Colorado employers have less than two months to bring their noncompetition restrictions into compliance with HB22-1317, a bill passed by the Colorado Legislature in May 2022.
HB22-1317, also known as the Restrictive Employment Agreements Act (the Act), will significantly change Colorado’s restrictive covenants statute, C.R.S. § 8-2-113, limiting the enforceability of noncompetition and customer nonsolicitation restrictions. Gov. Jared Polis signed the Act on June 8, 2022, making it effective on Aug. 10, 2022. Notably, the new limitations on the ability to enforce noncompetition restrictions are not retroactive.
Under the Act, noncompetition and nonsolicitation of customer restrictions remain void unless they fall within certain statutory exceptions. The Act, however, substantially alters some of these widely used exceptions, removing the management and executive personnel exception and altering the trade secrets exception so that it applies only to highly compensated employees (earning $101,250/year or more) if the noncompete is for the protection of trade secrets and is no broader than reasonably necessary to protect trade secrets. Additionally, the Act imposes new notice requirements, expands penalties for employers that violate the statute and, restricts agreements about choice of law and choice of venue.
The most important changes under the Act are summarized below.
Permitted Restrictive Covenants
Certain noncompetition and nonsolicitation of customer restrictions will be enforceable under Colorado law if they meet specific requirements. Those restrictions include:
- A noncompete agreement that is (1) no broader than is reasonably necessary to protect the employer’s legitimate interests in protecting trade secrets and is (2) entered into with a worker or prospective worker who, at the time the noncompete is entered into and at the time it is enforced, earns an amount of annualized cash compensation equivalent to or greater than the threshold amount for highly compensated workers (currently $101,250, as set by the Colorado Department of Labor and Employment).
- A customer nonsolicitation agreement that is (1) no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets and is (2) entered into with a worker who earns 60 percent or more of the threshold amount for highly compensated workers (currently $60,750).
- A provision providing for recovery of certain expenses of educating and training a worker if the expenses are distinct from normal, on-the-job training and the recovery decreases proportionately based on the number of months that have passed since the worker completed the training.
- A reasonable confidentiality provision relevant to the employer’s business that does not prohibit disclosure of 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.
- A covenant for the purchase and sale of a business or business assets.
- A provision requiring the repayment of a scholarship if the individual fails to comply with the conditions of the scholarship.
To be enforceable, a restrictive covenant covered under one of these exceptions must also be deemed reasonable in geographic and temporal scope.
The Act has new and broad notice requirements, which necessitate employers’ close attention. Pursuant to the Act, Colorado employers must provide workers and prospective workers with a notice stating the terms of the covenant “in clear and conspicuous terms in the language in which the worker and the employer communicate.” The notice must be presented to current workers at least 14 days before the earlier of either (1) the effective date of the noncompete agreement or (2) a change of the condition of employment providing consideration for the agreement. Prospective workers must receive the notice before accepting their offer of employment. The notice must then be signed by the worker, separately from the signature on the restrictive covenant agreement itself. If the employer violates the notice requirement, the restrictive covenant will be void.
To be clear, employers satisfy the notice requirement by:
- providing a copy of the agreement;
- identifying, in a separate notice, the agreement by name and stating that the agreement contains a noncompete that could restrict the workers’ options for subsequent employment; and
- directing the worker to the sections or paragraphs of the agreement that contain the noncompete covenant language.
Enforcement and Penalties
In addition to voiding certain prohibited restrictive covenants, the Act subjects employers that enter into, present to a worker or prospective worker as a term of employment, or attempt to enforce any prohibited restrictive covenant to a penalty of $5,000 for each impacted worker or prospective worker, injunctive relief, actual damages, and attorneys’ fees and costs. The Division of Labor Standards and Statistics, the attorney general and individual workers can bring enforcement actions (or, in the case of an individual, a private right of action, as applicable) to enforce the Act’s requirements.
While the Act contains a “safe harbor” eliminating or reducing the full statutory penalty if employers or prospective employers can show they acted in good faith and had reasonable grounds to believe they did not violate the statute, other remedies, such as injunctive relief and actual damages, may still be imposed.
The Act also clarifies language added to the statute during the 2021 Colorado legislative session, which stated that a violation of any portion of the statute is a class 2 misdemeanor. The Act explains that only the use of force, threats or other means of intimidation to prevent a person from engaging in lawful work are grounds for the criminal penalty.
Impacted Parties, Venue and Governing Law
The Act impacts any business that employs or hires as an independent contractor a person who primarily lives or works in Colorado. Moreover, employers cannot require adjudication of a restrictive covenant outside Colorado if, at the time of termination, the worker primarily lived or worked in Colorado, and it further bans employers from trying to select any governing law other than Colorado law for workers who reside and work in Colorado.
The Act is not retroactive, nor will it affect existing state or federal case law in effect before the Act’s effective date. Stated another way, agreements signed before the Act’s effective date will not be affected unless they are renewed or renegotiated.
Practical Guidance and Takeaways
In anticipation of the Aug. 10, 2022 effective date, employers should ensure their agreements containing the restrictive clauses discussed herein, particularly those concerning noncompetition and nonsolicitation of customers, comply with the Act. Employers should also begin preparing the required notices, analyze any policies or protocols with regard to which employees or prospective employees receive a noncompetition or nonsolicitation of customer restriction, and consult with counsel prior to attempting enforcement of a restrictive covenant.
If you have questions or require assistance with complying with the Act, the BakerHostetler Labor and Employment team is here to help.