Disclaimer

By clicking, "I Accept" below, you accept and acknowledge the following:

The purpose of this website is to provide general information and insights about TLH, Advocates & Solicitors, and not to advertise or solicit work in any manner whatsoever.

Please note that as per the Bar Council of India Rules, advocates in India are prohibited from advertising or soliciting work in any form or manner. You acknowledge that you are visiting this website at your discretion and that there has been no solicitation, invitation, or inducement of any sort whatsoever from TLH, Advocates & Solicitors or any of its professionals in relation to this website.

The content available on this website does not constitute legal or other professional advice and should not be substituted for advice relevant to particular circumstances.

The access and use of this website does not establish any fiduciary or other relationship between you and TLH, Advocates & Solicitors or any of its advocates.

Please read the ‘Terms of Use’ and our ‘Privacy Policy’ before accessing this website.

Blog default background
Blog
Employment Law

Enforceability of Garden Leave Clause in an Employment Contract

Authors:
Karan Srinivasan
November 6, 2020
5 min read
Share this post
Copied!

Introduction

Garden leave clause is an extremely useful tool for employers to mitigate the impact of employees (usually a senior employee) exiting an establishment, by providing (a) transition period, to phase out the incumbent employee, and (b) bedding period for his or her replacement. It is common to find a garden leave clause in employment contracts of key employees of establishments who (a) have significant knowledge of day-to-today affairs of the establishments, or (b) are engaged in a highly technical industry (such as pharma, banking and financial services, biotechnology, etc.), or (c) possess significant trade secrets and confidential information. In practice, such a clause entails the employee in question being excluded from the workplace or being limited to a peripheral role, instilling a sort of Chinese firewall so as to minimize or eliminate their exposure to critical matters that impact the day-to-day affairs of the establishment. The garden leave clause is normally included in employment contracts and kicks in once the employee in question has begun serving his or her notice period. It remains effective for the entirety of the notice period, and in some instances may even extend beyond the contractual notice period.

While garden leave provisions have been widely accepted and are common around the world, there have been instances where Indian Courts have found such a clause to (a) fall foul of Section 27 of the Indian Contract Act, 1872 (“the Act”), and (b) be in disguise as a restraint of trade.

Tatva Legal, Hyderabad, amongst other services, provides comprehensive employment law related legal services and our team of experienced lawyers advise on all aspects of labour law, catering to the needs of both the private sector and public company employees.

Legal Position:

Articles 21 and 41 of the Indian Constitution protects every individual’s right to livelihood and work. Section 27 of the Act operates to protect this right by declaring any contract that restrains one from exercising a lawful profession, trade of business of any kind to be void, with one statutory exception being a non-compete clause executed pursuant to the transfer of the good will of a business. Historically, an agreement in restraint of trade has been identified as “one in which a party agrees with any other party to restrict his liberty in the future to carry on trade with other persons who are not parties to the contract in such a manner as he chooses[1]. In Krishan Murgai Versus Superintendence Company of India[2],the Delhi High Court held that ‘Section 27 does not contemplate the reasonableness of a restraint, and therefore any restraint imposed on the employee after the term of employment would prima facie be void and unenforceable’. Conversely, in Niranjan Shankar Golikari Versus Century Spinning & Manufacturing Company Limited [3], the Supreme Court held that “restrictions that are to operate only while the employee is contractually bound to serve his employer are never regarded as being in restraint of trade”.

While there is no express statutory provision prohibiting the use of garden leave clauses, the Bombay High Court in the landmark judgement rendered in the case of VFS Global Services Private Limited Versus Suprit Roy[4]observed that ‘garden leave clauses operating post termination of an employee’s contract would fall foul of section 27 of the Act, and further held that (a) garden leave can only be enforced for the duration of the employee’s contract/ notice period and (b) can be enforced only if the employee receives additional compensation for the period of such leave’.

Duty of the Employers:

Consequently, employers must pay close attention to the language used while drafting the garden leave clause to ensure that, it (a) does not purport to subsist post-termination of employment; and (b) provides the employee with fair compensation in lieu of such garden leave, in order to ensure Section 27 of the Act is not triggered.

Employers should also pay attention to certain practical considerations when including garden leave  clause in the employment contracts, such as ensuring that the notice period applicable to employees is long enough for any confidential information or know-how possessed by the employee to become ‘stale’, that is to say, the greater an employee’s exposure to an establishment’s critical confidential information, the longer that employee’s contractual notice period should be. Conversely, if such notice period and/or garden leave period is unusually long, it would be prudent for the employers to maintain evidence that demonstrates the real possibility of the trade secrets and/or the confidential information being disclosed to competitors, as the onus of proving the reasonableness of such a clause in the employment contract would rest with the party looking to enforce such a clause.

Conclusion:

To conclude, there is no doubt that garden leave clauses are extremely useful in preventing  employees from disclosing sensitive information, significant trade secrets and confidential information of the establishment, for the duration of one’s employment. Such clauses are not a comprehensive remedy for the employers / establishments, and therefore the employers / the establishments must ensure to have effective systems and policies in place to mitigate the loss of such an employee, and the risk of them disclosing sensitive information, significant trade secrets and confidential information of the establishment.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1] Petrofina (Great Britain) Ltd. vs Martin, (1966) Ch. 146

[2] 1980 SCR (3)1278

[3](1967) ILLJ 740 SC

[4] 2008 (2) BomCR 446

No items found.
employment contracts, Garden leave clause, notice period, Restraint of Trade, Section 27 of Indian Contract Act, VFS Global Services vs. Suprit Roy

Footnotes

Share this post
Copied!

Latest posts

July 10, 2025
From PSUs To Private Companies: Enforceability of Employment Bonds in India
This article explores the enforceability of employment bonds in India, focusing on their legal standing, key court decisions, and what makes such agreements valid or void in both public and private sectors.
Read more
Arrow Right
Corporate Law
July 9, 2025
SEBI’s New Disclosure Norms for Related Party Transactions: Redefining Corporate Governance in Listed Companies
The article revolves around corporate governance reforms introduced by SEBI related to Related Party Transactions (RPTs).
Read more
Arrow Right
Dispute Resolution
July 8, 2025
Revisiting the IBC-RERA Interplay in light of Umang Realtech
The article examines the evolving jurisprudence around the interface of the Insolvency and Bankruptcy Code (IBC) and the Real Estate (Regulation and Development) Act (RERA), with particular focus on the recent Umang Realtech decision.
Read more
Arrow Right
Corporate Law
June 14, 2025
The Finfluencer Effect: Unravelling Market Manipulation
Recently, the Indian stock market regulator, Securities and Exchange Board of India (SEBI) published a discussion paper addressing the growing concern pertaining to financial influencers, or finfluencers, providing financial advice. These influencers often lack the requisite qualifications and accountability for their recommendations.
Read more
Arrow Right
Employment Law
June 14, 2025
Contract Labour Deployment in India - Demystifying the Future Conceived by the Code on Occupational Safety, Health & Working Conditions, 2020
The business of human resource deployment by contractors for their clients has grown and evolved globally. In India, the contractor-sourced industrial workforce grew by about 293% between 2002-03 and 2021-22.[1] Recently, India has unfurled four labour codes that revamp its existing labour laws to meet the needs of the Indian workforce such as contract labour deployment.
Read more
Arrow Right
Corporate Law
June 14, 2025
Exploring Unchartered Territory? Laws for the Void
What can the Indian space sector learn from the Avengers? Besides, the incredible budget and scale, the key takeaway would be - bringing experts together to achieve phenomenal results. We all remember the fascinating back stories, the strength of and the role each member plays to fill an essential need under the able guidance of a strong leader.
Read more
Arrow Right
View All Blogs
Arrow Right