One of Wall Street’s favorite employee leverage tactics — non-compete agreements — is facing a major threat, and there could be far-reaching implications for how the financial industry does business.
The Federal Trade Commission is aiming to ban non-competes, claiming they create an unfair method of competition and thereby violate the Federal Trade Commission Act. It’s unclear what the final rule — expected in April — would look like, but based on a broad-based proposal floated last year, it would upend a major way Wall Street does business.
Not surprisingly, Wall Street is crying foul. “The near-categorical prohibition on non-compete clauses will hurt competition and the economy,” SIFMA, a trade organization for the securities industry, wrote in a comment letter — one of the nearly 27,000 comments the FTC received on its proposal. SIFMA’s board includes executives from most major financial firms including JPMorgan Chase, Morgan Stanley, Bank of America, Citigroup, and Goldman Sachs.
A national ban on non-competes would ripple across the entire economy, as can be judged by the number of major firms that hold board seats at an intellectual property trade group that submitted a comment letter arguing against the FTC approval, including Google, Apple, Pfizer, Exxon Mobil, General Electric, Procter & Gamble, General Mills and Nike. An analysis by the Economic Policy Institute in 2019 found that almost half of employers nationwide have some employees on non-competes. While difficult to provide a precise number, EPI’s survey work estimated between 27% to 46% of all private sector workers being subject to some form of a non-compete.
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But it’s also clear that Wall Street firms are under particular attention for the practice. Industry interests were among the opponents to a New York bill, recently vetoed by Governor Kathy Hochul, that would have banned all non-compete agreements in the state. California, where many of the tech giants are based, already has strong legal provisions against the use of non-competes, and its existing worker protections were recently enhanced. But even in the largest state economy in the U.S., companies have found workarounds, and the EPI found that many employers still use non-competes that would likely be overturned by courts if challenged.
The FTC effort puts Wall Street in a precarious position that’s already been tested by Covid, said Laurie Chamberlin, head of LHH Recruitment Solutions for North America. With major Wall Street firms already having among the most unpopular back-to-work policies in the market, “Wall Street is already in a position where they are recognizing they don’t have all the hands they had before,” Chamberlin said.
Here’s how things could shape up for Wall Street if the FTC’s proposal is enacted:
Existing work precedents that could shape a final rule
This is anybody’s guess, but attendees at the American College of Emergency Physicians’ annual meeting recently got a taste of the aggressive posture being taken by FTC chair Lina Khan’s perspective when it comes to an outright ban. “I’ll be honest, the overwhelming number of comments are firmly in support of the FTC proposal to ban non-competes across the board. And so, we take that very seriously,” Fierce Healthcare reported Khan as saying in October.
It’s also possible the FTC could decide to tailor the rule more narrowly, similar to what states have done to restrict the use of non-competes, said David Fisher, a labor and employment partner at Davis+Gilbert.
Massachusetts and Oregon, for instance, have “garden leave” provisions. These require employers to compensate workers, post-employment, while a non-compete is in force. Washington, meanwhile, has limited the permissible duration of non-compete clauses to 18 months. Massachusetts and Oregon have a one-year limit.
“There are many ways they could craft this rule to recognize the value that non-compete agreements bring … while at the same time protecting employees subject to them and their ability to earn a living and protect their families,” Fisher said. “There is a middle ground there that this rule doesn’t seem to acknowledge as currently drafted.”
An FTC spokesperson declined to comment other than to say that the agency would likely take action on the proposal in April.
Legal challenges are likely, up to Supreme Court
Industry participants expect legal challenges to ensue, claiming, among other things, that the FTC doesn’t have the constitutional authority to engage in this type of rulemaking, an argument that legal professionals say could hold weight with the current Supreme Court.
“I fully expect there to be immediate legal challenges,” said Juan A. Arteaga, partner at law firm Crowell & Moring.
Challengers would likely ask for a motion to stay enforcement of the rule while the case gets litigated.
Wall Street firms have serious concerns that an outright ban on non-competes could be detrimental for business. “If you have employees who have access to very sensitive proprietary information and they can just turn around and work for your biggest rival, that’s a real concern,” Arteaga said.
Unhappy employees should be identified now
Certainly, if the FTC’s ban goes through, it will allow for greater movement among roles on Wall Street — especially within M&A and sales and trading where these types of non-competes are common, said Paul Webster, managing partner for North America at the recruiting firm Page Executive.
That’s why, while the proposal is still pending, Wall Street leadership should take a hard look at employee engagement and satisfaction so they aren’t in a position to have “a mass exodus because people are unhappy working there,” said Matt Shore, chief executive of StevenDouglas, a Wall Street recruiting firm.
Shore recommends Wall Street firms undertake a thorough competitive analysis at every level in every department to ensure they are market competitive. This analysis should include benefits, paid-time-off policies, maternity benefits, career mobility and employee satisfaction surveys. This is true even if the FTC’s proposal faces legal challenges. “You can’t control whatever laws and rules are going to come down. What you can control is the environment employees are working in and your compensation structure,” he said.
Impact on stock compensation, salary, bidding wars
If top talent — no longer encumbered by non-competes — starts to leave, you’ll start to see more competitive compensation packages being offered to secure top talent, said Kareem Bakr, managing director at the recruiting firm Phaidon International. Firms might have to sweeten compensation packages for individuals that are likely to be wooed away, or be willing to play ball in terms of a counter-offer. This could lead to “pretty aggressive bidding wars,” he said.
Wall Street can turn to other tools like deferred compensation to discourage employees from leaving. The industry could also increase the use of stock or options to encourage stickiness. These are common tools already in use today, but they may be used even more if non-compete agreements disappear, Webster said. Higher compensation is also an option. If everyone else is paying $500,000, and you can offer $800,000, the likelihood of someone joining and staying is higher, Webster said.
Firms might also have to become more flexible with their post-Covid in-office policies, Webster said. If it’s more of a free market, candidates have more leverage to go to another employer who offers them more flexibility, Webster said. Even if firms like JPMorgan Chase and Goldman Sachs can continue to demand five days in the office because of their stature, 90% of the firms would likely have to allow more flexibility, he said.
Even if the FTC rule goes through, Wall Street firms still have options to protect their business.
“There is room for businesses to have agreements that will protect their proprietary information, trade secrets and intellectual property,” said Leslie John, partner with law firm Ballard Spahr. Many companies use non-solicitation agreements and non-disclosure agreements, in addition to non-competes, to bind employees who have access to trade secrets and other proprietary information. “So even if the non-compete agreement were to go away, they would still be bound by other contractual agreements that are enforceable,” John said.