Buried within recent legislation passed by the Colorado General Assembly lies a provision that will likely materially alter the relationship between employers and their employees. Colorado has long disfavored the restrictive covenants utilized by employers to curtail their employees’ future employment opportunities. Beginning on March 1, 2022, however, violations of Colorado’s restrictive covenant statute – C.R.S. § 8-2-113 – may subject employers to heightened exposure to criminal liability. Under Colorado Senate Bill 2021-271 (SB 21-271, which is primarily geared toward reforming sentences of misdemeanor and petty offenses, “a person who violates [C.R.S. § 8-2-113] commits a class 2 misdemeanor” punishable by up to 120 days in jail, a fine up to $750, or both.
Section 8-2-113, C.R.S. voids “[a]ny covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void,” except where they concern one of the following circumstances:
- the purchase and sale of a business or the assets of a business;
- the protection of trade secrets;
- the recovery of the expense of educating and training an employee who has served an employer for a period of less than two years; or
- a restriction on executive and management personnel and officers, and employees who serve as professional staff to executive and management-level personnel.
In addition to these enumerated exceptions, covenants not to compete must also be reasonable in time, geographic scope and scope of activities covered. Colorado courts have held that non-solicitation of customers’ provisions are also subject to C.R.S. § 8-2-113, but non-solicitation of employees’ provisions are not subject to the statute.
Previously, a restrictive covenant that did not meet one of the above exceptions or that was not “reasonable” in its duration, or geographic scope was merely deemed unenforceable and most often resulted in a civil penalty. Nonetheless, criminal exposure for employers under C.R.S. § 8-2-113 is not new. An often overlooked statute – C.R.S. § 8-2-115 – provides that a violation of the non-compete statute is criminally punishable as a misdemeanor. SB 21-271 repeals C.R.S. § 8-2-115 and provides for the criminal liability directly in C.R.S. § 8-2-113 – perhaps demonstrating the General Assembly’s desire to highlight the penalty in order to further deter employers from overstepping when crafting these sorts of agreements.
it is currently unknown how Colorado courts may apply SB 21-271’s misdemeanor provision to non-compete and non-solicitation agreements or how frequently the provision will be used. SB 21-271 states that anyone who violates C.R.S. § 8-2-113 commits a misdemeanor, but there is no guidance as to what will constitute a violation, especially since C.R.S. § 8-2-115 was sparsely used. Conceivably, even requiring an employee to execute what could later be found to be an unenforceable non-compete or non-solicitation agreement could result in criminal penalties for employers.
Colorado employers may want to revisit their non-competition and non-solicitation agreements to ensure they fall squarely within the exceptions to C.R.S. § 8-2-113 and are reasonable in their time and scope. Auditing these agreements now is especially important since there is, at present, no guidance as to what may trigger a violation of the newly enacted statutory provision criminalizing enforcement of unenforceable restrictive covenants. We can assist employers in crafting appropriate agreements that meet the requirements of Colorado law.
Authors: Kathleen Alt, DJ Goldfarb, and Lorenzo Thayn
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