Garden Leave in China

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2019-10-14 | 来源:劳动法苑


I. Summary of Garden Leave System

A. The Concept and Characteristics of Garden Leave System 

"Garden Leave" usually means that an employee is required to notify the employer a certain period of time prior to the formal resignation, and it is the employer's choice whether or not to initiate the "Garden Leave" clause to allow the employee to enter the period of paid leave ("take care of their gardens"). It could also be the employer giving notice and requesting an employee to have a paid leave during notice period before termination of labor contract. During garden leave, the employee is still employed by the employer, receiving normal pay, and not allowed to work for the employer's competitors. The garden leave period is usually 30, 60 or 90 days, possibly extended to 120 days or 180 days, but in general, the maximum is no more than 180 days. Employees are usually senior executives who are important to the employer's strategic considerations. During garden leave, the employer generally can make the employee assume the following obligations by reaching prior agreement:

i.Remove employees from their active duties.

ii.Exclude them from the workplace.

iii.Prevent their contact and communications with staff and customers or clients.

iv.Limit or cut off their access to the employer's computer systems, email, and other documents and information. 

B. Description of Extraterritorial Applications of "Garden Leave" System

Garden leave is well-established and popular in the common law countries, such as the United Kingdom, Australia, New Zealand and elsewhere in Europe. Garden leave is widely used in banking and finance industry. 

In the United States, state courts are still cautious about the widespread use of "garden leave". The relevant case law is underdeveloped. This is closely related to the conservative attitude of the US government towards the traditional non-compete system . In California, Oklahoma, and North Dakota, states well known for protecting the employee's freedom of employment, any non-competition system is illegal.  However, considering that the garden leave clauses have obvious characteristics, such as of shorter period and good salary, compared with the traditional non-competes, it is relatively less burdensome for employees. Thus, many courts are more likely to issue an injunction prohibiting competition during the notice period of the garden leave.

In a civil law country like France, there is no garden leave. In accordance with French law, during the performance of the employment contract (i.e. prior to any notification of termination), employees cannot be asked to remain unoccupied. This would violate the essential principle that it is the employer's responsibility to provide work to the employee, and this could entitle the employee to claim the equivalent of constructive dismissal, having the same consequences as an unfair dismissal. 

II. Analysis on the Localization of "Garden Leave" System

With various China's industries in line with international standards and the continuous deepening of transnational cooperation, more and more local enterprises have begun to introduce the practice of "garden leave" system. For example, some asset management companies stipulate in the labor contract that employees who are senior executives should resign to the company in writing 90 days in advance and enter the "garden leave" until 90 days before they can officially leave the company. Some companies have agreed in the rules and regulations that senior executives should start "garden leave" while they are under compliance investigations or audits. During garden leave, the employees still continue to be paid in full by the company, but no longer undertake specific work affairs, nor do they need to come to the company to go to work. They are strictly abided by the prohibition of non-competition obligations. They shall not join any new company, engage in self-employment or conduct business for others who has a competitive relationship with the employer, or engage in any form of cooperation with competitors. We hereby make the following analysis on the localization practice of this agreement in China.

A. The Legal Effect of "Garden Leave" System

Article 37 of the Labor Contract Law of the P. R. China stipulates the procedure of announcing the resignation of an employee. An employee may terminate the labor contract by giving a written notice to the employer 30 days in advance. Within the probation period, the employee may terminate the labor contract by notifying the employer three days in advance. This is the law gives workers the right to notice resignation.

Therefore, the "garden leave" system in China may be invalidated for violating Article 26  of the Labor Contract Law of the P. R. China.

B. Localization Practice of "Garden Leave" -- Secret-protection Period System

i. Overview of Secret-protection Period System

Secret-protection period means the employer and the employee who knows or possesses the trade secret agree on the advance notice period for the cancellation or termination of the labor contract, and the employee agrees to work for the employer for a certain period of time. During this period, the employer may take appropriate measures to remove confidentiality, and both parties shall still maintain the labor relationship. 

Secret-protection period was first seen in the provisions of Article 2 of the Notice of the Ministry of Labor on Certain Issues Concerning Employee Turnover in Enterprises (No. 355 [1996] of the Ministry of Labor):

"When the employer and the employee who holds the trade secret agree to keep the trade secret in the labor contract, the employer may agree to adjust its work position and change the relevant content in the labor contract before the labor contract is terminated or within a certain period (no more than six months) after the employee proposes to terminate the labor contract;..."

Besides, secret-protection period can also be seen in Article 18 of the Beijing Labor Contract Provisions (Order No.91 of the Municipal Government)  , Article 15.2 of the Regulations of Shanghai Municipality on Labor Contract (No. 58 of Municipal People's Congress Standing Committee Announcement) , Article 27 of the Regulations of Jiangsu Province on Labor Contract (Revised in 2013) (Notice No. 124 of the Standing Committee of the Eleventh People's Congress of Jiangsu Province)  and Article 18 of Notice of People's Insurance (Group) Company of China on <Printing and Distributing Interim Provisions on Personnel Transfer and Resignation of People's Insurance (Group) Company of China> (No.150 [1996])  .

It can be seen that the system of "secret-protection period" is the most similar system to "garden leave" in the local labor law practice in China. Both of them occur during the period of labor relationship, the vacation period is relatively short (about 6 months), and the employees remain on the payroll during the vacation period. If "garden leave" is interpreted as the "secret-protection period", it is possible to be supported in judicial practice.

ii. Trial Opinions on "Secret-protection Period" System

In China's judicial practice, the courts and the labor arbitration committees have two main opinions on the trial of the "secret-protection period" system cases involving commercial secrets:

a) Shall not be supported due to in violation of the relevant provisions of Article 37 of the Labor Contract Law Article 37 of the Labor Contract Law of the P. R. China gives workers the right of notice of resignation. An employee may terminate the labor contract by giving a written notice to the employer 30 days in advance. Therefore, there is no legal basis for requiring employees to submit their resignation in writing to the company 90 days in advance and not formally leave the company until 90 days later. Employees can leave after 30 days, even if they submit their resignation in writing to the company 90 days in advance.

Civil Judgment on Beijing A photoelectric technology Co. LTD vs. Mr. Duan (Case No. 7336 of [2016] BJ 01 Civil) supported this point of view. The court finds that the employee can terminate the labor contract by notifying the employer 30 days in advance with written form. Mr. Duan has fulfilled the statutory notice obligation by giving a written notice to the company on January 12, 2016 to terminate the labor contract due to personal reasons, and he planned to leave his job on February 15, 2016. The company's claim that the secret-protection period shall remain the period of the labor relationship between the two parties is lack of basis, and the court will not accept it. 

b) Shall be supported due to the autonomy of will of both employers and employees

Civil Judgment on Beijing A Bank Co. LTD Beijing Branch vs. Ms. Xu (Case No. 357 of [2018] BJ 02 Civil) supported this point of view. In this case, the bank appeals to claim that the labor contract between the bank and Ms. Xu has not been terminated, and Ms. Xu should continue to perform the obligation of secret-protection period. Ms. Xu did not approve. She mailed a written resignation report to the bank on October 17, 2016…The bank and Ms. Xu have agreed that the six-month period of period of classification is legal and compliant. The labor relationship between the two parties shall be terminated after the expiration of the secret-protection period.

Both parties recognized "Letter of Commitment" has been set forth, the period of six months after Ms. Xu proposed to terminate of the labor contract shall be her secret-protection period. Therefore, the court of first instance correctly determined that the labor relationship between the two parties was terminated on April 19, 2017, and the bank should issue the certificate of termination of labor contract, handle the procedures of archives and social insurance transfer for Ms. Xu.

C. Difference between "Garden Leave" and Non-competes

At present, the "garden leave" system, which has been applied and practiced by Chinese enterprises, is different from China's non-compete system in the following aspects:


By comparison, assuming that the employer and employee agree on the same vocation period, the human resources cost paid by the employer during the period of non-competition will be much lower than the cost incurred during the "garden leave" period.

III. Suggestion

In judicial practice, if the employer and the employee directly agree that "the employee must submit a written resignation notice 90 days in advance", the agreement is often invalid due to the deprivation of the employee's legal right of notice of resignation. We suggest that enterprises should respect China's judicial practice firstly and replace the "garden leave" clause with short-term non-competition agreement, so as to achieve the organic unity of the reduction of human resource cost and the legal compliance of the system.

If the enterprise must use the "garden leave" clause, the employer may consider designing the secret protection period clause in the flexible form of "resignation, negotiation and termination" to reduce the legal risk as much as possible. Specifically speaking, the employer can reach an agreement with the employee in the beginning of signing the labor contract, that if the employee plans to put forward abdication, he or she must put forward in advance 30 days with written form to the employer. Both parties also agree based on the principles of equality, voluntariness, consensus through consultation and good faith that the labor relationship between both parties shall be officially terminated 90 days after the employee submits his resignation in writing.

During such period, the employer maintains the employee's former pay, and have authority to ask the employee to have a garden leave vacation. Although courts and the labor dispute arbitration committees may still consider that such clause excludes the rights of the employee in a disguised manner and invalidate it on the basis of the principles of labor freedom and preferential protection, however, compared with violating the law directly, this agreement is more focused on reflecting the equal consultation between the employee and the employer, as well as balancing labor relations, realizing the rational allocation of labor resources and realizing the principle of labor freedom. It is relatively more likely to be supported. 

IV. Conclusion

As an import product, "garden leave" system has not been recognized yet in China's judicial practice. But in actual business activities, it has been gradually applied by many industries and employers. Employers should note that "garden leave" system is still not widely used even in countries like the United States that values contractual relationship and respects the free market regulation mechanism. Enterprises in China should take full account of the legal risks and avoid blind transplantation.

Editor: Normand Gauthier

Ellen Zhong


Yuge Song



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