Down the Garden Path: A Look at the “Garden Leave” Provisions of Proposed Non-Competition Legislation
In a state with an innovation economy like Massachusetts, the balance between protecting both a company’s pioneering intellectual property and the ability of employees to move freely in the marketplace is often in tension. It is no surprise, then, that in recent years, the Commonwealth’s legislature has trained its fire on non-competition agreements. Legislators have focused on issues such as the propriety of non-competition agreements for lower-level employees, and whether non-competition restrictions are justified by legitimate business interests, such as protecting trade secrets, or function merely a tool to suppress healthy competition. As we begin 2018, the perennial question looms for those who practice at the intersection of intellectual property and employment law: will this be the year that Massachusetts finally reforms or eliminates non-competition agreements?
The answer may lie in a novel proposal put forth in three bills (House Bill 4419, House Bill 2371, Senate Bill 840 and Senate Bill 1017) currently making their way through the Massachusetts legislature, all of which contain garden leave clauses. The concept of garden leave comes to us from England, where such provisions are more common. Garden leave means that an employer is required to pay a former employee his/her salary during the time of the non-competition agreement. During a garden leave, the employee is not required to report to work, but can spend his/her time “tending to their garden.” While some employment contracts contain garden leave provisions, especially for high-level employees in finance and other industries that also do business in Europe, that concept has not often been applied to at-will employees in the United States. As of this publication, Oregon is the only state that has some form of a garden leave requirement. These three proposed bills attempt to add Massachusetts to that very short list.
The garden leave concept has some appealing benefits. Courts may be more likely to enforce non-competition agreements when it is clear that employees are not going to be financially harmed during the period when they cannot compete with their former employer. Employers also may be less likely to use non-competition agreements in a punitive or overly broad way if doing so is going to hit them in the wallet. Instead, the hope is that employers will reserve the use of non-competition agreements for employees who have access to confidential company information and present a real risk of harming the company if they immediately go to work for a competitor.
However, the garden leave concept does not come without costs. Employers will be required to carry the expense of an employee who is providing no or limited services to the company, which may be burdensome, particularly for small companies and start-ups. There are also logistical concerns regarding an employee who takes the garden leave, but then is found to have improperly competed anyway – would the leave money be clawed back, and how? What notification procedures should be in place?
To many observers’ surprise, the Associated Industries of Massachusetts (“AIM”), the major pro-business lobbying group in Massachusetts, representing more than 4,000 employers, has supported the garden leave concept. Historically, AIM has been hostile to any attempts to legislate away non-competition agreements, or to significantly burden employers’ ability to use them. All the more surprising, then, when AIM came out publicly in support of House Bill 2371.
AIM’s unexpected support of a bill that includes a garden leave requirement—when there are other bills under consideration that do not require garden leave (e.g. House Bill 2366 and Senate Bill 988)—seems to be the result of a recognition that a compromise is necessary if employers want to maintain other traditional non-competition protections, including a one-year duration, the ability for a court to “blue pencil” overly broad non-competition provisions rather than throwing them out altogether, and the ability to offer some compensation other than garden leave, if the employee agrees. In addition, HB No. 2371, unlike the other “garden leave” bills on the table, only requires that employers pay 50% of the restricted employee’s salary, rather than 100%, as in the other two bills.
On April 17, 2018, the Massachusetts legislature’s Joint Committee on Labor and Workforce Development favorably reported HB. 4419 to the House Steering, Policy, and Scheduling Committee. This bill closely tracks the provisions AIM supported, and requires the employer to provide garden leave in the form of 50 percent of the employee’s base salary or “other mutually-agreed upon consideration” during the non-compete period. This now appears to be the bill to watch. In Massachusetts’ continuing effort to adequately protect the intellectual property of our most innovative companies and still protect the workplace mobility and livelihoods of our workforce, garden leave may provide the solution.