The US Federal Trade Commission wants to kill US non-compete clauses, which are highly unpopular with everyone.

Well . . . almost everyone. Sure, the FTC’s examples are disturbing, as are many of the 4,700-something comment letters so far submitted on the topic: doctors and nurses forced to leave their communities to practice, for example, and security guards banned from going to a similar job anywhere within 100 miles.

But all of this misses an important question for Alphaville’s readership: is this the end of garden leave in the US?!

Garden(ing) leave, for those who have stumbled upon this blog without working in the financial industry, is when someone gets paid to not work. An employer keeps a worker on payroll for months — or even years, in extreme cases — before they move to a new job. The idea is that, in time, they won’t be able to pass along the most sensitive secrets of their old job to their new employer.

There’s a reason for that in finance, at least; hedge funds are highly secretive about their investment positions, and quant funds about their technology in general. After a certain amount of time away, an employee’s knowledge becomes less helpful for competing with their old firm.

To a normal person, this type of leave seems like a really nice deal. But we know it’s not universally popular among Americans hyper-ambitious finance types, however: enough people complained last year to fill a 3,000-word Insider piece, which included the fact that Citadel now will only pay part of their employee’s salary if that employee takes a job in another industry while they’re on leave.

One could argue that the social implications of this are significantly less important than the other industries where non-competes are used. Unlike a doctor or nurse, no one’s physical health is affected when a quant spends a year away from work, other perhaps than the quant’s.

In 2014, a survey found, some 20 per cent of US workers were subject to a non-compete. More recent research estimates ~28 per cent at the low end. It seems reasonable to think that most of those workers don’t get paid to . . . not work. (This correspondent knows of at least one US trade publication that got non-compete-happy back in the 2010s. Needless to say, the writers were not paid for their non-compete periods, meaning they were pushed into public relations.)

Still, it would be remiss not to work through the finance angle. So we spoke with an expert: Elizabeth Wilkins, director of the Office of Policy Planning at the FTC.

First, we asked, how broad is the FTC’s mandate to enforce this rule?

“One important piece of this puzzle is that . . . it only applies to industries that fall within the jurisdiction of the FTC. There’s an exemption in the FTC’s jurisdiction for banks, savings and loans, and federal credit unions,” she said. “The rule, if it were finalised, wouldn’t apply to those institutions. It would apply to nonbank financial institutions, fintechs, things like auto-finance companies . . . it also applies to bank subsidiaries and affiliates.”

That latter group presumably includes the bank broker-dealers that are classified by the Fed as bank subsidiaries, which would mean it covers at least some sellside traders.

Is a non-compete still banned if a worker stays on payroll during their non-compete period? In the language of the FTC’s proposed rule, a non-compete is defined as: “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”

Wilkins said she didn’t want to “speculate on something in a specific contract that I am not seeing. If the person is still employed, it’s not a post-employment restriction. But it depends on how these are structured.”

Specifically, the FTC’s proposed rule uses a “functional definition of non-competes, to ensure that the definition is applied broadly,” she added. “We say that the ban applies to non-competes, and de facto non-competes, meaning other types of arrangements that functionally prevent the worker from taking another job in the industry.”

It isn’t clear whether a year of garden leave functionally prevents anyone from taking another job; as Wilkins says, it probably depends on the contract.

But wait — what does all of this mean for non-solicits and non-disclosure agreements? Does this mean a trader could lift a strategy and investor list whole and transplant them into a new firm?

Not really, says Wilkins. “The ban is not intended to cover your garden-variety non-solicit. That’s a different kind of arrangement. We have this functional definition, so you could imagine a non-solicit that’s so broad you couldn’t possibly [get a new job]”, but in general, “non-solicits are pretty different.”

The FTC’s proposal backs this up:

. . . the definition of non-compete clause would generally not include other types of restrictive employment covenants — such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements — because these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. However, under the proposed definition of “non-compete clause,” such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.

So there you have it! The FTC’s rule doesn’t affect garden-variety nonsolicits or NDAs, and while it could affect garden leave, depending on the contract, it won’t if you’re working for a bank. But it could if you’re working as a trader at a bank’s broker-dealer subsidiary. Simple as.