Allens Arthur Robinson - 12 July 2002

A recent Federal Court decision illustrates the importance of specifically agreeing with employees, terms allowing for payments in lieu of notice and garden leave.

Employers habitually use two strategies when terminating employment. The first is to pay the employee in lieu of notice, meaning that it is not necessary to leave the employee in the workplace during the notice period. An alternate strategy is to put the employee on garden leave, where the employee remains employed but is not required to attend for work during the notice or garden leave period.

Australian courts have shown an increased willingness to restrict use of these strategies. In 1998, in Sanders v Snell,1 the High Court confirmed that notice means notice and if an employment agreement does not specifically provide a right to terminate by payment in lieu of notice, the employee is entitled to work through their notice period. This is contrary to the common, but mistaken, assumption of employers that notice and payments in lieu are interchangeable.

In May this year, in Blackadder v Ramsey Butchering Services,2 the Federal Court suggested that an employer may have an obligation to provide the employee with meaningful work while employment continues, exposing the employer to breach of contract claims if garden leave is used.

The problem posed by Sanders is easy to resolve. By including a termination provision which allows the employee to elect between notice and payments in lieu of notice, employers retain that flexibility. The garden leave issue is less easy to resolve.

In Blackadder, the court considered (in a different context) the extent to which an employer has a duty to provide work to an employee. The court found that where an employer has a duty to provide employment under an employment contract, the employer must do more than merely pay the employee. Rather, the employer should provide the employee with all of the usual incidents of employment, such as attendance at the workplace and furnishing an employee with work.

Before Blackadder, courts had been willing to find that employers had a duty to provide an employee with meaningful work in limited circumstances only. For example, a duty has been implied where an employee has a specific or unique skill, and where it was clear that an employee's future employment depended on maintaining their skills through continued exercise of those skills. These categories included employees in the entertainment and sporting industries, such as television producers and professional footballers. Garden leave was said to blunt their skills.

Blackadder suggests a willingness to find that an employer has this obligation for a much larger category of employees. The court found that the obligation to furnish an employee with meaningful work will apply to most employees, including meatworkers (as was the case before the court).

Fortunately, the court recognised that the parties can agree up front as a term of employment that garden leave is legitimate. Unfortunately, other cases considering garden leave have tended to analyse garden leave as a defacto restraint of trade, difficult to enforce unless the clause supports a clear and legitimate interest of the employer. That analysis suggests that a period of garden leave needs to be assessed as if it were a restraint that prevents the employee from taking up another opportunity. Whether the garden leave clause survives that scrutiny will depend on the nature of the employment itself.

Lessons for employers

Essentially, the issue of whether an employer can terminate by payment in lieu of notice or send an employee on garden leave will depend on the terms of the employment contract, agreement or award. Blackadder and Sanders indicate that an employer is unlikely to be able to force an employee to accept payment in lieu of notice or to take garden leave, unless there is a specific enforceable agreement to that effect.