Legal battlelines are already forming over the FTC's move to clamp down on non-compete clauses in employment contracts – something that affects sectors including banking, investment and wealth management.

(Editor’s comment: This is a big story for professional services firms, including those in banking, wealth and investment. The FTC is taking a bold step, one might argue, in getting involved in how millions of Americans’ work contracts are structured. Is this regulatory overreach? As is the way of such matters, when the US moves, the rest of the world often follows, so this action will be watched in other jurisdictions. We are interested to hear what executive search firms have to say about this; by all means contact us. Email tom.burroughes@wealthbriefing.com)

Bankers and other white-collar professionals face a sweeping change to the kind of work contracts they sign after the US Federal Trade Commission pushed ahead with banning most forms of new non-compete clauses in contracts.

These agreements, which cover about 30 million people, are a staple feature of the North American wealth sector – as they are in many other markets. Already, there are reports that the FTC’s decision will be challenged in the courts. Challenges might end up going to the Supreme Court. 

On one side of the aisle, certain traders and bankers could quit jobs more easily and move to other firms; on the other, business leaders may worry that it will add to costs, possibly causing lawsuits between companies and workers who are trying to leave. It also throws up the issue of how businesses defend trade secrets and forms of intellectual property in certain instances. Opponents say government has no business trying to micro-manage terms and conditions of employment contracts.

The Alternative Investment Management Association (AIMA), to give one example, is unhappy about the FTC’s action. “We argued strongly against this proposal but aren't surprised how the final rule turned out, given FTC messaging on using non-competes,” it said in a note. 

AIMA notes that unlike the January 2023 proposed move by the FTC, the latest iteration of its policy does not ban non-competes outright. Instead, it bans new NCs for all workers,  including senior executives, as of the effective date (120 days); existing non-competes can remain in effect for senior executives but are unenforceable for all other workers after the effective date.

Another twist is that the FTC defines the term “senior executive” as workers earning more than $151,164 annually who are in a “policy-making position.”

Even though their senior figures are nominated by the President and confirmed by the Senate, up for debate is whether agencies such as the FTC, should be taking the kind of positions that ought, arguably, be matters for Congressional lawmakers instead? 

The FTC has argued that its actions are justified on grounds of competition. “The Treasury Department’s 2022 report highlights several ways in which a lack of labor market competition harms workers, noting how employers’ ability to restrict worker mobility can decrease wages, reduce benefits, and worsen working conditions. As such, promoting fair competition in labor markets is a key priority for the Commission,” it argued in a briefing note about the change. 

“Evidence shows that non-compete clauses bind about one in five American workers, approximately 30 million people. By preventing workers across the labor force from pursuing better opportunities that offer higher pay or better working conditions, and by preventing employers from hiring qualified workers bound by these contracts, non-competes hurt workers and harm competition,” the FTC said. 

One rejoinder to the FTC is that in an efficient free market, if a person signs a contract with a non-compete clause in it, then unless that contract can be proven to be signed under duress, then it is still a consensual agreement. How many such contracts are signed depends to some extent on the supply and demand for types of labor. Certain parts of the labor market are tight, and it is harder to impose non-competes in some fields than others. 

The US Chamber of Commerce is angry about the proposed change, and has sued the FTC.

“The Federal Trade Commission’s decision to ban employer non-compete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” a statement last week from president and CEO Suzanne P Clark said. “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Non-compete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban non-compete agreements in all sectors of the economy. This decision sets a dangerous precedent for government micro management of business and can harm employers, workers, and our economy,” Clarke added.

AIMA, for example, argues that this is a “big deal” for asset managers: “Non-competes are incredibly important to many fund managers. Non-competes are commonly used to protect their businesses and IP.”

It continues: “It is unfortunate to see the FTC proceed with a categorical ban on non-competes from now on rather than adopt any of the many practical alternatives that AIMA and others advocated for. The rule is intended to address all US industries uniformly. Although industries can share basic traits, there is little else in common between a sandwich shop and a private fund manager. Regulation should acknowledge those differences and address them accordingly. This rule does not.”

The rule will take effect 120 days after it's posted in the Federal Register and already there are litigation actions are under way to try to block the FTC’s move.