Colorado’s New Non-Compete Laws Are Here: What Employers Need to Know.

By Robert M. Thomas, Esq.

              Colorado House Bill 22-1317 (“HB 22-1317)[1] is now effective as of August 10, 2022, and imposes some of the most restrictive measures against non-competition covenants between employers and employees in the country.  While HB 22-1317 does not apply to otherwise-valid non-competition covenants executed prior to August 10, 2022 (meaning, employers may still enforce those agreements under the previous version of Colorado’s non-competition statute and law interpreting the same),[2] employers must ensure that any new or renewed non-competition covenants or agreements comply with HB 22-1317’s restrictions and notice requirements, or else they could face serious financial consequences.

Limited Exceptions to the Prohibition Against Covenants Not to Compete On and After August 10, 2022.

              To summarize, for any covenants not to compete executed or renewed on and after August 10, 2022, only the following covenants will be permitted:

· Covenants with employees who, at the time the covenant is entered into and at the time it is enforced, qualify as “highly compensated workers” (i.e. earning at least $101,250.00 in 2022, and adjusted annually thereafter), but only if the covenant is for the protection of trade secrets and is no broader than is reasonably necessary to protect the employer’s interest in protecting its trade secrets.

· Covenants entered into for the purchase and sale of a business or the assets of a business.

· Certain limited covenants pertaining to the recovery of scholarship or education and training-related costs.

Thus, the previous exceptions for executive and management personnel and officers, professional staff to executive and management personnel, and “[a]ny contract for the protection of trade secrets” are now gone.[3]  Employees must now be highly compensated workers (as defined), and the covenant must be intended to protect the employer’s trade secrets, in order to be enforceable. 

While agreements not to solicit an employer’s customers after the termination of employment are still permissible under HB 22-1317, these customer non-solicitation agreements are only valid if the employee earns at least sixty percent of the “highly compensated workers” threshold (both at the time of execution and at the time of enforcement of the agreement), and the agreement is no broader than reasonably necessary to protect the employer’s legitimate interests in protecting trade secrets.  Non-solicitation agreements that prohibit the solicitation of a former employer’s employees are not addressed in HB 22-1317 but, at least as of now, such agreements are still allowed.[4]   Reasonable confidentiality provisions relevant to an employer’s business are still permissible as well, subject to limitations.

New, Mandatory Notice Requirements for Otherwise-Valid Covenants Not to Compete.

HB 22-1317 also imposes new, detailed notice requirements for covenants not to compete which, if not followed, can render an otherwise-valid covenant void.  For current workers, notice of the covenant and its terms must be provided at least fourteen days before the earlier of 1) the effective date of the covenant; or 2) the effective date of any additional compensation or change in the terms or conditions of employment that provides consideration for the covenant.  This language strongly suggests that continued employment, standing alone, will no longer be sufficient consideration for an otherwise-valid noncompetition covenant entered into between a current employee and the employer after August 10, 2022.[5]  For prospective workers, the employer must provide notice of the covenant and its terms before the worker accepts any offer of employment. 

For either current or prospective workers, the required notice must be 1) submitted as a separate document apart from any other covenants; 2) written in clear and conspicuous terms; 3) signed by the worker.   The employer satisfies the notice requirements of HB 22-1317 when the written notice 1) is provided with a copy of the agreement containing the covenant not to compete; 2) identifies the agreement containing the covenant not to compete by name, and states that the agreement contains a covenant not to compete that could restrict the worker’s employment options in the future; and 3) directs the worker to the specific provisions or paragraphs in the agreement containing the covenant.

Potential Penalties and Jurisdictional Issues.

Last, Colorado law now provides for harsh penalties for attempts to enforce void non-competition covenants under HB 22-1317 (either substantively void or void for failure to follow specific notice requirements).  Employers may be liable for actual damages and penalties of up to $5,000 per worker or prospective worker.  Further, aggrieved workers are entitled to recover their reasonable costs and attorneys’ fees expended in obtaining either injunctive relief or damages for an employer’s attempt to impose or enforce a void covenant not to compete. 

HB 22-1317 also provides that the enforceability of any covenant not to compete must be decided under Colorado law if the aggrieved worker primarily resided and worked in Colorado at the time of termination of employment.  Similarly, employers cannot require employees who primarily resided or worked in Colorado at the time of termination of employment to litigate the enforceability of a covenant not to compete outside of Colorado. 

Takeaways.

              To the extent employers intend to enter into non-competition agreements or covenants with onboarding employees after August 10, 2022, or renew/revise existing non-competition agreements or covenants, these employers must be in compliance with HB 22-1317’s new procedural and substantive requirements.  The new restrictions and requirements for such covenants are a massive change from previous law, and may require the advice of skilled and experienced employment counsel to help navigate through the new changes.

[1]The full text of the bill as enacted is available here: https://leg.colorado.gov/sites/default/files/2022a_1317_signed.pdf

[2]HB 22-1317 § 2 (“This act applies to covenants not to compete entered into or renewed on or after the applicable effective date of this act.”).

[3]Colo. Rev. Stat. § 8-2-113(2) (March 1, 2022) (listing the old exceptions to the general prohibition against covenants not to compete).

[4]Phoenix Capital, Inc. v. Dowell, 176 P.3d 835, 844 (Colo. Ct. App. 2007).

[5]See Lucht's Concrete Pumping, Inc. v. Horner, 255 P.3d 1058, 1062 (Colo. 2011) (prior authority discussing continued employment as consideration for noncompetition agreements).