On August 10, 2022, Colorado’s new statute further restricting non-competition and non-solicitation provisions becomes effective. The new law, which passed earlier this year, continues Colorado’s trend toward increased scrutiny of post-employment restrictions and adds Colorado to the growing list of states that restrict the use of out-of-state choice of law and forum provisions in agreements that contain such restrictions.
Colorado’s existing law
Our colleagues’ description of Colorado’s previous statutory framework for restrictive covenants are available here. Briefly, Colorado’s previous law invalidated non-compete restrictions unless they fell into one of four categories: (1) covenants made in connection with the purchase and sale of a business, (2) covenants made for the protection of trade secrets, (3) covenants for the recovery of expenses incurred in educating and training employees who were employed for less than 2 years, and (4) covenants for executive and management personnel (and their professional staff) and officers. C.R.S. § 8-2-113. Those exceptions, while limited, still allowed employers a fair amount of leeway in the use post-employment restrictions, particularly for highly-compensated individuals or those with access to an employer’s sensitive information.
Colorado’s trend away from that relatively permissive framework became apparent in March, when it became the first state to impose misdemeanor criminal liability for the use of “force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation.” While it remains to be seen whether that criminal liability applies to just asking an employee to sign an unenforceable restrictive covenant or if some actual attempt at enforcement is required (there are no indications that any criminal charges have yet been filed under the statute), it appeared as though additional restrictions on non-compete and non-solicit covenants were on the horizon.
Colorado’s House Bill 22-1317 and its implications
Colorado’s legislature wasted no time in following up on its criminalization of overbroad restrictive covenants. House Bill 22-1317 (“the Act”) was passed in May and signed by Governor Jared Polis on June 8, 2022, making it effective on August 10, 2022. As our colleagues previously noted, the Act imposes significant new restrictions on the use of non-competition and non-solicitations restrictions, bars out-of-state choice of law or forum provisions in many instances, and imposes a notice requirement that will require a separate notice document for any employee subject to such restrictions.
To be clear, while the Act generally refers to covenants “not to compete,” it will also apply to customer non-solicitation agreements as well. The Act retains the language of C.R.S. § 8-2-113 stating that the assembly intended to preserve “existing state and federal case law in effect,” and Colorado courts have repeatedly found that non-solicit agreements are “a form of noncompete agreement.” 23 LTD v. Herman, 2019 COA 113, ¶ 20, 457 P.3d 754, 758; Phoenix Capital, Inc. v. Dowell, 176 P.3d 835, 844 (Col. App. Ct. 2007) (same).
Employers who wish to continue using post-employment restrictions with Colorado employees should take note of the following:
- The Act eliminates Colorado’s previous allowance of non-competition restrictions for “executive and management personnel” and instead, like many other states, will set an annual income threshold for enforcement. Non-competition provisions are only permissible for individuals who, at the time of both execution of the agreement and enforcement, earn in excess of the threshold for a “highly compensated worker” as determined by the state’s Department of Labor. That amount, which is $101,250 for 2022, will be adjusted annually based on inflation and is one of the higher income thresholds in the nation for non-compete enforcement. Customer non-solicits are not enforceable unless the individual makes at least 60% of that “highly compensated worker” threshold—$60,750 for this year—again both at the time that the agreement is first entered into and when it is enforced.
- In addition to the income thresholds referenced above, the Act bars enforcement of non-compete and non-solicit provisions unless the covenant “is for the protection of trade secrets and is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.”
- The Act requires employees subject to a restrictive covenant to be given notice of it before they begin employment (for new employees). For existing employees presented with new restrictions, the notice must be given to the employee the earlier of (1) the effective date of any restriction, or (2) the effective date of “any additional compensation or changes in the terms or conditions of employment” that provide consideration for the restriction. Beyond the timing requirements mentioned above, the notice must: (1) be in a separate document, (2) be signed by the employee, (3) be accompanied by a copy of the agreement, (4) identify the agreement by name and state that the agreement contains a covenant not to compete that could restrict the workers’ options for subsequent employment following their separation, and (5) point out the specific paragraphs or sections in the agreement where the restrictions are contained.
- With regard to choice-of-law and forum provisions, the Act requires the application of Colorado law to determine the enforceability of a restrictive covenant, and bars out-of-state forum selection provisions, if the employer “primarily resided and worked in Colorado.” While Colorado is not the first state to require the application of its own laws to agreements with individuals living and residing there, unlike California and Washington, the Act looks to the employee’s location at the time of termination, rather than execution of the Agreement, in determining whether Colorado law and forum must apply.
- The Act creates some stiff penalties for even presenting an individual with an unenforceable agreement, regardless of efforts to enforce one. Specifically, any employer who enters into, presents to a worker, or attempts to enforce an restrictive covenant not in compliance with the Act is subject to a private right of action and a $5,000 per violation penalty, along with injunctive relief and attorneys’ fees and costs.
Colorado is certainly not the first state to limit the use of post-employment restrictions, but the Act creates some unique challenges and risks for employers. While the Act is not retroactive, it arguably requires the application of Colorado common law to determine a restrictive covenant’s enforceability if the employee is a Colorado resident at the time of termination, regardless of when the agreement was signed. Even putting that issue aside, determining enforceability based on where the employee lives at the time of termination, instead of the time of execution of the agreement, presents particular challenges in an era of increased remote working arrangements.
Similarly, while a notice provision is included in many new state laws regarding restrictive covenants, Colorado appears to be the first state to require that notice in a separate document signed by the employee, which employers will want to bear in mind during the onboarding process. Any employer with workers in Colorado should immediately ensure that their new agreements are in compliance with the Act, or else risk significant penalties from civil suits for even presenting unenforceable agreements to employees.
 The Act’s general prohibition on post-employment restrictions contains an exception for non-solicitation restrictions above a certain income threshold (discussed below). However, that exception only refers to covenants not to solicit customers, and says nothing about covenants not to solicit employees. Regardless, employee non-solicitation provisions are still likely permissible based on existing Colorado law, which draws a distinction between the two. See Phoenix Cap., Inc. v. Dowell, 176 P.3d 835, 844 (Colo. App. 2007) (noting difference between customer non-solicit and employee non-solicit, and finding latter to be acceptable because it “would not impair the former employee’s ability to make a living.”)