Colorado’s New Restrictive Covenant Law Now Effective

On August 10, 2022, Colorado House Bill 22-1317 became law. Following the national trend of limiting employer use of non-compete and non-solicit covenants, Colorado now prohibits the use of non-competes and non-solicits except in the sale of business context and with “highly compensated” workers. The law also provides specific notice requirements and imposes costly penalties for non-compliance. The law’s requirements and penalties are not retroactive. The key requirements of the new law are as follows:

• Non-Compete Covenants. Under Colorado’s new law, non-competes are only enforceable against “highly compensated” workers, which is defined as an individual earning at, or in excess of, $101,250. Non-competes are void and unenforceable against any worker earning less than $101,250. The earning threshold must exist at the time the covenant is entered into with the worker and at the time the employer seeks to enforce the covenant.

• Non-Solicit Covenants. Generally, there are two types of non-solicit covenants; those prohibiting customer and/or client solicitation and those prohibiting employee solicitation. Under Colorado’s new law, customer non-solicitation covenants are only enforceable against workers who earn 60% of the “highly compensated” threshold. Currently, that amount is $60,750. Customer non-solicit covenants are void and unenforceable against any worker earning less than $60,750. The law does not reference specific limitations on employee non-solicit covenants.

• Confidentiality/Non-Disclosure Covenants. While reasonable confidentiality and non-disclosure covenants remain valid in Colorado, the new law expressly provides these covenants are permitted so long as they do not prohibit the disclosure of: (i) information arising from the worker’s general training, knowledge, skill, or experience; (ii) information that is readily ascertainable to the public; and (iii) information that the worker otherwise has a legal right to disclose.

• Notice Requirements. The new law imposes requirements concerning notice that must be afforded to prospective or current workers for a non-compete to be enforceable. Employers must present the non-compete and its terms to prospective workers before the prospective worker accepts an offer of employment. For current workers, employers must present the non-compete and its terms at least fourteen (14) days before the effective date of the restriction or change in condition of employment. The required notice must be in “clear and conspicuous terms in the language in which the worker and employer communicate,” and must be signed by the worker. Importantly, the notice and signature must be on a document that is separate and apart from the document which contains the covenant restrictions. Thus, two documents will be required – a notice and the covenant agreement.

• Choice of Law and Choice of Venue Requirements. Notwithstanding any contractual provision to the contrary, Colorado law governs the enforceability of a covenant not to compete for a worker who at the time of termination of employment primarily resided and worked in Colorado. Moreover, the law provides that a covenant not to compete that applies to a worker who, at the time of termination of employment primarily resided or worked in Colorado, may not require the worker to adjudicate the enforceability of the covenant outside of Colorado.

• Enforcement and Penalties. The new law imposes penalties for non-compliance. Any employer who enters into, presents to a worker or prospective worker as a term of employment, or attempts to enforce, any void and unenforceable covenant is liable for actual damages and a statutory penalty of $5,000 to the aggrieved worker or prospective worker. Violators are also liable for attorneys’ fees and costs. Enforcement actions may be brought by the Attorney General, the Division of Labor Standards and Statistics and/or through a private right of action by the current or prospective worker.

While the statute does not reference or contemplate specific limitations on restrictive covenants with independent contractors, the language references “workers” rather than “employees.” Such a reference may suggest the legislature intended the requirements apply not just to employees, but also to independent contractors and other non-employee workers. We will see whether the State issues any guidance on this issue.

The law expressly states it will not affect existing state or federal case law in effect regarding the reasonableness of the scope of non-competes and non-solicits.

Employers should consult legal counsel to ensure agreements containing non-compete, non-solicit and/or confidentiality/non-disclosure covenants satisfy the requirements of the new law.