On April 23, 2024, the Federal Trade Commission issued its final rule banning noncompetition (noncompete) provisions for all workers as an unfair method of competition.   The U.S. Chamber of Commerce has vowed to challenge the ruling, but employers need to start understanding the law and how it will impact their documents and their worker’s rights.

What is the New Rule?

Under the new rule, any provision which prevents a worker from accepting similar work, or starting a business, after the conclusion of the employment (noncompete) will no longer be enforceable.  In fact, the rule requires that after the effective date, employers may not enter into, or even attempt to enter into, enforce or infer that a worker is subject to a noncompete provision. The rule applies regardless of whether the worker is an employee, independent contractor, extern, intern, volunteer or apprentice.  In addition to not enforcing the noncompete provision, failure to comply with the new rule may result in civil penalties.  The effective date is currently uncertain, but will become effective 120 days after publication in the Federal Register.

What are the Exceptions?

There are a few, limited exceptions to the application of the new rule.  The exceptions include:

  1. Existing Causes of Action. The new rule does not apply if the cause of action (breach) of the noncompete accrued prior to the effective date.  Thus, if an employer has a claim for a breach of a noncompete before the effective date, the employer may enforce the provision.  However, because this is an exception to the general rule, we expect that courts will find any number of reasons to invalidate the noncompete provision as against public policy under Arizona law.
  2. Pre-existing Noncompete with a Senior Executive. Existing noncompete provisions in agreements entered into prior to the effective date of the ban will be enforceable if it applies to an executive who: (a) is in a policy making position; and (b) who earns at least $151,164 annually.  Payments for medical or life insurance, retirement plans or other fringe benefits are excluded from the calculation of compensation.  Existing noncompete agreements with these executives will remain enforceable, but such provisions will still have to qualify under Arizona law as being reasonably necessary to protect the employers interests.  Again, we believe that courts will be more likely to invalidate these provisions as against public policy under Arizona law.  After the effective date, it will be illegal to incorporate noncompete restrictions in an agreement with a worker.
  3. Franchisees with respect to the Franchisee-Franchisor relationship. The new rule does not apply to franchisees in the context of a franchisee-franchisor relationship.  In this situation, the definition of “worker” specifically excludes a franchisee, so the franchisor may continue to enforce geographic or other prohibitions on the franchisee’s ability to perform similar work after conclusion of the relationship.
  4. Sale of Business. A noncompete agreement associated with the sale of substantially all of the stock or assets of a business are not subject to the ban.  These agreements are enforceable and may be used in the future. However, the provision will have to be narrowly tailored to protect the goodwill of the business purchased to be enforceable under Arizona law.

How are Existing Agreements Impacted?

Except for the limited exceptions set forth above, the new rule renders most existing noncompete provisions unenforceable.  In addition to being unenforceable, employers will have a duty to notify certain workers that noncompete provisions will not be enforced against them after the effective date.

We recommend: (1) reviewing your entity’s documents and agreements to identify which agreements have noncompete provisions in them; (2) organizing the agreements into four categories:

(a) agreements which are banned under the law;

(b) existing agreements which rights are already accrued;

(c) existing agreements with qualifying senior executives; and

(d) agreements related to a franchise or purchase of a business.

And take the appropriate action for each category as follows:

a. Banned Agreements. Employers must provide notice to workers who do not qualify for the Senior Executive exception that their noncompete agreements will not be enforced.  While the rule provides a sample notice that satisfies the law, the sample does not give the whole picture and should be revised to fit your organization. The notice must be sent to the worker’s last known street address, email or telephone number via text message.

b. Rights Already Accrued. If the facts and circumstances are that a noncompete provision has already been breached, the provision is enforceable to the extent it is valid under Arizona law.

c. Senior Executives. Existing Agreements for Senior Executives are still enforceable. However, in the future, noncompete provisions will need to be stricken from any agreements with the employee.

d. Franchise or Purchase of a Business. Noncompete provisions related to a franchise or the purchase of a business are not banned by the law, remain enforceable and may be used in the future. No notice is required and the provisions remain enforceable to the extent it is enforceable under Arizona law.


What Else Should Employers Do Now?

The new rule prohibiting noncompete provisions will cause employers to revise their employment documents and protocols.  In addition to categorizing its current agreements, employers should take a few additional steps to comply with the new rule to protect its customers and goodwill.  A few steps include:

  • Deleting noncompete provisions from all worker related documents before the effective date.
  • Strengthening confidentiality provisions and replacing your noncompete provisions with strong nondisclosure, nonsolicitation and nonuse provisions in all worker related documents such as employment agreements, employee handbooks, policy and procedures manuals and other intake documents signed by new employees.
  • Educating current employees on the new rule and its application.
  • Marking confidential, proprietary and trade secret information as such and limiting access to owners or key employees.

These are just a few examples of the steps that will be required to comply with the new rule. If you would like DeAngelis Legal to review your worker related documents and provide recommendations, just give us a call at 480-281-1512.