Q&A Can I pay an employee in lieu of notice or put them on garden leave, if they’re leaving to join a competitor?

Q: I am concerned about one of my employees who has just resigned to join a competitor. They are entitled to three months’ notice, but I want to keep them away from the business and our clients. Can I pay them in lieu of notice or put them on garden leave?

A: The employee’s contract of employment will stipulate what you can do.

If the contract of employment contains a payment-in-lieu-of-notice clause, then this means you have the right to immediately terminate the employee’s employment at any point after notice of termination has been served by either party. This means that the employee can be immediately exited from the business. However, they are then usually free to take up employment elsewhere, subject to any restrictive covenants.

If the employment contract contains a garden leave clause, then you have the right at any point after notice of termination has been served by either party, to require the employee to remain at home, but they are still an employee during this time. This means that they cannot work for another employer during this time, though they will still be entitled to their usual salary and benefits during the notice period.

If there is no right for the employer to make a payment in lieu of notice, then, unless they agree to it, technically you will be acting in breach of contract if you purport to terminate the employee’s employment with immediate effect. The employee would then potentially have a claim for breach of contract for the loss of their salary and benefits during their notice period. However, any payment you pay, in respect of the notice period, will be offset against any such claim. This means that the employee may not have suffered any loss, so it would be pointless to bring a claim for breach of contract.

There are three key points to bear in mind when terminating in breach of contract in this way:

1. If the employment contract contains restrictive covenants but no right for the employer to make a payment in lieu of notice, the covenants will not be enforceable if you breach the employment contract by making a payment in lieu of notice. If your employment contract contains restrictive covenants (which are standard in the recruitment sector), then you should ensure it also includes a payment-in-lieu-of-notice clause.
2. If you terminate the employment contract in breach in this way, any payment you make in lieu of the notice period may be deemed to be compensation in lieu of notice, rather than a payment in lieu of notice. A payment of compensation in lieu of notice may benefit from being paid free of tax and National Insurance contributions up to £30,000. You are recommended to take legal advice to determine whether this may apply.
3. If you make a payment in lieu of notice and do not continue to provide the employee with the benefits they are entitled to receive and the employee subsequently suffers a loss as a result, in theory they could bring a claim for such losses. For example, if you provide life assurance at four times salary and the employee subsequently dies during what would otherwise have been their notice period, the employee’s estate may have a claim against you for the loss of that benefit.

In the absence of a right to place an employee on garden leave, the safest option is to seek the employee’s agreement to this. In my experience, most employees are happy to take paid leave from the office. If, however, the employee is resisting this, then there may be grounds to compel the employee to remain at home on garden leave, but I would recommend taking specific legal advice to determine whether this is reasonable or not as some employees have an implied right to work. You should also consider amending your employment contract to include the right to place employees on garden leave.

The right to make a payment in lieu of notice and to place an employee on garden leave are key rights employers in the recruitment sector should ensure they have. If these are absent from your contract, I would recommend having your contract reviewed to ensure it is suitable for your business. In addition, you should also consider including restrictive covenants which protect you beyond the life of the notice period. Well-drafted and tailored restrictive covenants can be enforceable and can help protect your business in the long run.