The 2022 legislative session of Colorado’s General Assembly closed not with a whimper but with a bang. Although several new bills affect employers, the most interesting was HB 22-1317, which substantially changes non-compete and non-solicitation agreements in Colorado. The Restrictive Employment Agreement Act (“Act”) passed both houses of the legislature and will become effective in August 2022 if Colorado’s Governor signs it.
The Act provides significant changes to the state law concerning restrictive covenants in the employment context. For example, the Act:
- eliminated a significant exception and limited the remaining exceptions applicable to restrictive covenants;
- provided formal notice requirements in certain contexts;
- limited adjudication of Colorado-based employees’ restrictive covenants to Colorado courts and Colorado law; and
- added damages, attorneys’ fee-shifting, and monetary penalties for unsuccessful attempts to enforce a restrictive covenant under C.R.S. § 8-2-113.
These changes will affect any restrictive covenants made or renewed on or after August 10, 2022. However, the Act does not affect restrictive covenants made or renewed prior to August 10, 2022.
Below is a summary of the most significant changes that all Colorado employers and employees should know.
The Current Law
Currently, under C.R.S. § 8-2-113, certain restrictive covenants, such as covenants not to compete or solicit customers, are void unless they qualify for one or more of the following exceptions:
- The purchase and sale of a business or its assets;
- The protection of trade secrets;
- The recovery of education or training expenses associated with an employee who has been with an employer for less than two years; or
- A restriction on executive or management personnel or staff
The New Act
New Prohibitions on Restrictive Covenants
The Act’s most significant changes will eliminate the executive and management personnel exception. Additionally, the Act will modify the trade secret exception to require a six-figure-plus compensation threshold and require that restrictive covenants be “no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.” Specifically, the trade secret exception will only be permissible with a worker or prospective worker who, both at the time the covenant is entered into, and at the time it is enforced, earns an amount equal to or greater than a highly compensated worker ($101,250 in 2022). Additionally, the Act’s language will likely eliminate a court’s ability to rewrite (i.e., blue pencil) a restrictive covenant that is overbroad on its face and instead render such covenants void and in violation of the new law.
Non-solicitation agreements are now explicitly contemplated by the statute. After the Act’s effective date, non-solicitation agreements will only be valid and enforceable against workers who earn at least 60% of the threshold amount for highly compensated workers (or $60,750). Further, the non-solicitation agreement may not be broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
The Act also explicitly allows for reasonable confidentiality provisions, but its structure suggests that overbroad confidentiality provisions may violate the Act. Specifically, the Act provides that a reasonable confidentiality provision relevant to the business that does not prohibit disclosure of information generally obtained through the job, information available to the public, and/or information an employee has a right to disclose, is not prohibited by the law.
Other Types of Restrictive Covenants
The Act also calls out specific restrictive covenants in employment agreements that remain permitted under Colorado law. Those include the following types of agreements:
- Agreements providing for the recovery of certain reasonable training costs for workers who leave an employer’s employment within two years after the training occurs;
- A covenant for the purchase and sale of a business or for business assets; and
- A provision requiring the repayment of a scholarship if the individual fails to comply with the conditions of the scholarship.
Colorado employers will now be required to provide workers and prospective workers with a separate notice containing specific information before a non-compete agreement can become enforceable. For current workers, an employer must present the notice at least 14 days prior to the earlier of either (1) the effective date of the non-compete agreement, or (2) a change of the condition of employment providing consideration for the agreement. Prospective workers must receive the notice prior to accepting their offer of employment.
If challenged, an employer’s failure to provide sufficient notice of the non-compete agreement will result in a Court finding that the non-compete agreement is void.
Enforcement and Penalty Provisions
In addition to the changes above, the Act also provides for enforcement that may carry stiff penalties. For example, suppose a restrictive covenant is found void Coloardo law. In that case, the party seeking enforcement is liable for actual damages, reasonable costs, attorneys’ fees, and a penalty of $5,000 per worker or prospective worker harmed.
Thankfully, however, the Act contains a “safe harbor” for employers or prospective employers acting in good faith with reasonable grounds to believe they were not violating the Act. However, the safe harbor only protects the employer or prospective employer against the full statutory penalty’s imposition, not from other remedies. Further, any reduction of the penalty is entirely up to the court’s discretion.
Choice of Law and Choice of Venue Requirements
Finally, the Act also contains a mandatory choice of law and choice of venue provisions for employees who primarily reside or work in Colorado at the time of the termination of their employment. For those individuals, the Act will require that irrespective of the language in the agreement, Colorado law will govern the terms of any restrictive covenant and that litigation arising from the enforceability of the restrictive covenant must occur in Colorado.