The new law comes only months after Colorado enacted a criminal statute making violations of the state's noncompetition statute a Class 2 misdemeanor punishable by 120 days in jail, a fine up to $750 or both.
A new Colorado law effective August 10, 2022, voids noncompetition and customer nonsolicitation covenants with certain employees who work or live in Colorado, depending on their level of compensation. The new law potentially subjects noncompliant employers to significant penalties and voids any provision in violation of the statute.
HB 22-1317, signed into law on June 8, 2022, amends Colorado's existing noncompetition statute, C.R.S. § 8-2-113, for agreements entered into or renewed on or after August 10, 2022. The new law comes only months after Colorado enacted a criminal statute making violations of the state's noncompetition statute a Class 2 misdemeanor punishable by 120 days in jail, a fine up to $750 or both. Specifically, the new law:
- Voids any noncompetition covenant that is not entered into with a "highly compensated worker"?a threshold that begins at $101,250 in 2022 and will be adjusted annually by the Colorado Department of Labor. In order to satisfy this threshold, the "worker" (i.e., not only an employee) must be "highly compensated" both at the time the noncompetition covenant is entered into and "at the time it is enforced" (the amendment does not define what is considered the time of enforcement). The amendment also maintains the requirements in the current statute that a noncompetition covenant must be designed to protect trade secrets and narrowly tailored to protect an employer's "legitimate interests";
- Voids any customer nonsolicitation covenant entered into with a worker whose annual compensation threshold is less than 60 percent of the compensation threshold for a highly compensated employee, and further requires that the customer nonsolicitation covenant be "no broader than reasonably necessary to protect the employer's legitimate business interest in protecting trade secrets";
- Requires employers to provide pre-hire notification to the extent a worker or prospective worker will be required to sign a noncompetition covenant. The pre-hire notification must be in a separate document containing "clear and conspicuous terms" and signed by the worker or prospective worker. For prospective workers, the pre-hire notification must be provided before the worker accepts the offer of employment. For current workers, the pre-hire notification must be provided two weeks before the earlier effective date of the restrictive covenant or of any additional compensation or change in the terms or conditions of employment in consideration of the noncompetition covenant;
- Continues to permit post-employment nondisclosure of confidential information restrictions, so long as the employer does not attempt to restrict the disclosure of information relating to the worker's "general training, knowledge, skill, or experience, whether gained on the job or otherwise";
- Prohibits employers from requiring a worker to adjudicate the enforceability of a noncompetition covenant outside of Colorado if the worker primarily resided or worked in Colorado at the time of termination of employment;
- Provides that Colorado law governs the enforceability of a noncompetition covenant, notwithstanding any contractual choice of law provision to the contrary, if the worker primarily resided or worked in Colorado at the time of termination of employment;
- Creates a new exception for an agreement to recover the cost of a scholarship for an apprentice who does not comply with the conditions of a scholarship agreement;
- Prohibits employers from attempting to enforce, entering into and even presenting to a worker or prospective worker a noncompetition covenant that is void under the statute;
- Incorporates existing state and federal case law in effect before the effective date of the statute, including case law "defin[ing] what counts as a covenant not to compete that is prohibited by" the statute;
- Reaffirms that a person who violates the statute commits a Class 2 misdemeanor; and
- Provides that an employer violating the statute is "liable for actual damages and a penalty of $5,000 per worker or prospective worker harmed by the conduct"; that, in addition to a worker or a prospective worker, the state attorney general may bring an action for injunctive relief to recover damages; and provides that a worker or prospective worker may also recover reasonable costs and attorneys' fees in any private action brought under the statute.
What This Means for Employers
While the amendment is not retroactive, in light of the significant statutory penalties associated with noncompliance, companies with Colorado-based employees or independent contractors should engage counsel to reevaluate their current and prospective restrictive covenant agreements and exit procedures.
For More Information
If you have any questions about this Alert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, Bryan Shapiro, any of the attorneys in our Non-Compete and Trade Secrets Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.