Preparing for Colorado’s New Limits on Employee Non-Competes

Continuing the ongoing trend of states placing restrictions on employee non-competes, on May 10, 2022, the Colorado General Assembly passed a bill amending C.R.S. § 8-2-113 (the “Amendment”) and adding significant limitations on employee non-compete agreements. Most notably, the Amendment seeks to:

• Void all non-compete and customer non-solicit agreements, except for certain limited circumstances, such as non-competes with workers paid over the “highly compensated worker” threshold (currently $101,250 annually) and customer non-solicits with workers earning 60% of that threshold (currently $60,750 annually);
• Require certain carve-outs to be included in employee confidentiality agreements;
• Require mandatory notices be provided to new hires and current employees at specific times and separate and apart from the actual non-compete agreement; and
• Mandate the use of Colorado law and venue for any workers who reside or work in Colorado at the time of termination.

Violations of the Amendment can subject employers to private suits to recover damages, attorneys’ fees, and costs as well as penalties of $5,000 per worker. Colorado Governor Jared Polis is expected to sign the Amendment into law. If this happens, the Amendment would take effect on August 10, 2022. As a result, Colorado employers should start reviewing their non‑compete practices and agreements now in light of these new restrictions.

Key Considerations

Effective Date

The new restrictions in the Amendment will not be retroactive. Rather, if signed into law, the obligations will only apply to covered agreements entered or renewed on or after the effective date.

Covered Agreements

Before the Amendment, Colorado law prohibited non-compete agreements unless they fell into one of the following exceptions: (1) contracts for the sale of a business or asset of business; (2) contracts for protection of trade secrets; (3) agreements to recover expenses related to educating and training employees who have served an employer for a period of less than two years; and (4) agreements entered with executive and management personnel, officers, and employees who constitute professional staff to executive management personnel. 

If signed into law, the Amendment will ban all covenants not to compete, including customer non-solicitation agreements, that “restrict[] the right of any person to receive compensation for performance of labor for any employer,” unless those restrictions are entered into in one or more of the following circumstances:

1. Non-compete agreements with workers that are paid at or above the highly compensated worker threshold (currently $101,250 annually) if such covenant is reasonably necessary to protect the employer’s trade secrets;

2. Customer non-solicit agreements with workers earning 60% or more than the highly compensated worker threshold if such covenant is reasonably necessary to protect the employer’s trade secrets;

3. Agreements for the purchase and sale of a business or asset of a business;

4. Agreements providing for recovery of training and education expenses, if the training is distinct from normal on-the-job training;

5. Agreements requiring the repayment of a scholarship provided to a worker in an apprenticeship, but only if the individual fails to comply with the conditions of the scholarship; and

6. Reasonable confidentiality agreements if such agreements do not prohibit disclosure of information that: (a) arises from the “worker’s general training, knowledge, skill, or experience, whether gained on the job or otherwise”; (b) “is readily ascertainable to the public”; or (c) “a worker otherwise has a right to disclose as legally protected conduct.”

Highly Compensated Individuals

Colorado currently permits non-competes that are for the protection of trade secrets, regardless of how much the restricted individual earns. The Amendment will place monetary thresholds on non-competes and customer non-solicits needed to protect employer trade secrets:

• Non-competes will be limited to individuals who earn an amount of annualized cash compensation equivalent to or greater than the “threshold amount for highly compensated workers” (the “Threshold”) based on the Colorado Department of Labor and Employment’s Division of Labor Standards and Statistics. 
• Customer non-solicits will be limited to workers who earn an annualized cash compensation equivalent to or greater than 60% of the Threshold.

The Threshold is currently $101,250 per year, subject to annual adjustments. The worker must earn this amount both:

• at the time the covenant not to compete is entered; and
• at the time it is enforced.

The Amendment will also require employers to show that the non-competes and customer non‑solicits for these workers are no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.

Mandatory Notice Requirements

If passed, the Amendment will require employers to comply with new timing and notice requirements. 

• New Hires: If the covenant not to compete is provided to a new hire, the notice must be given before the employee accepts the job offer. 
• Current Employees: If the non-compete is provided to a current employee, the notice must be given at least 14 days before the earlier of:
  
  • the effective date of the covenant; or
  • the effective date of any additional consideration or change in the terms or conditions of employment that provides consideration for the covenant. 
• Form and Contents of Notice: Employers must provide the notice to restricted workers in a separate document apart from the restriction, and the separate document must:
  
  • Contain clear and conspicuous terms in the language in which the worker and the employer communicate about the worker’s performance;
  • Be signed by the worker;
  • Provide a copy to the work of the agreement containing the restrictive covenant;
  • Identify the agreement by name and state that the agreement contains a covenant not to compete that could restrict the worker’s options for subsequent employment following their separation from the employer; and
  • Direct the worker to the specific section or paragraphs of the agreement that contain the covenant not to compete.

Failing to comply with these notice requirements not only voids the non-compete, but, as discussed further below, it can also subject the employer to statutory penalties, compensatory damages, and attorneys’ fees.

Colorado Law and Venue Required

The Amendment also requires employers to use Colorado choice of law and venue in certain instances.

• Choice of Law: Colorado law must govern the enforceability of a covenant not to compete for a worker who, at the time of termination, primarily resided and worked in Colorado.
• Choice of Venue: The Amendment provides that a worker who, at the time of termination, primarily resides or works in Colorado cannot be required to adjudicate the enforceability of the covenant not to compete outside of Colorado.

Consequences for Violations

The Amendment contains consequences for businesses that try to enforce, enter into, or present employees with agreements prohibited by the Amendment. An employer who fails to comply with the Amendment’s obligations can be liable for:

• Private suits by employees for actual damages, reasonable costs, and attorneys’ fees; and
• Penalties of $5,000 per worker or prospective worker harmed by the conduct.  

The attorney general and any worker or prospective worker harmed by an employer may bring an action for injunctive relief and to recover penalties. 

The Amendment provides some wiggle room for employers, stating that a court has discretion to preclude or limit any penalty for an employer who can prove its failure to comply with the Amendment was in good faith and it had reasonable grounds for believing it was not a violation. Employers do not want to be in this position and should take affirmative steps to comply with the law.

The Amendment Adds to the Growing List of Jurisdictions Limiting Non-Compete Agreements

The Amendment is yet another example of states placing limits on the enforceability of employee non-compete agreements. Although not an outright ban on employment non‑competes, like California and the soon-to-be effective District of Columbia law, the Amendment is much more restrictive than laws enacted by other jurisdictions in recent years banning non‑competes for low-wage workers or the more comprehensive limitations on non-competes for all workers, such as those in Illinois, Washington, and Massachusetts. Not only does the Colorado Amendment limit the types of non-compete agreements that can be enforced, it establishes a higher wage threshold on non-competes than most other states that have banned non-competes for low-wage workers.    

Employers are encouraged to continue monitoring developments across the country in the ever‑changing landscape of employee non-compete agreements. Although it is unknown whether future laws will resemble the limits and requirements of the Amendment, more laws may be enacted that further limit what employers are permitted to do concerning covenants not to compete.