Colorado’s recent enactment of House Bill (HB) 22-1317 brings about a significant reduction in employers’ ability to enter into and enforce restrictive covenants (i.e., non-compete agreements) with their employees. Employers need to understand and prepare to embrace the cosmic shift to non-compete law when it comes into effect on August 10, 2022.
Current Landscape for Restrictive Covenants
Under current Colorado law, restrictive covenants are void as a matter of public policy unless they fall into at least one of the following four exceptions: (1) in connection with the purchase and sale of a business or its assets; (2) for the protection of trade secrets; (3) for the recovery of education or training expenses associated with an employee who is employed for less than two years; or (4) a restriction on executive or management personnel or staff. C.R.S. § 8-2-113.
The Amended Law Under HB22-1317
Limited Exceptions: The law remains that a covenant not to compete that restricts the right of any person to receive compensation for the performance of labor for any employer is void, except with limited exceptions. HB22-1317, however, further narrows these limited exceptions by removing the exception for executive and management personnel entirely and refining the exception for the protection of trade secrets.
Accordingly, under the new law, restrictive covenants are void as a matter of public policy, unless limited to:
- The purchase and sale of a business or its assets.
- The protection of a trade secret where:
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- the employee meets the minimum yearly earning threshold for a highly compensated employee (HCE) ($101,250 in 2022) for non-compete restrictions (i.e., a ban on competing against the employer for a period of time), or 60% of the HCE threshold ($60,750 in 2022) for non-solicitation restrictions (i.e., a ban on soliciting the employer’s clients or customers for a period of time), at both the time of entering into and enforcement of the covenant; and
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- the restriction is “no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.”
- The recovery of training or educational expenses for employees with less than two years of employment where such training is “distinct from normal, on-the-job training.”
Confidentiality Agreements: The law allows reasonable confidentiality provisions. Specifically, the law does not prohibit reasonable confidentiality provisions relevant to the employer's business that do not prohibit disclosure of 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.
Colorado Law and Venue Requirements: The law adds a jurisdictional component that makes any restrictive covenant that attempts to apply law other than Colorado law or requires adjudication outside of Colorado courts void. Accordingly, if a worker “primarily resided or worked in Colorado,” Colorado law will apply. In light of the increasing expansion of remote work opportunities, this provision will likely be heavily litigated as the law does not contain a definition as to what it means for a worker to “primarily” work in Colorado.
Strict Notice Requirements: The law requires for a restrictive covenant to be enforceable only if notice of the covenant is provided to a prospective employee prior to acceptance of an offer of employment, or for current employees, the notice of the covenant is provided to the employee at least 14 days prior to the effective date of the covenant or the provision of new consideration in exchange for the covenant.
The notice must: (1) be in a separate document from the covenant itself, (2) explain the significance of the covenant, (3) clearly indicate the location of the covenant, and (4) be signed by the employee. An employer satisfies the notice requirement when the notice is provided with a copy of the agreement containing the covenant not to compete, identifies the agreement by name, and states that the agreement contains a covenant not to compete that could restrict the workers’ options for subsequent employment following their separation from the employer, and directs the worker to the specific sections or paragraphs of the agreement that contain the covenant not to compete. Failing to comply with these requirements could void the covenants and render the employer liable for significant penalties, as discussed below.
Physician Ability to Practice: The law does not make any changes to a physician’s ability to practice medicine, which means that while physicians are still free from constraints on their ability to practice medicine, they are not necessarily free from damages that may arise from their violation of a restrictive covenant. Physicians can avoid liability for treating former patients who would otherwise be restricted under a restrictive covenant if the patient has a rare medical condition, and the disclosure of the physician’s new practice and/or treatment of the patient was following the termination of the relationship from which the covenant stemmed.
Significant Penalties: The law includes serious consequences for employers attempting to enforce a covenant not to compete that is void. That is, employers are liable for actual damages, reasonable costs, attorney’s fees, and a penalty of up to $5,000 per worker or prospective worker harmed. These penalties are in addition to the changes enacted by Colorado on March 1, 2022, which made it a Class 2 Misdemeanor to attempt to enforce an unlawful restrictive covenant. However, if the employer shows that its actions were in good faith and had reasonable grounds for believing it was not acting in violation of the law, a court may, in its discretion, decline to enter or reduce an award or penalty against the employer.
Employer Considerations
While these upcoming changes will not affect any restrictive covenants made or renewed prior to the law’s August 10, 2022, effective date, any restrictive covenants made or renewed following the effective date must comply with these changes. Consequently, Colorado employers should review their employment contracts and restrictive covenant templates to determine if they will comply with the updated law or whether their agreements will require amendment once the new law takes effect. Additionally, employers seeking to enforce restrictive covenants should carefully undertake a revised cost-benefit analysis before initiating any restrictive covenant enforcement actions in consideration of the increased exposure to potentially significant penalties.
Employers Council can help organizations navigate the pitfalls of the new non-compete law and discuss the cost-benefit analysis of enforcing restrictive covenants. Members with questions can contact Employers Council at info@employerscouncil.org.