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The Basics of Garden Leave And Why Careful Tilling Is Needed

August 24, 2011

By Paul Hastings Professional

When it comes to employee terminations, employers have several alternatives by which to structure any severance-related pay that they desire to provide. A terminal leave approach may appeal to employers who want to delay an employees termination date, perhaps to allow for further vesting of stock awards or retirement benefits or to extend the period when COBRA1 health insurance coverage will begin. Terminal leaves come with some baggage, however, because they trigger complex risks under Section 409A of the Internal Revenue Code, and could create disputes with health and welfare insurance providers when policies tie coverage to active employee status. At the other end of the spectrum, an accelerated termination date may be desired in order to assure that an exiting employees execution of a claims release does not leave the door open for claims of employment discrimination during atail-end period of terminal leave or wind-up services.

Garden leave falls somewhere in between by continuing the employment relationship, albeit sometimes inactively, for a transition period, while coincidentally stalling the employee from joining a new employer. The structuring of garden leave severance implicates subtle, yet material, issues that include drafting for maximum enforceability, cost-benefit analyses, and compliance with Section 409A. This last issue has become the latest trap for the unwary.

Reproduced with permission from Pension & Benefits Daily, 164 PBD, 08/24/2011. Copyright  © 2011 by The Bureau of National Affairs, Inc. (800-372-1033)http:// www.bna.com