Some "garden leave" agreements that Wall Street firms use to protect their secrets are expected to survive a new noncompete ban from the Federal Trade Commission.
But some won't, according to employment attorneys.
The FTC’s ban leaves "an open question" as to whether all garden leave provisions would be enforceable, said Chris Marquardt, head of Alston & Bird's labor and employment group.
The new FTC rule announced last week could restructure the balance of power in the American workplace by making it easier for millions of US workers to leave their existing jobs to work for a competing company or to start their own.
But the impact is much less clear on Wall Street, where companies rely on garden leave contracts to keep their secrets intact.
Banks, hedge funds, money managers, or private equity firms will pay outgoing employees to take leave and not work for a certain period — a period long enough that sensitive information about a pending deal or trade can’t be shared with a rival firm.
These garden leaves can last for six months or even a year.
"You're basically sitting on the bench," said Marquardt of Alston & Bird.
The key to whether these agreements get the thumbs-up from the federal government may be whether a firm satisfies the FTC's version of paying that worker their "same" wages and benefits during the required leave.
The FTC's rule says agreements are permitted where a worker remains "employed and receiving the same total annual compensation and benefits on a pro rata basis."
Some Wall Street firms have been reducing pay during garden leaves, and those agreements could be invalidated, according to Reed Smith attorneys Mark Goldstein and Veronica Miclot.
The FTC said it's OK to exclude bonuses and other incentive-based compensation from garden leave compensation.
However, Reed Smith's Samantha Grant said employers would be wise to clearly define prerequisites for earning such compensation to ensure they're inapplicable to workers on garden leave.
If an employee actually quits during his or her garden leave, that could potentially render the agreement invalid too.
"I suspect that the FTC would consider some garden leave periods to be post-employment noncompetes and take the position that they are invalid and unenforceable under the rule," Marquardt said.
The FTC's comments indicate that, generally, it would not invalidate garden leave terms. But that won’t apply across the board; it will likely depend on the specific language of a company’s garden leave provision and other factors.
The FTC defines noncompetes as agreements that expressly prohibit workers from seeking or accepting other work after their employment ends.
What is clear is that traditional banks will maintain more control over their workers than, say, private equity firms or hedge funds or asset managers.
That’s because banks are exempt from the FTC’s new rule. So are certain nonprofits such as healthcare providers and stockyards.
There is another important exception. The FTC’s rule doesn't apply to noncompete agreements already reached with company CEOs, presidents, and senior business executives who have "policymaking" authority and are paid more than $151,164 per year.
Some expect companies beyond the finance industry to gravitate to more garden leaves if the FTC’s rule survives legal challenges and goes into effect later this year, as planned.
"It is a way to sort of work around unfavorable law regarding noncompetes," said Gregory Brown, an employment litigation shareholder with Hill Ward Henderson.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
Click here for in-depth analysis of the latest stock market news and events moving stock prices.
Read the latest financial and business news from Yahoo Finance
