Compensation can be at full pay or a reduced amount and might exclude bonuses and commissions.

Garden Leave in the United States

While garden leave is infrequent in the United States, it is not completely uncommon, especially in the financial industry. In addition, state legislation addresses the topic. A 2018 Massachusetts law restricting noncompetes requires noncompete provisions to include garden leave with 50% pay (or other mutually agreed upon consideration) if the provisions are to survive the law’s broad restriction against them.

A 2021 Illinois law prohibiting noncompetes specifically excludes garden leave from the noncompete agreements that are prohibited, an approach similar to the one adopted by the FTC in its noncompete rule.

FTC Position on Garden Leave as a Noncompete Agreement

The FTC rule on noncompetes was published on May 7, 2024, and is currently scheduled to take effect Sept. 4, 2024, although lawsuits filed to stop the rule may delay that date or prevent the rule from ever taking effect. The rule bans noncompete clauses in almost all circumstances and invalidates most existing noncompete agreements. “Non-compete clause” is defined in the rule as a term or condition of employment that prohibits a worker from, penalizes a worker for or functions to prevent a worker from:

• Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
• Operating a business in the United States after the conclusion of the employment that includes the term or condition.

The FTC considered the subject of garden leave after receiving comments on the topic in response to the proposed noncompete rule. The preamble to the final rule articulates the FTC’s position, and it notes that commenters used the term “garden leave” to refer to a variety of different agreements, including provisions that paid employees at their full rate but restricted their access to co-workers and company facilities, and agreements that provided post-employment payments to employees. The FTC said commenters described these agreements in different ways, including severance pay, partial pay and full pay akin to administrative leave, in exchange for an agreement not to compete.

The FTC concluded in the preamble that given the varied usage of the term, the agency could not provide a blanket opinion on all types of garden leave. However, it said garden leave agreements will not be prohibited by the rule if:

• The worker is still employed; and
• The worker is still receiving the same total annual compensation and benefits on a pro rata basis.

Critical to the FTC’s reasoning was that if the worker continues to be employed (even though their job duties or access to colleagues or the workplace may be curtailed), the garden leave does not meet the rule’s definition of a prohibited noncompete.

In further language helpful to employers, the FTC said garden leave as described above would be acceptable under the rule even if a worker did not meet a condition to earn a particular aspect of their expected compensation, like a bonus, and therefore was not paid that compensation. Likewise, a severance agreement that imposed no restrictions on where the worker could work following the employment would not be a noncompete clause under the rule because it does not impose a post-employment restriction.