Colorado Passes Law Drastically Limiting Noncompetes

Posted by Benjamin I. Fink on

Colorado’s legislature recently passed a bill drastically limiting the circumstances under which noncompetes and other restrictive covenants may be used. It is expected that Colorado’s Governor, Jared Polis, will sign the bill into law, and upon execution, the bill will become effective 90 days after the legislature adjourns, in August of 2022. If executed, the law will place Colorado among several other states that prohibit restrictive covenants for low-wage workers.

Significant Limitations to Restrictive Covenants
Colorado currently permits restrictive covenants as long as 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 new legislation deems all restrictive covenants presumptively void unless they relate to:

  • contracts for the purchase and sale of a business or the assets of a business;
  • restrictive covenants executed by a “highly compensated worker” when the noncompete is no broader than reasonably necessary to protect trade secrets; and
  • restrictive covenants executed by workers earning 60% or more of a “highly compensated worker.”

A “highly compensated worker” is defined as one who is earning $101,250 a year or more, and the figure is indexed to the threshold set by the Colorado Department of Labor and will increase annually.

Thus, as it relates to employees, the enforceability of a restrictive covenant will depend on the employee’s earnings, rather that the employee’s position with the company.

Importantly, if an employee primarily resides or works in Colorado at the time the employee’s employment ends, a choice-of-forum provision may not require adjudication outside of Colorado.

Also, regardless of any contractual provision to the contrary, Colorado law will govern the enforceability of the restrictive covenants for employees who primarily resides or works in Colorado at the time the employee’s employment ends. This means employers cannot get around the statue by including a provision choosing the law of another state or by requiring employees to litigate in another state.

Strict Notice Requirements under the New Law
Additionally, under the new law, an employer is required to provide notice of the restrictive covenants to prospective and current employees.

As to a prospective employee, the employer must provide notice of the restrictive covenants before the prospective employee accepts an offer of employment. As to a current employee, the employer must provide 14-days’ notice before the effective date of the covenants or the additional consideration to be provided to the employee. The law also spells out what constitutes notice, requiring such notice to be in writing and signed by the employee, in a separate document with clear and conspicuous language, include the agreement containing the covenants, identify the agreement by name and state that it contains a covenant that could restrict the employee’s future employment options, and direct the employee to the specific paragraphs containing the covenants.

Damages, Penalties, and Attorneys’ Fees for Noncompliance
Employers face substantial consequences if they enter into, attempt to enforce, or present an employee with any void restrictive covenants or fail to provide the requisite notice required under the new law. In addition to actual damages and injunctive relief that may be sought by current or prospective employees, the law imposes a statutory penalty of $5,000 per employee and provides for the recovery of reasonable attorneys’ fees.

However, Colorado judges have full discretion in imposing the $5,000 penalty, and may not impose the penalty if the employer can demonstrate it acted in good faith and had reasonable ground for believing it was not violating the law. Additionally, the Colorado Attorney General is authorized to sue for relief under the statute.

Impact of the New Law
The new law creates additional challenges for Colorado employers and businesses with Colorado employees. Employers with employees in Colorado should take immediate steps to review the restrictive covenants they use and assess when they are used and whom they are used with. Additionally, strict notice procedures are necessary to ensure the employer is in compliance with the notice requirements of the new law both as to prospective and current employees.