Garden Leave

Garden leave is an arrangement under which an employer pays a departing worker to stay out of the market for a period. The name is British in origin and describes the picture: paid, at home, tending the garden rather than working. In the United States it is used for two arrangements that are not the same.

In the notice-period sense, the employee has resigned or been given notice and remains employed and on the payroll throughout a notice period, but is told not to come to work, is cut off from clients and systems, and may not start elsewhere until the notice expires. Employment has not ended.

In the Massachusetts statutory sense, employment has ended, and the former employer pays the former employee during the period in which a noncompetition agreement restricts them from competing. Massachusetts General Laws chapter 149, section 24L defines a "garden leave clause" as "a provision within a noncompetition agreement by which an employer agrees to pay the employee during the restricted period", and provides that the clause "shall become effective upon termination of employment unless the restriction upon post-employment activities are waived by the employer or ineffective" under the statute — so an employer that gives up the restraint owes nothing under the clause. These are two different points on the timeline, and a document that uses the phrase without saying which it means has told the reader almost nothing.

The Massachusetts provision is worth reading closely, because it is the only place in US law where the phrase has a defined content. Section 24L(b)(vii) requires that a noncompetition agreement "shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement." It then says what qualifies. To constitute a garden leave clause within the meaning of the section, the agreement must:

• provide for payment on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee's highest annualized base salary paid by the employer within the two years preceding termination, made consistently with the state's wage payment requirements; and
• except where the employee breaches, not permit the employer to unilaterally discontinue or otherwise fail or refuse to make the payments.

Where the restricted period has been extended beyond twelve months because the employee breached a fiduciary duty or unlawfully took the employer's property, the employer is not required to pay during the extension.

Two structural points in that statute change how the clause should be read. First, the garden leave clause is consideration, not a restriction. It is what an employer gives in exchange for the restraint, and section 24L(b)(vii) permits "other mutually-agreed upon consideration" instead — so a Massachusetts noncompete need not contain a garden leave clause, provided something else was agreed and specified in the document. Second, the statute's own definition of "noncompetition agreement" expressly excludes garden leave clauses from the list of things that count as one. The clause is the payment obligation; the restraint is elsewhere in the agreement.

What actually turns on which sense applies. The difference is employment status, and a surprising amount hangs on it:

• Group health coverage. An employee on notice is still an employee and normally stays on the plan on the same terms. A former employee being paid under a garden leave clause has separated, so coverage is a question of continuation rights and the exit package rather than of ordinary enrollment.
• Retirement contributions. Salary paid during a notice period is compensation from which an elective deferral can be withheld and on which an employer match can be earned. A post-employment payment under a garden leave clause is a different kind of payment, and whether the plan treats any of it as compensation is a plan-document question.
• Service and vesting. Time on the payroll during notice continues the employment relationship. Time after separation does not.
• Working elsewhere. During a notice period the employee generally cannot start a new job because they still have one. During a post-employment restricted period the bar comes from the noncompete's own terms, and it reaches only what those terms reach.

What the arrangement is for, from the employer's side, is the same in both senses: keeping someone with current knowledge of customers, pricing or strategy away from a competitor while that knowledge goes stale, and paying for the privilege rather than relying on a court to enforce a bare restraint. Understanding that makes the negotiation legible. The employer is buying time, and the price is a number in a document.

What this page cannot tell you is what your own state requires. Only Massachusetts was read at source here, and the fifty states differ widely on whether a noncompete needs to be paid for at all. Whether a garden leave provision in your document is required, optional or ineffective is answered by your own state's law and by the enforceability rules covered on the non-compete agreement entry.

1. Identify which sense the document uses. Look for the trigger. A clause that operates during a notice period is the employment sense; one that becomes effective "upon termination of employment" is the Massachusetts sense.

2. Find the payment terms. How much, measured against what, paid on what schedule, and for how long.

3. Find the discontinuation terms. Whether the employer can stop paying, and on what grounds. Under section 24L, a qualifying garden leave clause may not permit the employer to discontinue unilaterally except on the employee's breach.

4. Work out what stops on your last day. Health coverage, retirement deferrals and the employer match, service credit, and any equity that vests only while employed.

5. Value the restriction, not just the payment. The payment offsets part of the earnings you are giving up; the question is what share.

A hypothetical illustration using the Massachusetts standard. Priya's highest annualized base salary in the two years before she leaves is $150,000, and her noncompetition agreement imposes a 12-month restricted period supported by a garden leave clause.

For the clause to qualify under section 24L(b)(vii), it must pay at least 50 percent of that figure across the entire restricted period: 150,000 × 0.50 = $75,000, paid pro rata, which over twelve months is 75,000 ÷ 12 = $6,250 a month.

Now put that against what she is giving up. If the restriction keeps her out of a role that would have paid $150,000, the twelve months cost her $150,000 of earnings and return $75,000, a net gap of $75,000 before considering the benefits she also loses on separation. The statutory minimum is a floor on the consideration, not a measure of the restraint's cost, and treating the two as the same is the mistake the number invites. All figures are illustrative, and the 50 percent standard is Massachusetts law rather than a national rule.

Pros

• It is paid. Whichever sense applies, the arrangement converts part of a period out of the market into income, which a bare restraint does not.
• In the notice-period sense, employment continues, so health coverage, retirement deferrals and service credit continue with it.
• Under the Massachusetts standard, a qualifying clause cannot be discontinued unilaterally except on the employee's breach, so the payment is not at the employer's option once agreed.
• Because a garden leave clause is consideration rather than a restriction, it is a term that can be negotiated upward without changing what the restraint itself covers.

Cons

• The phrase names two arrangements with different consequences, and a document using it loosely leaves the employee guessing which they have.
• In the post-employment sense the employment relationship has ended, so benefits, service credit and employment-conditioned equity end with it.
• The Massachusetts floor is half of base salary, which by construction pays less than continuing to work, and covers base salary only rather than bonus or commission.
• Only some states require any payment for a noncompete at all, so outside those states a garden leave provision exists only if it was negotiated.
• Being out of the market for a year has career costs the payment does not price.