Colorado Adds New Limitations To Non-Compete And Non-Solicit Agreements – Employee Benefits & Compensation

In recent years, a number of states have adopted legislation
restricting the ability of employers to enter into non-compete
agreements with employees who are not “highly
compensated.” The State of Colorado has now followed this
trend. Colorado’s new restrictive covenants law, effective
August 10, 2022, bans new non-competes and non-solicits with
employees who do not meet the state’s compensation threshold.
The law requires advance notice before entering into a non-compete
with a highly compensated employee, and provides that disputes with
workers in Colorado regarding non-competes must be adjudicated in
Colorado pursuant to Colorado law.

Ban for Non-Highly Compensation Employees

The new Colorado statute prohibits non-competes with employees
who are not highly compensated. Highly compensated employees have
annualized cash compensation that exceeds a threshold determined by
the Colorado Department of Labor and Employment. That threshold is
currently $101,250 and will be adjusted annually. For a non-compete
to be valid, the employee’s annualized cash compensation must
exceed this threshold both at the time the employee enters into the
non-compete and “at the time it is enforced.”

Colorado’s new statute also prohibits agreements not to
solicit customers with employees whose annualized cash compensation
is less than 60% of the threshold amount (currently $60,750). The
statute is silent as to agreements not to solicit employees. The
restrictions in the new statute do not apply to reasonable
confidentiality agreements, restrictive covenants imposed as part
of a sale of a business, or agreements to recover certain costs of
education and training that are distinct from standard on the job
training.

Restrictive covenants with highly compensated employees in
Colorado whose annualized cash compensation exceeds the required
threshold will still be subject to the existing limitations on
restrictive covenants, including that they be designed to protect a
legitimate interest of the employer and be no broader than
necessary to protect that legitimate interest.

Notice

The new law requires employers in Colorado to give notice to
employees that they will be asked to enter into a non-compete. The
statute imposes several notice obligations:

• An employer must give a new employee notice of the covenant not
  to compete and the actual terms of the covenant before the employee
  accepts the offer of employment.

• Existing employees must get notice and the terms of the
  covenant not to compete at least 14 days before the effective date
  of the covenant or the effective date of any change in employment
  terms (including compensation) that provides consideration for the
  covenant not to compete.

• The employer must give this notice in a separate document, and
  the notice must be in “clear and conspicuous terms in the
  language in which the worker and employer communicate about the
  worker’s performance.”

• The statute provides that an employer meets its notice
  obligation if the notice includes a copy of the agreement with the
  covenant not to compete, identifies the agreement by name, states
  that the agreement contains a covenant not to compete that that
  could restrict subsequent employment options, and identifies the
  specific provisions of the agreement that contain the covenant not
  to compete.

• Importantly, the worker must sign the notice to acknowledge
  receipt.

Choice of Law and Forum

Under the new statute, a covenant not to compete with a worker
who primarily resided or worked in Colorado at the time of
termination of employment must be governed by Colorado law, even if
the agreement provides for the law of a different state. Similarly,
a covenant not to compete with an employee who primarily resided or
worked in Colorado at the time employment ends may not require the
employee to adjudicate the enforceability of that covenant outside
of Colorado.

Enforcement

An employer who seeks to enter into, present or enforce a
covenant not to compete that is void under the new Colorado law is
liable for actual damages and a penalty of $5,000 per worker
harmed. The statute gives the courts discretion to reduce or
eliminate the penalty if the employer acted in good faith and had
reasonable grounds for believing that its conduct did not violate
the statute. An employee or prospective employee may seek actual
damages and may recover attorneys’ fees in any action brought
under the new statute. An impacted employee (or prospective
employee) or the Colorado Attorney General may seek injunctive
relief or penalties. An employee or the employee’s actual or
potential subsequent employer may seek a declaratory judgment that
the covenant not to compete is unenforceable.

Conclusion

With this new statute, Colorado joins jurisdictions from
Washington state to Washington, D.C. that have recently enacted
laws prohibiting non-competes with employees who are not highly
compensated and requiring specific and detailed notice for highly
compensated employees who do have non-competes. Colorado, like many
of these other states, has also taken steps to try to ensure that
employers and employees based in Colorado cannot avoid the Colorado
statute by choosing to apply the law of another state or requiring
disputes to be resolved in another state. As with many of these
statutes, the Colorado law presents challenges to employers, but
also provides some clarity about steps employers can take to ensure
that their agreements with employees in Colorado are
enforceable.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.