Colorado Enacts Amendment to Non-Compete Law with More Restrictions and Stricter Penalties

On August 10, 2022, an amendment to Colorado’s non-compete law, which sets stricter limits on employers and the potential for higher penalties, went into effect. H.B. 22-1317 amends Colorado’s existing law, following a recent trend to prohibit non-compete agreements for workers earning less than a certain salary threshold. Notable changes include increasing the penalty for violations to $5,000, prohibiting non-compete agreements for all employees who are not “highly compensated,” and prohibiting customer non-solicitation agreements for all employees making under a certain yearly salary. 

Why should the amendment matter to employers?

The amendment put significant additional restrictions on employers who wish to require that their employees enter into non-compete agreements. Previously, Colorado law prohibited restrictive covenants unless they were related to: (1) contracts for the sale of a business; (2) contracts for the protection of trade secrets; (3) agreements to recover expenses related to education and training, and (4) agreements with executive and management personnel, officers, and professional staff to executive management personnel. Now, except in the limited exceptions below, post-employment non-compete agreements, including customer non-solicitation agreements, are banned.

What types of restrictive covenants are permitted under the amended law?

Post-employment non-compete agreements: Colorado law presumes that non-compete agreements are void, unless:

(1) The employee is a “highly compensated employee”;

A “highly compensated employee” who may be subject to a non-compete must have annual earnings at or above the highly compensated worker threshold – which is currently $101,250 annually.

(2) The purpose of the non-compete agreement is to protect trade secrets, and

(3) The agreement is not any broader than what is “reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.”

Customer non-solicitation agreements: Customer non-solicitation agreements are permissible only for employees earning 60% or more than the highly compensated worker threshold – which would currently be $60,750 annually.

Note, however, that employee non-solicitation agreements are not covered by the amendment, and Colorado precedent suggests that these agreements are still permissible under the law.

Confidentiality agreements: “Reasonable” confidentiality agreements are permissible as long as they do not prohibit the disclosure of information that: (1) arises from the employee’s “general training, knowledge, skill, or experience,” (2) “is readily ascertainable to the public,” or (3) if the worker otherwise “has a right to disclose legally protected conduct.”

Other types of agreements explicitly permitted in the amendment: The amendment also specifically permits restrictive covenants in agreements for the purchase and sale of a business, agreements providing for recovery of training and education expenses, and agreements for the repayment of a scholarship provided to a worker if the individual did not comply with the terms of the scholarship.

Which employees are covered by the amendment?

The amendment applies to all employees and prospective employees. As addressed above, there are specific instances in which non-compete agreements or customer non-solicitation agreements are permitted for employees earning above a certain wage.

What additional provisions should employers be aware of?

Choice of Law and Venue: For employees who primarily work and reside in Colorado, employers may not require the employee to adjudicate the dispute outside of Colorado, and Colorado will presume that Colorado law governs the agreement. Most importantly, the amendment imposes some of the highest penalties for violation of the law, leaving employers vulnerable to significant penalties if they fail to comply with the law.

Notice:

For new hires, employers must provide notice of the restrictive covenant before the employee accepts the job offer.

For current employees, employers must provide notice of the restrictive covenant at least 14 days before the earlier of the effective date of the covenant or the effective date of any change in the terms or conditions of the employment that provides consideration for the agreement.

The statute also lays out the requirements of the notice and that failure to comply with the notice provision will void the agreement.

Penalties:

For attempting to enforce, enter into, present non-compete agreements to employees or prospective employees, when not allowed, employers may be liable for actual damages and a penalty of $5,000 per worker harmed. Employers do have the defense, to any damages award or penalty, of showing that it had reasonable grounds for believing it was complying with the law. The state attorney general is also authorized to bring an action for injunctive relief or penalties.

When is the amendment effective?

The amendment is already effective, as of August 10, 2022. Importantly, the amendment is not retroactive, and will not affect the validity of any non-compete agreements entered into prior to August 10, 2022. However, it may affect the enforceability of certain provisions, as the amendment requires that employees meet the statutory compensation threshold at both the time of signing and the time of enforcement.

Outstanding questions may be clarified by regulations or administrative guidance. Colorado employers and employers with employees working in Colorado should monitor developments.