Gardening Leave – Avoiding the Thorns!

The recent case of Actrol Parts Pty Ltd v Coppi (No 2) [2015] VSC 694 provides an important reminder to employers on how to manage exiting senior talent through gardening leave. Though described in the case by the Supreme Court of Victoria as “an unfortunate and condescending expression [where] the employer is entitled to direct a resigning employee to go home and tend the garden during the notice period”, gardening leave remains a useful tool for employers. It allows an employer to direct an employee who has resigned or been given notice of termination to stay away from the workplace during the notice period (while remaining on the payroll) thereby preventing the employee from commencing employment with a competitor while also maintaining their implied duties of loyalty, fidelity and confidentiality.

In the case, Mr Coppi had been employed as the National Sales Manager of Actrol, a refrigeration wholesaler, since 2010. In August 2014 he tendered his resignation and Actrol directed him to go on gardening leave for the duration of his four week notice period. During this time, Actrol required him to return his company-issued motor vehicle, iPhone, iPad and laptop computer. Mr Coppi, believing that Actrol had no right to place him on gardening leave and had repudiated the contract of employment by unilaterally removing his contractual benefits, commenced employment with Totaline, a competitor of Actrol’s, nine days before the end of his notice period.

Actrol launched legal action claiming that Mr Coppi had breached his contract’s implied duties of loyalty and fidelity by starting work with another company during his notice period and trying to poach an Actrol employee. Allegations of confidentiality breaches were also initially made, but these were not pursued in the absence of evidence that confidential information had been shared or misused. While the case involved several legal issues, the primary question for the court was “whether the plaintiff was entitled to place the defendant on leave with pay during the resignation notice period.”

In the absence of any right at common law or under the Fair Work Act 2009 (Cth) enabling an employer to direct an employee not to work, the general rule is that gardening leave must be conferred by an express term in an employment contract. In Actrol there was no such express term, but the court found that the term could be implied into Mr Coppi’s contract because “it was entirely reasonable for Actrol to protect itself from the risk of harm that might flow from [Mr Coppi] performing normal duties in the particular factual circumstances.” Those particular circumstances included the fact that Mr Coppi, as a sales manager, was directly responsible for a number of sales representatives within a territory.

Furthermore, the company had reason to believe that Mr Coppi would go and work for a competitor. The court therefore found that the gardening leave term was necessary to give business efficacy to the contract because “without it, Actrol would have to maintain Mr Coppi in a position where he would have continuing contact with its sales representatives and confidential information.”

Despite finding that gardening leave was “reasonable and equitable” in the circumstances, the court went on to find that Actrol had repudiated the contract of employment when it withdrew Mr Coppi’s work car and electronic devices (because this amounted to a unilateral reduction in his salary package). Mr Coppi argued that, by taking up employment with Totaline, he had accepted Actrol’s repudiation and thereby terminated the contract of employment. Actrol contended that the contract had not been brought to an end because Mr Coppi had never directly communicated his acceptance of its repudiation. Interestingly, the court rejected Actrol’s argument and held that “the election of the innocent party [i.e. either acceptance or rejection of the repudiation] can be communicated to the defaulting party directly or indirectly and by words or conduct.” In this case, the court accepted that
Mr Coppi’s acceptance of Actrol’s repudiation was indirectly communicated to the company when its managing director telephoned Totaline and recognised Mr Coppi’s voice on the answering machine.

In terms of an outcome to the case, the court has scheduled a further hearing to decide what, if any relief, should be awarded to Actrol.

Lessons for Employers

• Even though the court in Actrol implied a gardening leave term into the contract of employment this will not always be the case. It is therefore prudent for employers to ensure that there is an express provision in their contracts of employment which entitles them to place an employee on gardening leave for all or part of the notice period.
• Employers also need to be aware that in exchange for an employee’s duty of fidelity while on gardening leave, the employer must keep the employee on its payroll and the employee must receive all contractual entitlements including benefits such as a car or phone. As seen in Actrol, removing any valuable benefit which forms part of an employee’s salary package could amount to a repudiation of the employment contract.
• As businesses are settling into the new year it is a good time to review your employment contracts including considering whether your employment contracts currently contain adequate and enforceable provisions which protect your business from departing employees.