Colorado has become the newest state to introduce legislation further limiting an employer’s ability to utilize restrictive covenants with their employees. This news will impact any organization that currently has employees in Colorado or may have employees in that state in the future.
Historically, Colorado has enforced a general prohibition on restrictive covenants with limited exceptions to the rule. However, effective August 9, 2022, Colorado employers will face increased restrictions, administrative burdens, and penalties for violating the law.
Amendment Overview
A key exception to the general prohibition stated that non-compete agreements are only enforceable with executive, management personnel, or professional staff. Under the new law, an employee must be a “highly compensated worker,” and there must be a legitimate interest in protecting trade secrets to create a valid non-compete agreement. For 2022, the required salary threshold for a highly compensated worker will be $101,250. Additionally, the amendment states that customer nonsolicitation agreements are only enforceable with employees that earn at least 60% of the “highly compensated” salary threshold or $60,750. The Division of Labor Standards and Statistics will adjust the salary threshold amount each year. HB22-1317 also permits the use of reasonable confidentiality provisions as long as they do not prohibit the disclosure of information arising from the worker’s general training, knowledge, skill, or experience.
There are several exceptions to Colorado’s general prohibition of restrictive covenants that remain unimpacted despite the amendment. Specifically, there is no prohibition for selling a business or its assets, non-compete with a physician is void, and an employer may continue to recover reasonable training expenses. However, employers should note that the amendment does clarify that any recovery must be for training that is distinct from regular, on-the-job training and the recovery amount must decrease proportionately based on the number of months that have passed since the employee completed training.
Multi-state employers will want to pay particular attention to any choice of law or venue provisions included in restrictive covenant agreements. Under the new law, such a provision cannot require adjudication outside of Colorado for an employee that primarily resides and works in Colorado. This limitation will also apply if the employee relocates to Colorado after the agreement has been executed.
A unique obligation created for employers by the amendment involves the notice requirement. An employer must give notice of the covenants and its terms to new workers before they accept an employment offer or 14 days before the effective date of the restriction or change in conditions of employment for current workers. The required notice must be a separate document from the restrictive covenant agreement and must be signed by the worker. Failure to properly issue notice to the employee renders the subsequent restrictive covenant agreement void and subjects the employer to potential fines and penalties.
An employer that enters into, presents, or attempts to enforce a void restrictive covenant may be liable for actual damages, plus a $5,000 penalty per worker or prospective worker harmed by the conduct. Furthermore, violators of this statute can face criminal penalties of up to 120 days of imprisonment, up to a $750 fine, or both.
Employer Action Items
Fortunately, the new law does not retroactively apply to existing agreements and only applies to the ones executed on or after the effective date of the amendment. Therefore, employers should review their current restrictive covenant agreements and revise them to ensure compliance with the new legal framework.
