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Business News/ News / For Traders, the FTC Ban on Non-Compete Clauses Comes With Big Catches
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For Traders, the FTC Ban on Non-Compete Clauses Comes With Big Catches

Wall Street traders and money managers could be in for disappointment if they’re hoping a new US ban on non-compete clauses will clear the way for them to spring into the arms of higher-paying competitors.

For Traders, the FTC Ban on Non-Compete Clauses Comes With Big CatchesPremium
For Traders, the FTC Ban on Non-Compete Clauses Comes With Big Catches

(Bloomberg) -- Wall Street traders and money managers could be in for disappointment if they’re hoping a new US ban on non-compete clauses will clear the way for them to spring into the arms of higher-paying competitors.

The Federal Trade Commission’s sweeping prohibition on efforts to prevent staff defections makes an exception for mandatory garden leaves. Those have become a common facet of finance-industry contracts for employees privy to sensitive information, such as knowledge of a money manager’s trading strategies or pending deals.

As long as a firm keeps paying a departing employee normal wages during a required garden leave, it isn’t a non-compete clause, according to a copy of the rule published by the FTC. 

That’s because “the worker continues to be employed, even though the worker’s job duties or access to colleagues or the workplace may be significantly or entirely curtailed," according to the rule.

Concerned that many companies are stifling competition for talent, the FTC voted on Tuesday to adopt a near-total ban on clauses that prevent workers from switching jobs within an industry. The measure, encouraged by President Joe Biden, is already running into legal challenges from business groups, which say it undermines efforts to protect confidential information.

Read More: Chamber of Commerce Sues to Block FTC’s Non-Compete Ban

Some officials were especially concerned about the number of low-wage workers who were subject to non-competes. Indeed, the rule doesn’t cover senior executives in a “policy-making position" who earn more than $151,164.

For bank staff, there’s another rub: They are outside of the FTC’s jurisdiction. But employees at non-banks such as hedge funds, private equity firms and traditional asset managers would be covered.

Go Surfing

Wall Street garden leaves, a concept popularized in the UK, often last a few months, but in some cases drag on longer. The cooling-off period helps to ensure that a departing employee can’t take knowledge of current transactions to their next job. Theoretically, the time could be spent in the garden.

The FTC rule — if it survives — will encourage more companies to adopt garden leaves in lieu of non-competes, said Peter Steinmeyer, an attorney who advises financial-services firms.

“There is relatively little litigation over garden-leave clauses because people think they are fair," he said. “Who wouldn’t like to get paid to move out to Hawaii and learn how to surf for 180 days? It is a pretty good deal."  

The FTC said it received diverging opinions on how to handle garden leaves. Some commenters argued the practice amounts to a non-compete clause, because it still hinders employees’ ability to jump to competitors. Some pushed for curbs on the cooling-off period. Others urged the agency to make clear that garden leaves are allowed, because there is no “legal obligation on the part of the worker to refrain from competing."   

There may still be a benefit for financial professionals. In recent years, some firms have pressed staff to accept garden leaves that pay only a fraction of their wages. 

To avoid being deemed a non-compete clause, the FTC’s rule says employees must get their “same total annual compensation and benefits on a pro rata basis."

Even then, there may yet be court challenges over issues, including how to define compensation.

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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Published: 25 Apr 2024, 12:11 AM IST
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