Passed in May 2022, Colorado’s HB22-1317 – also known as the Restrictive Employment Agreements Act (Act) – becomes effective August 10, 2022.
The Act places further limits on the enforceability of non-compete and customer non-solicitation restrictions. Changes also include new notice requirements, expanded penalties, and restrictions about choice of law and venue. HB22-1317 will not be enforced retroactively.
Some of the Act’s key changes are listed below:
Certain restrictions on non-competes and non-solicitation of customers remain enforceable if they meet specific requirements:
- Non-compete agreements must be:
- No broader than reasonably necessary to protect an employer’s legitimate interests in protecting trade secrets.
- Entered into with a worker or prospective worker who, at the time the noncompete is entered into and at the time it is enforced, earns an amount of annualized cash compensation equivalent to or greater than the threshold amount for highly compensated workers (e.g., $101,250 or more annually).
- Customer non-solicitation must be:
- No broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
- Entered into with a worker who earns 60 percent or more of the threshold amount for highly compensated workers (e.g., $60,750 or more annually).
- Confidentiality agreements/provisions must:
- Be relevant to the employer’s business.
- Not prohibit disclosure of information:
- Arising from the worker’s general training, knowledge, skill or experience, whether gained on the job or otherwise.
- Readily ascertainable to the public; or
- A worker otherwise has a right to disclose as legally protected conduct.
All restrictions must also be reasonable in scope and location.
Notice must be presented:
- “[I]in clear and conspicuous terms [state] the language in which the worker and the employer communicate.”
- To current workers at least 14 days before the earlier of either:
- The effective date of the noncompete agreement; or
- A change of the condition of employment providing consideration for the agreement.
- To applicants before they accept the offer of employment.
To be valid, the notice must be separately signed. This means the notice cannot be included within the restrictive covenant document(s). Violation of the notice requirement will void the restrictive covenant agreement and subject the employer to significant penalties (e.g., $5,000 for each impacted worker or prospective worker, injunctive relief, actual damages, and attorneys’ fees and costs).
Choice of Law and Venue
Workers who primarily live or work in Colorado at the time of termination cannot be required to adjudicate a restrictive covenant agreement outside of Colorado. The same circumstances prevent an employer from designating another state’s laws as governing the agreement for enforcement purposes. However, the enforceability of this provision is questionable in light of the Supreme Court’s decision in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 571 U.S. 49 (2013).
Before the August 10, 2022 effective date, employers should begin a review of existing restrictive covenant agreements/provisions for compliance. This internal audit should also include a review of the company’s current protocols/processes for presenting and discussing restrictive covenant documents with current and prospective workers. Given the significant penalties associated with noncompliance, employers should consult legal counsel before making any changes to existing restrictive covenant agreements.