Colorado has long disfavored non-compete agreements within the state. Historically, under C.R.S. § 8-2-113, restrictive covenants were void and unenforceable except for under specific circumstances, including:
- 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.
Due to growing concerns about the harmful effect these agreements have on Colorado employees, the General Assembly has narrowed the circumstances in which employers may demand employees agree to these restrictions.
The General Assembly has made steady efforts to deter employers from requiring that employees enter into restrictive covenants. Earlier this year, the General Assembly emphasized its displeasure with restraints on trade by highlighting that employers could be subject to criminal penalties should they require an employee to execute what could later be found to be an unenforceable non-compete or non-solicitation agreement.
Now, with the passage of House Bill 22-1317, the Legislature has gone one step further and re-written C.R.S. § 8-2-113 to narrow the circumstances that might warrant having an employee agree to a restrictive covenant, all while expanding the scope of the statutory protections available to employees in this area.
Agreements to Protect Trade Secrets
For companies seeking to use restrictive covenants to protect their trade secrets, the relevant provisions contained in HB 22-1317 are of particular importance. Under the new law, employers may only utilize non-competes to protect trade secrets so long as the provision:
- Is “no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets”; and
- The employee, both at the time the agreement 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.” The threshold amount of cash compensation for 2022 equals roughly $101,250.00, which will be recalculated each year. Other non-cash compensation is not considered for the threshold calculation.
This threshold limits the number of employees who fall under the trade secret exception, marking an important change that employers within the state need to be aware of.
HB 22-1317 also applies the “highly compensated employee” limitation to agreements aimed at clauses preventing former employees from soliciting customers after leaving. The provision must again be no broader than is reasonably necessary, and the employee, both at the time the agreement is entered into and at the time it is enforced, must earn an “annualized cash compensation equivalent to or greater than sixty percent of the threshold amount for highly compensated workers.” In other words, once this law goes into effect on August 10, 2022, employees making less than approximately $60,750.00 will be protected from entering nonsolicitation agreements. This new law, however, does not address clauses restricting the solicitation of employees.
Non-Compete Agreements for Executives and Managers
The longstanding executive and manager exception to Colorado’s prohibition against non-competes will be eliminated after HB 22-1317 goes into effect. This could be particularly impactful if there are managers or executives within your company who do not meet the highly compensated employee provision. This change also eliminates the restrictive covenants for professional and administrative staff who support executives and managers, so long as their income fails to meet “highly compensated” worker criteria.
Employers often use restrictive covenants to protect information that may not rise to the level of a trade secret but is nonetheless confidential. Under HB 22-1317, confidentiality agreements remain valid but are limited. The legislation will allow confidentiality provisions that are not overly broad and meets the following requirements:
- is “relevant” to the employer’s business,
- does not prohibit disclosure of information arising from the worker’s general training, knowledge, skill, or experience, or
- information that is readily available to the public, or
- information the worker has a legal right to disclose.
The new law still allows certain restrictions and requirements for employees, such as the recovery of training costs, repayment of scholarship funds for failure to comply with the conditions of a scholarship, and, most importantly, restrictive covenants arising from the sale of a business or business assets.
Additional Notice Requirements
HB 22-1317 introduces additional administrative hurdles employers must overcome to enforce a valid restrictive covenant with their employees, including a substantial notice requirement. For a covenant to be valid, among other requirements, employers must give workers notice of the provision and its terms either:
- Before a new worker accepts an offer of employment, OR
- For current employees, 14 days before the effective date of the restriction or change in conditions of employment or any compensation increases that serve as consideration for an existing restrictive covenant
The notice must be an independent document that is clear, conspicuous, and delivered in the language that the employer and employee commonly use to communicate. Additionally, the employee must sign the notice to confirm their receipt of the document. As a result, employers will need to review existing agreements to ascertain if additional notice is needed in conjunction with salary increases.
Criminal and Civil Penalties
HB 22-1317 reaffirmed the criminal penalties imposed earlier this year which emphasized that “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. The legislation also amends C.R.S. § 8-2-113 to include civil penalties on any employer who enters, presents as a term of employment, or attempts to enforce any covenant not to compete that is void under the new law. Penalties for violating C.R.S. § 8-2-113 include actual damages, a $5,000.00 fine per employee or prospective employee harmed, plus costs and attorneys’ fees. Additionally, a claim for injunctive relief under the statute may be brought by either the state attorney general or a harmed worker.
Choice-of-Law and Venue Provisions
Finally, when HB 22-1317 goes into effect, if the employee who is a party to a restrictive covenant agreement primarily lives or works in Colorado at the time of termination, the agreement must be governed by Colorado law. This provision has the potential to create traps for employers with a remote workforce who, at the time of hiring, did not even consider these new restrictions because the employee resided outside of Colorado.
The Impact on Your Company and Next Steps
When HB 22-1317 becomes effective in August, it will mark the beginning of a new era for the employer-employee relationship in Colorado. Employers must be up to date on the new requirements and should audit their existing agreements to ensure compliance, especially given the proliferation of remote work due to the pandemic. Below are some of the ways you can be proactive and get ahead of the impending changes:
- Contact someone on our team to determine how the new law may impact your relationship with your employees and discuss best practices for issuing restrictive covenants.
- Review your existing agreements, including severance agreements, to ensure they comply with the new laws, including verifying whether those currently under a non-compete meet the compensation threshold included in HB 22-1317
- Train your HR and management teams on the new administrative requirements for entering a restrictive covenant with your employees
- Consult a member of our team before taking steps to enforce a restrictive covenant against any former employees to avoid any potential exposure to criminal or civil penalties
Authors: Kathleen Alt, Heidi Johnson, Alex Dinkel
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