This is a friendly reminder that Colorado’s long-awaited new non-compete law (HB 22-1317) went into effect on August 10, 2022. The new law is much more worker friendly than the previous law and significantly narrows the exceptions to Colorado’s long-standing “general rule” that non-competes are void in Colorado. It does not apply retroactively, and therefore only affects agreements entered on or after August 10, 2022.
Previously, while Colorado’s non-compete law declared that “any covenant not to compete which restricts the right of any person to receive compensation” for labor was “void,” the exceptions nearly swallowed the rule. These exceptions included, among others, “any contract for the protection of trade secrets” and “executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.”
Limited Exceptions, smaller scope. The new law – still located at C.R.S. § 8-2-113 – changes all this. To start, it eliminates the exception for executive and management personnel. And, while the new law retains the exception for the protection of trade secrets, the exception is considerably narrower. The law now requires the employer to show that any covenant for the protection of trade secrets is no broader than “reasonably necessary” to protect the employer’s “legitimate interest” in protecting its trade secrets. Additionally, this exception only applies to “highly compensated” employees (currently those who make over $101,250 a year). Workers must meet this compensation threshold both at the time of executing the covenant and at the time of enforcement.
The new law also limits the enforceability of non-solicitation agreements and confidentiality clauses. As to the former, a non-solicitation agreement is enforceable only if it is no broader than “reasonably necessary” to protect the employer’s “legitimate interest” in protecting its trade secrets and for those workers who make no less than 60% of the highly compensated amount (currently $60,750).
As to the latter, the new law still permits confidentiality clauses, but limits their scope. Only “reasonable” confidentiality clauses “relevant to the employer’s business” that do not prohibit the disclosure of (1) information that arises from the worker’s “general training, knowledge, skill or experience” (gained on the job or otherwise), (2) information that is “readily ascertainable to the public,” or (3) information the worker “otherwise has the legal right to disclose” are enforceable.
The new law still permits non-competes in conjunction with the purchase or sale of a business or assets of a business, as well as agreements providing for the recovery of certain training costs for workers who leave their employment within two years after the training occurs, and provisions requiring the repayment of a scholarship if the individual fails to comply with the conditions of the scholarship.
Notice requirements. In addition to the heightened restrictions on non-compete enforceability, the new law creates new procedural steps and considerations for employers seeking to enforce non-competes, in particular a notice provision. Failure to comply with the following new notice requirements will render the covenant void:
- Employers must provide notice of the non-compete and the terms of the non-compete to any prospective worker either before the worker accepts the job or 14 days before the effective date or date of additional compensation that provides consideration for the covenant. Failure to provide such notice will render the covenant void; and
- Effective notice must be in a document separate from the covenant, must direct the worker to the relevant paragraphs, and must be signed by the worker.
Enforcement. Other changes include the inclusion of mandatory Colorado choice of law and choice of venue provisions for those workers who, at the time of employment termination, primarily live or work in Colorado as well as a clarification to the 2021 amendment that made violations of the statute a class two misdemeanor. The new law establishes that it is a class two misdemeanor to use force, threats, or other means of intimidation to prevent any person from engaging in lawful work (as opposed to simply violating any provision of the statute).
Finally, employers can now face significant statutory penalties of up to $5,000, in addition to actual damages, injunctive release, costs, and attorney’s fees, for presenting a worker with or trying to enforce a void non-compete. Importantly, enforcement actions can be brought not only by the individual and the Division of Labor, but also by the Attorney General.
While the new law contains a “safe harbor” for employers and prospective employers who were acting in good faith and who had reasonable grounds to believe they weren’t violating the statute, such safe harbor only protects against the imposition of the full statutory penalty (no other remedies) and its applicability is entirely left up to the discretion of the Court.
All told, while the new law explicitly affirms that the general assembly intends to “preserve existing state and federal case law in effect before the effective date of this act,” there is no denying that the landscape has shifted. Going forward, in addition to ensuring compliance with the notice requirements and compensation limitations, employers should carefully consider the scope of the restriction. Further, these changes may encourage employers to consider other means of limiting unfair competition in certain circumstances.