The Colorado Legislature recently approved significant changes to the state's noncompetition and restrictive covenants statute. The Restrictive Employments Agreement Act ("Act") (HB 22-1317) is a major overhaul of C.R.S. § 8-2-113, in which Colorado's restrictive covenants restrictions are enshrined.
To be sure, restrictive covenants are still void in Colorado, unless they fall within certain statutory exceptions. These statutory exceptions have been substantially changed or removed altogether by the Act. Among others, the Act has also inserted notice requirements to the statute, violations of which result in a void restrictive covenant, and enforcement and remedies provisions, including statutory penalties, available to both aggrieved workers and prospective workers.
Below is a summary of the most important changes that all Colorado employers and employees should know.
New Prohibitions on Restrictive Covenants
As an initial matter, the Colorado Legislature has removed the management and executive personnel exception for non-compete agreements and augmented the trade secrets exception with an additional compensation requirement. Under the new rubric, a non-compete agreement is permissible with a worker or prospective worker who, at the time the non-compete is entered into and at the time it is enforced, earns an amount of annualized cash compensation equivalent to or greater than the threshold amount for highly compensated workers (which is determined by the Colorado Department of Labor and Employment, and currently set at $101,250). To be valid, the non-compete agreement must also be for the protection of trade secrets and it can be no broader than is reasonably necessary to protect the employer's legitimate interests in protecting trade secrets.
Non-solicitation Agreements
Non-solicitation agreements are now explicitly contemplated by the statute, another big change. After the Act's effective date, non-solicitation agreements will only be valid and enforceable against workers who earn 60% of the threshold amount for highly compensated workers (or $60,750). Further, the non-solicitation agreement may not be broader than reasonably necessary to protect the employer's legitimate interest in protecting trade secrets.
Other Types of Restrictive Covenants
The statute also calls out specific types of restrictive covenants in employment agreements that remain permitted under Colorado law. Those include the following types of agreements:
- Agreements providing for the recovery of certain reasonable training costs for workers who leave employ within two years after the training occurs;
- Reasonable confidentiality provisions;
- A covenant for the purchase and sale of a business or for business assets; and
- A provision requiring the repayment of a scholarship if the individual fails to comply with the conditions of the scholarship.
Notice Requirements
Colorado employers will now be required to provide workers and prospective workers with a separate notice containing specific information before a non-compete agreement can become enforceable. For current workers, the notice must be presented at least 14 days prior to the earlier of either (1) the effective date of the non-compete agreement, or (2) a change of the condition of employment providing consideration for the agreement. Prospective workers must receive the notice prior to accepting their offer of employment.
An employer's failure to provide sufficient notice of the non-compete agreement will result in the non-compete agreement being deemed void.
Enforcement and Penalty Provisions
The new subsection 8(a) of the statute mandates that an employer who enters into, presents to a worker or prospective worker as a term of employment, or attempts to enforce any void non-compete agreement be liable for actual damages and a statutory penalty to the aggrieved worker or prospective worker. Enforcement actions may now be brought by individuals, as well as the Division of Labor Standards and Statistics and the Attorney General, the latter of which has brand-new enforcement authority over the statute.
Available remedies for a violation of subsection 8(a) will now include:
- Actual damages, declaratory judgment, injunctive relief, reasonable costs and attorney fees; and
- Statutory penalty: $5,000 per worker or prospective worker harmed by the conduct.
The statute will contain a "safe harbor" for employers or prospective employers acting in good faith and who had reasonable grounds to believe they weren't violating the statute. However, the safe harbor only protects the employer or prospective employer against the imposition of the full statutory penalty, and not from other remedies. Further, any reduction of the penalty is entirely up to the discretion of the court.
Class 2 Misdemeanor
Finally, the Act attempts to eliminate confusion caused by language added to the statute during the 2021 Colorado Legislative Session that a violation of any portion of the restrictive covenants statute is a class 2 misdemeanor. The amendment clarifies that it is only a class 2 misdemeanor to use force, threats or other means of intimidation to prevent any person from engaging in lawful work, and not to simply violate any provision of the statute.
Choice of Law and Choice of Venue Requirements
Another significant change is the inclusion of mandatory choice of law and choice of venue provisions for workers who, at the time of the termination of the employment, primarily reside or work in Colorado. For those individuals, the statute will require that, irrespective of language in the agreement, the terms of any restrictive covenant be governed by Colorado law and that litigation arising from the enforceability of the restrictive covenant must take place in Colorado.
With no organized opposition to the bill, Gov. Polis is expected to sign the bill into law with the changes to C.R.S. § 8-2-113 to take effect Aug. 10, 2022. The Act's prohibitions and requirements are not retroactive. This means Colorado employers have less than three months to ensure their policies and procedures comply with the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
