Coming August 2022: Colorado Substantially Limits Noncompete Agreements

Beginning August 10, 2022, Colorado will drastically narrow the circumstances in which Colorado employers can seek to enforce noncompete and other restrictive employment agreements. Despite Colorado law already having a general restriction against the use of noncompete agreements, the Colorado General Assembly recently passed, and Gov. Jared Polis has now signed, HB 22-1317. With this bill, Colorado joins the growing number of states enacting increased employee protections against restrictive covenant agreements, including banning such agreements with workers earning below a certain threshold.

Once effective, this bill will:

• Void all noncompete agreements that are: (1) not entered into with a worker making at least the cap for “highly compensated” workers (in 2022, this threshold is $101,250); (2) not designed to protect trade secrets; or (3) broader than necessary to protect the employer’s “legitimate interest in protecting trade secrets.”
• Void all agreements not to solicit customers that are: (1) entered into with a worker making less than 60% of the salary requirement for a highly compensated employee, or (2) broader than necessary to protect trade secrets.
• Require advance notice to an employee and time for them to review the proposed noncompetition or nonsolicitation agreement.
• Require disputes to be adjudicated in Colorado courts and under Colorado law, unless the employee did not reside or work in Colorado at the time of separation from employment.

Redefined Acceptable Agreements

Colorado law currently prohibits noncompete agreements unless the contract is for the sale of a business, for the protection of trade secrets, to recover the expense of educating an employee working for fewer than two years, or to restrict executive and management personnel. C.R.S. § 8-2-113. A violation of the foregoing statute can carry a criminal misdemeanor penalty and there is a private right of action for individuals to sue for actual damages. See Colorado Increases Its Criminal Penalty for Violations of Its Noncompete Law | Publications | Insights | Faegre Drinker Biddle & Reath LLP.

Under HB 22-1317, Colorado will continue to prohibit noncompete and nonsolicitation agreements but will impose even narrower exceptions. As noted above, for a noncompete agreement to be enforceable, it must be entered into with a highly compensated worker (i.e., an employee making at least $101,250 in 2022 in accordance with Colorado’s PAY CALC Order, which increases annually), be designed to protect trade secrets, and be no broader than necessary to protect the employer’s “legitimate interest in protecting trade secrets.” For a nonsolicitation agreement to be enforceable, the bill requires that it be entered into with a worker making at least 60% of the salary requirement for a highly compensated employee and be no broader than necessary to protect trade secrets.

The new law will continue to permit agreements related to the sale of a business, recovering the cost of training an employee, and to protect confidential business information. However, HB 22-1317 adds additional criteria for an agreement related to the cost of training and the protection of business information. Additionally, there will be a new exception for an agreement to recover the cost of scholarship for an apprentice who does not comply with the conditions of a scholarship agreement.

Notice Requirements

The new law will require notice for a noncompete or a nonsolicitation agreement to be enforceable. Specifically, the notice must be:

1. In a separate document that (1) references the restrictive covenant agreement by name, (2) states the that the agreement contains a restrictive covenant, (3) identifies where in the agreement the restriction is located, and (4) contains a copy of the agreement.
2. In “clear and conspicuous terms” in the same language used to discuss the worker’s performance.
3. Signed by the worker.

This notice and the terms of the agreement will need to be provided to a new hire before the worker accepts the offer of employment, or in the case of a current employee, two weeks before the earlier of the effective date of the restrictive covenant or the effective date of the consideration (i.e., additional compensation or change in the terms of employment). A worker may request, and an employer is obligated to provide, an additional copy of the terms of their agreement once per calendar year.

Choice of Law

Once effective, HB 22-1317 will prohibit the enforcement of a restrictive covenant agreement outside of Colorado against a worker who primarily resided or worked in Colorado at the time of termination. Colorado law will likewise govern the enforceability of noncompete and nonsolicitation agreements for employees who lived and worked in Colorado at the time of separation from employment. This change will effectively bar choice of law provisions that select a jurisdiction outside of Colorado but will not void agreements solely because they utilize a choice of law clause outside of Colorado.

Penalty Provisions and Private Right of Action

Under the new law, the criminal penalty associated with a violation of Colorado’s noncompete statute is restricted to violations of the prohibition against unlawful intimidation of workers under subsection (1.5). HB 22-1317 also creates a new damages system for employers presenting or attempting to enter into or enforce void restrictive covenant agreements. Accordingly, any employer that violates the law will be liable for actual damages and a penalty of $5,000 per worker (or prospective worker) harmed by a violation. The law includes a private right of action to enforce the statute and seek injunctive relief; and permits the Attorney General to seek the same relief on behalf of individuals. A worker may recover actual damages, reasonable costs and attorneys’ fees related to a private cause of action.

HB 22-1317 provides an exception from the penalty subsection for employers able to demonstrate a good faith belief that they believed they were following the requirements of the statute.

Moving Forward

Once effective, the changes created by HB 22-1317 will not be retroactive; however, the bill makes clear that the Colorado General Assembly intended to preserve existing case law related to defining an unenforceable noncompete agreement and the scope of enforceable trade secret protections.

In order to ensure they are compliant with the new law, employers should reassess the intended purpose and necessary scope of restrictive employment agreements — as well as practices and processes related to such agreements — with any Colorado workers.