Through HB22-1317, concerning Restrictive Employment Agreements (the “Act”), the Colorado Legislature delivered sweeping changes to C.R.S. § 8-2-113 – the statute governing noncompete agreements in the state of Colorado. Among the changes made to existing law, the Act altered the statutory exceptions that may allow for an enforceable restrictive covenant, such as a noncompete agreement. Additionally, the Act created notice requirements employers must follow if they wish to enter a restrictive covenant with an employee. Finally, the Act contains provisions governing enforcement, penalties for employers in violation of the statute, and remedies for aggrieved current and prospective employees.
Narrowed Exceptions to Enforceability and Compensation Tiers
Section 8-2-113(3) clarifies that certain types of employment covenants are permissible, including covenants permitting an employer’s recovery of expenses associated with employee training, reasonable confidentiality provisions, covenants for the purchase and sale of a business or its assets, or provisions requiring repayment of a scholarship provided to an apprentice if the apprentice fails to adhere to the scholarship’s terms. C.R.S. § 8-2-113(3)(a)-(d).
Specific to restrictive covenants, the Act maintains the pre-existing baseline that all noncompete agreements are void and unenforceable, unless an exception applies. § 8-2-113(2)(a). The Act drastically altered the various exceptions that may render a noncompete enforceable. Specifically, the old law permitted restrictive covenants for management and executive personnel, which the Act did away with.
Now, restrictive covenants are permissible only to the extent they are in place for the protection of an employer’s trade secrets, and only to the extent certain earnings thresholds are satisfied. Specifically, employees that are considered “highly compensated,” may be subject to a noncompete. Whether an employee is considered “highly compensated,” depends on whether that employee falls within the threshold earnings amount as determined by the Colorado Department of Labor and Employment. As of the time of this E-Brief’s drafting, highly compensated employees include those earning equal to or more than $101,250 per year. Even if an employee is highly compensated and may lawfully be subjected to a noncompete, the noncompete may be no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets. § 8-2-113(2)(b).
For the next compensation tier, the Act specifically addresses nonsolicitation agreements – something that, prior to the Act, had been relegated to case law. Employees earning 60% of the highly compensated employee threshold amount may be subject to customer solicitation prohibitions. Like noncompetes for highly compensated employees, customer nonsolicitation provisions may not be any broader than reasonably necessary to protect the employer’s trade secret information. § 8-2-113(2)(d). As of this E-Brief’s drafting, employees within this compensation tier include employees earning from $60,750 to $101,249.
The Act does not permit any sort of restrictive covenant for employees earning below $60,750. However, as noted above, these employees may still be subject to other forms of employment agreements, including confidentiality agreements.
In addition to the Act’s compensation-based restrictive covenant exceptions, the Act also creates notice requirements for noncompete agreements. Per the Act, employers must provide notice to employees if the employer wishes to enter a noncompete with the employee. § 8-2-113(4). Concerning form, the notice must be provided on its own, in a separate document from any other covenants being provided to the employee, and the notice must also be provided along with the terms of the noncompete. The time requirements differ for prospective and current employees. For prospective employees, the notice must be provided before the prospective employee accepts the employer’s offer of employment. For current employees, the notice must be provided 14 days before the earlier of: (a) the effective date of the noncompete agreement, or (b) the date of any additional compensation change in the terms and conditions of employment that provide consideration for the covenant. If an employer fails to follow these notice requirements, such failure may render an otherwise enforceable restrictive covenant void and unenforceable. § 8-2-113(4)(a).
Enforcement, Penalties, and Remedies
The Act contains enforcement, penalties, and remedies provisions. The Act prohibits employers from entering into, presenting to workers or prospective workers, or attempting to enforce any covenant not to compete that is void or unenforceable under § 8-2-113. Any such violation may subject the employer to actual damages, and a $5,000 fine for each violation. Actions against employers allegedly in violation of the statute may be brought by workers or prospective workers, or by the attorney general. The Act also makes available to workers and prospective workers actual damages, reasonable costs, and attorney fees in private actions brought under § 8-2-113. Additionally, the Act clarifies that it is a class 2 misdemeanor “to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place the person sees fit.” § 8-2-113 (1.5).
Venue and Choice of Law
The Act mandates that a covenant not to compete for a worker who primarily resided or worked in Colorado at the time of termination shall be governed by Colorado law, even if the covenant at issue indicates differently. Additionally, covenants not to compete for workers primarily working or living in Colorado at the time of termination cannot require the worker to adjudicate the enforceability outside the state of Colorado.
Suggestions Moving Forward
To ensure compliance with the new law, employers should evaluate the intended purpose and scope of their restrictive covenant agreements and develop and implement notice templates and procedures consistent with the new law. If you have any questions on this topic, or need assistance in navigating the updated law, please contact our Labor and Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to keep up with the latest HR news, tips, and updates.