Colorado recently enacted a law increasing criminal penalties for employers seeking to implement or enforce noncompetes that violate Colorado’s restrictive covenants law. The law goes into effect on March 1, 2022, revising the violation from a misdemeanor to a Class 2 misdemeanor with increased penalties. This law is seen by many as part of a larger trend of states making it harder for employers to implement and enforce noncompetes, as is the case with Colorado’s noncompete agreements.
Colorado’s Noncompete Statute
In Colorado, noncompetes are void unless they relate to:
- contracts for the purchase and sale of a business or the assets of a business;
- contracts for the protection of trade secrets;
- contracts for the recovery of expenses of educating or training an employee who has served the employer for less than two years, and;
- executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. The statute also provides that it is unlawful to “use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.”
Colorado’s New Law
On March 1, 2022, Colorado Senate Bill 21-271 goes into effect. Starting on that date, any violation of Colorado’s noncompete statute will be punishable by up to 120 days in jail, a fine of up to $750, or both. This is an increase from the current penalty of up to 60 days in jail and a fine of $10 to $250.
The new penalties do not change the noncompete law itself, including the provisions governing the enforceability of restrictive covenants. Rather, it increases the violation to a Class 2 misdemeanor and increases the potential penalties for such a violation.
Impact of the New Law
The new law creates challenges for Colorado employers and business with Colorado employees. At a minimum, it further incentivizes compliance with the noncompete law. Importantly, in Colorado, a customer non-solicitation provision is considered a form of non-compete and, therefore, the new criminal penalties apply to unlawful customer non-solicitation covenants, as well.
To avoid stiffer penalties for violation of the law, employers should avoid overzealous and unreasonable use of noncompetes and should only use noncompetes when permitted by Colorado law. The increased potential criminal exposure and potential penalties also make much more significant the question of what constitutes the use of “force, threats, or other means of intimidation.” Additionally, it is an open question as to whether the law punishes the mere inclusion of an unenforceable noncompete or just an attempt to enforce such a noncompete, or both.
Employers must be mindful of these considerations and should review any restrictive covenants that may be impacted by the new law, particularly with the March 1, 2022 date fast approaching.
As noncompete laws continue to change throughout the country, it is essential for employers, and in particular employers who have employees in multiple jurisdictions that have varying noncompete laws, to stay informed of the changes taking place and to update their practices and agreements accordingly.
Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.
