Introduction
Garden leave is a practice where an employee gets their salary during their notice period but they are not allowed to work join a competitor or do any business activity. This practice has become very important in employment contracts in India but its legal status is still not clear. Garden leave came from employment law and is now commonly used in contracts for top executives, investment bankers, fund managers and technology leaders. However, its legal standing under law is still uncertain.
The main issue here is that Indian contract law handles an employer’s ability to enforce a contract while the employee is still working in a way than when the employee has left the job. The Indian Contract Act has a section, Section 27 that says agreements that stop a person from doing their job or profession are not valid. Indian courts have looked at Section 27 of the Indian Contract Act in a way, which makes these non-compete clauses in the Indian Contract Act almost impossible for the employer to enforce after the employee has left the job.
The Indian Contract Act and its Section 27 are very important when it comes to compete clauses, in the Indian Contract Act.. This article looks at whether a structured garden leave clause can be considered a way to enforce a contract under Section 27 of the Indian Contract Act.
What Is Garden Leave? Origin and Structure
The term “garden leave” comes from the idea of a senior executive being paid to stay at home and tend to their garden. This concept originated in the United Kingdom. Was recognized by English High Court decisions in the 1980s. In one case Provident Financial Group plc v. Hayward 1989 the English Court of Appeal said that an employer has the right to ask an employee to stay at home and get a salary during the notice period. Garden leave makes sense commercially because when a senior employee leaves or is asked to leave they still have access to client relationships, strategies and confidential data. A short notice period does not provide protection so garden leave extends the time when the employee is legally bound to the employer but cannot work in the market.
The commercial logic is straightforward. When a senior employee resigns or is asked to leave, they possess real time access to client relationships, proprietary strategies, competitive intelligence, and confidential data. A bare notice period particularly one that is short provides inadequate protection. Garden leave extends the effective period during which the employee is legally bound to the employer while being economically neutralised from the market. During this period, the employee is typically prohibited from:
- Attending the employer’s premises or contacting clients, suppliers, or colleagues.
- Commencing employment with any other organisation.
- Undertaking consultancy, advisory, or freelance engagements in the same sector.
- Disclosing or building upon confidential information acquired during employment.
The Statutory Framework: Section 27 and Its Limits
Section 27 of the Indian Contract Act, 1872 provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. The provision is broad, unqualified and admits of only one narrow exception agreements relating to the sale of the goodwill of a business. Unlike English law, which subjects restraint of trade clauses to a reasonableness test, Indian law imposes an almost categorical bar.
The Supreme Court of India affirmed this position in Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981), holding that a post-service covenant restraining an ex-employee from engaging in any competing business is void under Section 27. The Court declined to import the reasonableness doctrine from English law, observing that the Indian provision was absolute and admitted of no judicial discretion in favour of partial enforcement.
The 'During Employment' Exception
Section 27 is concerned with agreements in restraint of trade a category that courts have consistently held applies to post-termination restrictions. The position with respect to restrictions operative during the subsistence of employment is different. A clause prohibiting an employee from moonlighting or working for a competitor during the term of their employment is not strictly speaking, a restraint on post-employment trade. It is an incident of the employment relationship itself enforceable as a term of the contract.
This distinction is critical for garden leave analysis. If garden leave operates exclusively during the notice period which is in law part of the subsisting employment relationship it may fall within this ‘during employment’ carve-out. The enforceability question then shifts from Section 27 to the general principles of specific performance and injunctive relief under the Specific Relief Act, 1963.
Limits of Enforceability:- Specific Performance and Personal Service
The Specific Relief Act, 1963, however, imposes a significant constraint. Section 14 of the Act bars courts from ordering specific performance of a contract for personal service. An injunction that has the practical effect of compelling an employee to work for the employer or to remain idle in the employer’s service against their will may be refused on this ground.
Courts have navigated this tension by distinguishing between a positive injunction to serve (which is barred) and a negative injunction restraining the employee from serving a competitor (which may be granted). This is the same distinction drawn in English law following Warner Bros. Pictures Inc. v. Nelson 1937. The distinction is legally coherent but operationally thin in practical terms, prohibiting a senior professional from working anywhere else has much the same effect as compelling them to work for the original employer.
Drafting a Defensible Garden Leave Clause: Key Elements
1. Continued Payment of Full Remuneration:- The clause should make it clear that the employee will continue to receive their full contractual remuneration including salary, performance bonuses and other contractual benefits during the garden leave period. Any clause attempting to withhold salary during garden leave will likely be characterised as a post-termination restraint and struck down under section 27.
2. Length of time relative:- The duration of garden leave should be proportionate to the employee’s seniority, the nature of the confidential information in the employee’s possession, and the operational risk to the employer’s competitive position. For a senior executive, a commercially reasonable garden leave period would be three to six months. Even if couched in terms of notice, judicial scepticism is probable for periods longer than 12 months.
This should be included in the notice period provisions of the contract and not as part of a post-termination covenant. This framing is essential to the claim that the restriction is during employment and thus is beyond the scope of Section 27.
3. Level of Restriction:- The restriction on garden leave should be limited to activities which are directly competitive with the employer’s business and should not amount to a blanket prohibition on all professional activity. Restrictions should be limited to the employer’s market, geographic territory and, where relevant, client base.
4. Confidentiality Integration:-The garden leave clause should be read and supported by a strong confidentiality agreement. Protection of trade secrets and confidential information is also independently enforceable under Indian contract law and provides an additional legal basis for interim relief.
AMLEGALS Remarks
Garden leave is in a legally defensible space in the Indian employment law landscape but only if it is carefully distinguished from the category of post-employment restraints that Section 27 makes void. This is more than a semantic issue. A clause that is in force during a paid notice period, supported by full remuneration, and presented as an incident of the subsisting employment relationship, has a materially stronger chance of judicial enforcement than a post-termination non-compete, which Indian courts have consistently refused to uphold.
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