On Wednesday, June 8, 2022, Governor Polis signed into law a new bill that significantly amends Colorado’s restrictive covenant statute. The new law will apply to new agreements entered on or after August 10, 2022. Restrictive covenants are contractual provisions typically included in agreements with workers,1 but can sometimes be included as part of an incentive program or when a worker receives a promotion to a level of higher trust or authority. Restrictive covenants include noncompete, non-solicit, and confidentiality or non-disclosure agreements. Noncompete covenants are the most restrictive of all, generally seeking to bar a worker from joining a competitor within a certain period of time after separation from employment and/or a geographic scope.
These provisions, especially noncompetes, have long been disfavored by Colorado law. The amendments to Colorado’s restrictive covenant statute, C.R.S. § 8-2-113, will make noncompete agreements and other restrictive covenants even more difficult to enforce against workers and will require additional procedural steps in order to adopt and enforce a valid restrictive covenant in Colorado.
Some changes to Colorado’s restrictive covenants laws were already enacted earlier this year. In March 2022, C.R.S. § 8-2-113 was amended to provide for criminal misdemeanor penalties against those who use force, threats or other means of intimidation to prevent any person from working where they see fit, signaling Colorado’s growing resistance towards these types of agreements. HB 22-1317 now further limits the circumstances under which restrictive covenants may be enforced. The bill also expressly differentiates noncompete agreements from other restrictive covenants, such as non-solicitation and confidentiality agreements.
Overview of Legislative Changes
With respect to noncompete agreements, HB 22-1317 significantly narrows the four exceptions to Colorado’s general ban on noncompete agreements. The four exceptions found in the prior version of C.R.S. § 8-2-113 included covenants designed for the protection of the employer’s trade secrets, agreements entered into as part of the sale of a business or its assets, agreements applied to executive or managerial personnel, or professional staff thereto, and provisions which allowed for recovery of education and training costs paid by the employer.
Notably, the bill eliminates the exception for executive and managerial employees or professional staff to executive or managerial employees, and significantly modifies the requirements for contracts designed to protect the employer’s trade secrets. Now, any noncompete related to trade secret protection may only be enforced against a worker who, at the time the covenant not to compete signed and at the time it is enforced “earns an amount of annualized cash compensation” of at least the “highly compensated worker” (“HCE”) threshold established by the Colorado Department of Labor & Employment (“CDLE”). The current HCE threshold established by CDLE is $101,250. Thus, an employer may not ask an individual earning less than $101,250 (as of today) to sign a noncompete agreement, even to protect trade secrets. Even where noncompete agreements are allowed for the protection of trade secrets, i.e., where the worker earns more than $101,250 per year, the limitations must be no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
Similarly, HB 22-1317 only allows enforcement of non-solicitation agreements as to the employer’s customers where the worker has annualized cash compensation of greater than 60% of the HCE threshold, i.e., $60,750 (as of today), but such restrictions on solicitation may be no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
The law expressly allows for reasonable confidentiality agreements which protect against disclosure of confidential information relevant to the employer’s business. However, the statute clarifies that “confidential information” does not include “information that arises from the worker’s general training, knowledge, skill or experience, whether gained on the job or otherwise, information that is readily ascertainable to the public, or information that a worker otherwise has a right to disclose as legally protected conduct.”
Covenants allowing the employer to recover training and educational costs incurred for an individual within a certain period of time from the start of the training or course are still permitted, regardless of the worker’s salary, so long as the education and training was not primarily for the benefit or convenience of the employer. HB 22-1317 also preserves the right to enforce restrictive covenants relating to the purchase and sale of a business or the assets of a business. The statute also maintains the unique terms relating to payment of damages by a physician who leaves a practice that suffers injury be reason of the physician’s termination.
New Notice and Procedural Requirements
Additionally, HB 22-1317 adds several notice and procedural requirements for employers. These include employers’ obligation to notify workers of any noncompete before they accept employment or, for existing workers, at least 14 days prior to any offer of additional consideration or changes to the terms of employment (e.g., promotion or transfer). Such notice must be given in a separate document in clear and conspicuous terms and workers are entitled to receive a copy of such agreement. This notice must be signed by the individual. Workers also may request an additional copy of the restrictive covenant at least once each calendar year.
Choice of Law Provisions
The new law prevents employers from requiring workers who primarily reside or work in Colorado to litigate such issues outside Colorado. Likewise, regardless of any choice of law provision in a restrictive covenant, Colorado law will govern the enforceability of a covenant not to compete for an individual who, at the time of termination of employment, primarily resided and worked in Colorado. In prior years, federal courts sitting in Colorado have expressed the position that such provisions were generally unenforceable anyway where the individual in question works and resides in Colorado; that interpretation is now expressly adopted by the statute.
Enforcement and Penalties
Individuals or subsequent employers to an individual who has a noncompete agreement with a prior employer may seek a declaratory judgment from a court or arbitrator that the covenant not to compete is unenforceable.
The bill also imposes steep monetary penalties for employers who enter into, present to a worker or prospective worker, or attempt to enforce any covenant not to compete that is void under the current statute. For each separate violation—meaning for each unenforceable agreement—the employer will be liable for actual damages plus a $5,000 penalty per worker or prospective worker “harmed by the conduct.” The bill provides for both a private right of action and action by the attorney general for violations of the law.
In light of these changes, it is important that employers seeking to have Colorado workers sign any type of restrictive covenant consult with their legal counsel regarding such agreements.
1. The statute refers to “workers” and “individuals,” and in prior years courts have applied certain restrictive covenants (e.g., non-solicitation agreements) to independent contractors.
For additional information and guidance related to noncompete and other restrictive covenants under Colorado law, please contact Michelle B. Ferguson at firstname.lastname@example.org or (303) 628-3658 or Jenn M. Kinkade at email@example.com or (303) 628-3647.
What is written here is for general information only and should not be taken as legal advice. If legal advice is needed, please consult an attorney.