NOTE: THIS IS THE FIRST IN A SERIES OF CLIENT ALERTS OUTLINING RECENT CHANGES TO COLORADO’S EMPLOYMENT LAWS, MOST OF WHICH TAKE EFFECT AUG. 10. This is an updated version of an alert published on May 16, 2022.
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Effective today, Aug. 10, 2022, the Colorado Legislature’s significant changes to the state’s noncompetition and restrictive covenants statute become effective. The Restrictive Employments Agreement Act (“Act”) (HB 22-1317) is a major overhaul of C.R.S. Section 8-2-113, in which Colorado’s restrictive covenants restrictions are enshrined. Previously, the statute only expressly addressed non-competes. Going forward, the statute addresses restrictive covenants more broadly, including not only non-compete clauses, but also provisions addressing the non-solicitation of business and customers, confidentiality provisions, and reimbursement for training and education costs.
To be sure, restrictive covenants will remain presumptively void in Colorado, unless they fall within certain statutory exceptions. However, starting today and going forward, these statutory exceptions have been substantially changed or removed altogether by the Act. Among other changes, the Act inserted notice requirements to the statute. An employer’s failure to comply with the notice provisions may result in not only a void restrictive covenant agreement, but also potential enforcement of remedies provisions, including statutory penalties, attorney’s fees damages, and costs available to aggrieved job applicants and workers.
Going forward, employers with Colorado workers will be required to balance the legitimate business needs of protecting their confidential and trade secret information against the Legislature’s public policy encouraging the free flow of workers (particularly those earning lower wages).
Below is a summary of the most important changes of which all Colorado employers and employees should be aware, as well as suggested considerations to factor in while drafting restrictive employment agreements.
New Prohibitions on Non-Competes
As an initial matter, the Colorado Legislature has removed the management and executive personnel exception for non-compete covenants and augmented the trade secrets exception with an additional compensation requirement. Under the new rubric, a non-compete covenant is only permissible with a worker or prospective worker who, at the time the non-compete is entered into and at the time it is enforced, earns an amount of “annualized cash compensation” (as defined and described in the statute) equivalent to or greater than the threshold amount for highly compensated workers (which is determined annually by the Colorado Department of Labor and Employment, Division of Labor Standards and Statistics (“Division”) via the Pay CALC Order. The Division’s 2022 PAY CALC Order sets the current salary threshold at $101,250. This value will increase on January 1 annually (based on the Consumer Price Index and multiplied by 2.25). To be valid, the non-compete agreement must also be for the protection of trade secrets and it can be no broader than is reasonably necessary to protect the employer’s legitimate interests in protecting trade secrets. In effect, going forward, employers may only impose non-competes on workers earning over the salary threshold, who have access to actual trade secrets, and who could legitimately use the trade secrets to improperly compete.
Non-solicitation of Customers/Business Covenants
Non-solicitation of customer and/or business provisions are now explicitly contemplated by the statute, another big change. Now, non-solicitation covenants will only be valid and enforceable against workers who earn 60% of the threshold amount for highly compensated workers (currently, $60,750). Further, the trade secret requirement remains—the non-solicitation covenant may not be broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
Other Types of Restrictive Covenants
The statute also calls out specific types of restrictive covenants in employment agreements that remain permitted under Colorado law, but are now subject to the purview of the statute. Those include the following types of covenants:
- Reasonable confidentiality provisions;
- Notably, to be valid and allowable under the statute, confidentiality provisions may NOT “prohibit the disclosure, of information that arises from the worker’s general training, knowledge, skill, or experience, whether gained on the job, or otherwise.” Similarly, a confidentiality provision may not prohibit a worker’s disclosure of “[i]nformation that is readily ascertainable to the public, or information that a worker otherwise has a right to disclose as legally protected conduct.”
- Agreements providing for the recovery of certain reasonable training costs for workers who leave employ 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.
Physician restrictive covenants were not changed.
All Covenants are Void Absent Timely and Valid Notice
Colorado employers are also required to timely provide workers and prospective workers with a separate notice containing specific information before the restrictive covenants can become enforceable.
As to timing, for current workers, the notice must be presented at least 14 days prior to the earlier of either (1) the effective date of the restrictive covenant, or (2) a change of the condition of employment providing consideration for the covenant(s). Prospective workers must receive the notice prior to accepting their offer of employment, such that it is advisable that the notice and proposed covenants are included with the offer letter.
To satisfy the Notice provision, in addition to timely distribution, the employer must also:
- Provide the Notice as a stand-alone document, along with a copy of the agreement containing the restrictive covenants;
- Use “clear and conspicuous terms” in the language “the worker and employer communicate about the worker’s performance”;
- Explain in the Notice the name of the restrictive covenant agreement and state “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 direct the worker to the specific provisions containing the covenants; and
- Have the worker sign the Notice.
An employer’s failure to provide sufficient notice of the non-compete agreement will result in the restrictive covenant being deemed void and may subject the employer to statutory penalties.
The New Civil Enforcement Framework: Damages, Penalties, Attorney’s Fees and Costs
The new subsection 8(a) of the statute mandates that an employer that enters into, presents to a worker or prospective worker as a term of employment, or attempts to enforce any void non-compete agreement be liable for actual damages and a statutory penalty to the aggrieved worker or prospective worker. Enforcement actions may now be brought by individuals, as well as the Division and the Attorney General, the latter of which has brand-new enforcement authority over the statute.
Available remedies for a violation of subsection 8(a) will now include:
- Actual damages, declaratory judgment, injunctive relief, reasonable costs and attorney’s fees; as well as
- Statutory penalty: $5,000 per worker or prospective worker harmed by the conduct.
Criminal Enforcement - Class 2 Misdemeanor
Finally, the Act attempts to eliminate confusion caused by language added to the statute during the 2021 Colorado Legislative Session. Previously, a violation of any portion of the restrictive covenants statute was a class 2 misdemeanor. Now, it is a class 2 misdemeanor for an employer or individual “to use force, threats or other means of intimidation” to prevent any person from engaging in lawful work.
Choice of Law and Choice of Venue Requirements
The statute now provides that, for workers “primarily” residing or working in Colorado at the time of their separation of employment, the choice of law and venue provision must be Colorado. That is, irrespective of the parties’ drafted language, the terms of any restrictive covenant will be statutorily governed by Colorado law and litigation arising from the enforceability of the restrictive covenant must take place in Colorado.
The Act’s prohibitions and requirements are not retroactive: “[t]his Act applies to covenants not to compete entered into or renewed on or after the applicable effective date of this Act.” This means that restrictive covenants entered into before August 10, 2022, will be evaluated under the prior statutory and common law framework.
Good Faith Exception
Finally, the statute contains a “safe harbor” for employers or prospective employers acting in good faith and who had reasonable grounds to believe they were not violating the statute. However, the safe harbor only protects the employer or prospective employer against the imposition of the full statutory penalty, and not from other enforcement or remedies. Further, any reduction of the penalty is entirely up to the discretion of the court.
What Now? Drafting Considerations
Going forward, employers with Colorado employees, applicants, and independent contractors subject to restrictive covenant provisions now have an entirely new paradigm within which to draft and ensure protection of their trade secrets and confidential information. We recommend employers keep in mind the following concepts when revising restrictive covenants going forward:
- Sharp Drafting.
- Confidentiality and Trade Secret definitions: Employers should be precise in drafting confidentiality and trade secret provisions, or should expressly carve out the information that, statutorily, cannot be covered by confidentiality or trade secret provisions (that is, “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.” The restrictions should be tethered to the protection of the information and should be “no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.” Overly broad provisions risk the restrictive covenant being deemed unenforceable.
- Notice: Employers should strictly follow the timing and letter of the notice requirements contained at Section 113(4).
- Compensation and Trade Secret Access. Employers will have to carefully determine which workers have access to trade secrets, and then understand that only those earning above the required compensation thresholds may be bound by a non-compete or non-solicitation of business/customer provision, at the time they execute the covenants and at the time of enforcement. Employers should carefully study the annualization of compensation requirements described at Section 113(2)(b–c).
- Multijurisdictional Compliance. Colorado’s restrictive covenant requirements are now some of the strictest in the nation, so what is drafted and deployed for Colorado workers may be materially different from what is required in the employer’s other jurisdictions.
- Good Faith. Consider how to best demonstrate the employer’s good faith, pursuant to Section 113(8)(c), while preserving attorney-client privilege or work product protection.
- Then and Now. When considering enforcement and other considerations, employers must be cognizant that covenants executed before August 10, 2022, and on or after, will be subject to a different analytic framework, statute, and common law.
Contact a member of Brownstein’s Employment Group for assistance with updating policies and procedures related to non-compete laws.