In recent years several states have limited the scope of non-compete agreements, including Illinois, Maine, Nevada, Oregon, Rhode Island, and Washington, while the District of Columbia has largely prohibited non-competes altogether. Legislators and courts in those and other states appear more hostile to non-competes than before, especially as some employers had attempted to impose such restrictions on a wider swath of their employees, including those at relatively low wage levels.
On June 8, 2022, Colorado Governor Jared Polis signed into law HB 22-1317, which significantly amends existing state law regulating “restrictive employment agreements”, or non-competes. The new law takes effect in August and restricts the use of non-competes further than does current law. It also imposes strict notice requirements and penalties for violations.
Current non-compete categories and what will change
Under current law (CRS § 8-2-113), non-competes are prohibited unless they come within one of four exceptions. The new law eliminates two of those exceptions, one permitting non-competes generally involving executives, higher-level managers, or their professional staff, and the other allowing such agreements if the employer considers them necessary to protect its trade secrets.
Under the revised law, there will only be two exceptions to the general prohibition on non-competes (or agreements not to solicit the employer’s customers, which are considered very similar to a non-compete):
- Non-compete agreements are only valid with employees who are “highly-compensated” (currently earning $101,250 per year or more) and if the non-compete is for the “protection of trade secrets and no broader than is “reasonably necessary” to protect that interest of the employer’s.
- Agreements specifically not to solicit the employer’s customers are valid only with employees who earn at least 60% of the threshold amount of a highly-compensated employee, or about $60,000, but again may be no broader than necessary to protect the employer’s interests.
The threshold for a “highly compensated” employee is determined by the Colorado Department of Labor and Employment and will be adjusted annually. This creates a “bright-line test” for what level of employee may be subject to a non-compete agreement, as the current language is vague and has been heavily litigated. In addition, some employers were requiring lower-level employees to agree to non-competes, which many see as unfair and a restriction on labor mobility.
An employer may still enforce an agreement with an employee for the recovery of certain training costs, if the employee leaves within two years of receiving the training, but such training must be distinct from “normal, on-the-job training” as the statute phrases it. The amount an employer may recover must be phased out proportionately over the two-year period. The new statute also continues to allow non-compete agreements relating to the purchase and sale of a business, which restrict the seller of the business from competing with the buyer for a period of time and in a certain geographic area.
Finally, the new law permits reasonable confidentiality agreements so long as they do not prohibit a former employee from disclosing information relating to his or her general training, knowledge, skill or experience. For example, an employer may not prohibit an accounting employee from using Excel or Quickbooks in a subsequent job, if that is general knowledge the employee has in order to do her work, but specific customer or cost information may be confidential and the employer can prohibit the employee from using that.
New notice requirements
SB22-1317 imposes strict notice requirements designed to protect employees. The employer must give a prospective worker notice of a non-compete covenant and its terms before the prospective worker accepts an employment offer. For current workers, the employer must provide similar notice at least 14 days before the earlier of either (1) the covenant’s effective date or (2) the effective date of any additional compensation or change in the conditions of employment. The notice must be in “clear and conspicuous terms in the language in which the worker and employer communicate” and the worker must sign the notice for it to be considered effective.
This puts a larger burden on the employer, who must provide the notice, obtain the signature of the current or prospective worker on the notice, and then provide the actual non-compete and obtain a signature on that as well. The employer may provide a copy of the non-compete agreement (or whatever agreement contains the non-compete terms) along with the required notice, but the notice must (1) identify the agreement by name, (2) state that it contains a covenant not to compete that could restrict the worker’s employment options in the future and (3) directs the worker’s attention to the specific non-complete provisions.
Choice of law and venue provisions
Many employers are based (or incorporated) in one state but have employees elsewhere. For example, Google is based in California but has employees in Colorado and other states. Lockheed Martin is headquartered in Maryland but employs hundreds of people in Colorado. Some employers (not Google or Lockheed Martin, to my knowledge) have required employees to enter into non-competes with provisions that the state law where the company’s headquarters are located will govern the agreement, and that any lawsuit to enforce the non-compete must be filed in that state.
Of course, this can place a great burden on the former employee, if he or she worked in, say Colorado and found another job here, but the former employee sues to enforce a non-compete in Florida, for example. HB 22-1317 restricts this practice and states that Colorado law will apply to any worker who, at the time of termination of employment, primarily resided and worked in Colorado, even if the written non-compete agreement says that some other state’s law governs. In addition, the agreement may not require the worker to “adjudicate”, that is, go to court, outside of Colorado. Any action by the former employer to enforce a non-compete against a Colorado worker who “primarily resided and worked” in the state at the time of termination must be brought in Colorado courts, and Colorado law will apply. The statute also allows a worker, or a worker’s subsequent employer, to file an action seeking a “declaratory judgment” as to whether the non-compete is enforceable.
Penalties and enforcement of the new law
HB 22-1317 creates new enforcement mechanisms and civil penalties for violations. First, it states broadly that an employer may not enter into, present to a worker (or prospective worker) as a term of employment or attempt to enforce, any non-compete that is void under this statute. So even putting such an unenforceable agreement in front of the worker is a violation, opening the employer to penalties.
Penalties include actual damages, as well as a penalty of $5,000 per current or prospective workers “harmed by the conduct”, which is somewhat vague. An individual worker may file suit for penalties and injunctive relief, a court order to the employer to stop trying to enforce the agreement. The worker may also recover actual damages, attorneys fees, and costs. In addition, the state attorney general may file a suit, but only for injunctive relief and statutory penalties.
There is an exception if the employer can show that it had “reasonable grounds for believing” that its actions were not a violation. In that case the court may limit the penalty awarded to the worker or deny a penalty altogether. However, employers should not try to rely on this exception, as it may be difficult to prove those “reasonable grounds.”
The bill also clarifies an earlier amendment to the statute that actually criminalizes violations of the non-compete law. It states that anyone who uses “force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation” commits a Class 2 misdemeanor, which is punishable by fines, jail time, or both. It is not a misdemeanor to violate other provisions of the statute, just to use “force, threats, or other means of intimidation” as described above.
Takeaways for employers
- HB 22-1317’s changes to Colorado law are effective on or about August 22, 2022. Any non-compete agreements entered into after that date, and any existing agreements renewed after that date, will be governed by the new law. Be sure to review which employees currently have such agreements and whether they fall into the permitted exceptions.
- Customer non-solicitation agreements will be covered after the effective date but are enforceable only for those earning less than 60% of the “highly-compensated” threshold.
- Agreements prohibiting solicitation of employees of the former employee are still permitted.
- A non-compete agreement with a high-level executive or manager (one who is “highly-compensated) will not be enforceable unless it is also for the protection of the employer’s trade secrets. If it just restricts the former employee from working for a competitor, it will be in violation of the new law.
- It is critical that employers comply with the notice provisions of the new law when entering into new non-compete or non-solicitation agreements.
This new law is a significant change from current law, and it is important that employers be ready to comply with it. If you have questions, please contact Mark Spitz at Spitz Legal Counsel, 720-575-0440 or mark@spitzlegalcounsel.com.