Employers in Colorado and across the United States have long used non-compete and non-solicit clauses to restrict their former employees’ activities once they leave the company. However, many states are starting to crack down on the use and enforceability of these agreements. Colorado is one of 12 states to place restrictions on the use of these clauses, while California, Oklahoma, and North Dakota have banned their use entirely.
What are Non-Compete and Non-Solicitation Agreements?
Non-compete and non-solicitation agreements are both useful tools frequently used in business to mitigate the loss of valuable tangible and intangible assets.
With a non-compete agreement (NCA), an employee agrees not to compete with the company for a specific period after their employment. On the other hand, with a non-solicitation agreement (NSA), an employee agrees not to solicit the organization’s clients, employees, or other individuals with whom the employee worked.
These agreements aren’t typically appropriate for all employees. However, they are commonly relied upon if an employee has substantial client contacts or a robust business development presence. When drafting an NCA or NSA, companies need to consider the following:
Duration: The duration of the agreement must be fairly balanced. Six months to a year is often considered “typical,” while greater than two years could be unreasonable and potentially unenforceable.
Location: The restriction should be reasonably tailored geographically, accounting restriction is needlessly broad, the entire agreement risks being deemed unreasonable and, therefore, legally unenforceable.
Recent Changes to Colorado’s Non-Compete Laws
Last spring, the Colorado legislature passed a bill amending Colorado’s non-compete statute, C.R.S. § 8-2-113. The bill was then signed into law by Governor Jared Polis in August 2022. The new law removes nearly every exception to the general rule and voids most non-compete agreements. Under the changes, enforcing the remaining permitted agreements is also more challenging.
Non-compete agreements with executives, managers, or professional staff to managers or executives, or those allowed only to protect trade secrets, are no longer legal under the changes. Now there are only two exceptions to the general rule:
Agreements with “highly compensated employees” (HCEs) are allowed only if the covenant protects trade secrets. In 2022, HCEs were defined as those earning an annualized cash compensation of at least $101,250. In 2023, the salary requirement has been raised to $112,500. The Colorado Department of Labor and Employment (CDLE) determines this threshold annually.
Agreements for the non-solicitation of customers with employees earning more than 60 percent of the HCE salary threshold are permitted. However, the statute doesn’t address agreements not to solicit employees. The new restrictions don’t apply to restrictive covenants involved in the sale of a business, reasonable confidentiality agreements, or agreements to recover costs of education and training that are distinctive of regular on-the-job training.
Furthermore, according to the new law, all disputes with Colorado workers regarding non-competes must be adjudicated in this state. Therefore, Colorado employers must ensure strict compliance with these recent changes.
Restrictive agreements with Colorado HCEs whose annualized cash compensation surpasses the required threshold are still subject to the previous limitations on restrictive agreements, including that they:
Must be designed to protect a legitimate employer interest
Are no broader than necessary to protect that legitimate interest
Under the recent changes to the non-complete laws, Colorado employers must give employees notice that they will be asked to sign a non-compete agreement. The employer’s notice obligations include the following:
Provide a new employee notice of the non-compete clause and its terms before they accept an employment offer
Provide existing employees a notice and the terms of the non-compete agreement a minimum of 14 days before its effective date or the effective date of changes in employment terms (including compensation) that provides consideration for the non-compete agreement.
Provide such notice in a separate document. It must be in “clear and conspicuous terms in the language in which the worker and employer communicate about the worker’s performance.”
Have the employee sign the notice to acknowledge its receipt.
By law, employers meet their notice obligation if the notice:
Contains a copy of the non-compete agreement
Identifies the agreement by name
Details that the agreement includes a non-compete clause that could restrict subsequent employment options
Identifies the particular provisions of the agreement containing the non-compete clause
Law and Venue Choice Requirements
Under the new laws, a non-compete agreement with an employee who primarily lived or worked in Colorado when their employment was terminated must be governed by Colorado law. This remains the case even if the contract provides for the law of a different state.
Enforcement and Penalties
Employers who attempt to enter into, present, or enforce an invalid non-compete agreement under these new Colorado laws will be liable for actual damages and a $5,000 penalty per employee harmed. By statute, the courts may decrease or remove the penalty if the employer acted in good faith and reasonably believed that its actions didn’t violate the new laws.
A current or prospective employee can pursue actual damages and recover attorneys’ fees in any legal action brought under the new statute. An impacted current or prospective employee, the Colorado Attorney General, or the Division of Labor Standards and Statistics can all pursue injunctive relief or penalties. Furthermore, an employee or their actual or prospective employer has the legal right to request a declaratory judgment that the non-compete agreement is unenforceable.
What About Independent Contractors?
While the new laws don’t specifically reference non-compete agreements with independent contractors, the language used in the law is “workers” rather than “employees.” This reference suggests that lawmakers intended the requirements apply to employees as well as independent contractors and other non-employee workers. However, it’s yet to be seen if the State issues any guidance on this issue.
If you have questions about non-compete or non-solicitation agreements or recent changes to Colorado law, we are here for you. Call Ball & Barry Law today at (720) 439-2530 or contact us online.