Restrictive Covenant Agreements in Colorado
How the 2022 Law Affects Your Business and Employees
Employment law continues to have significant changes in Colorado. During the 2022 Colorado legislative session, HB22-1317 was passed.
This new law governs restrictive covenants imposed by employers. The new law applies to employees who either resided or worked in Colorado at the time of their termination. The effective date for the new law is August 10, 2022.
The 2022 Colorado law covers the following restrictive covenants:
Covenants not to compete,
Covenants not to solicit,
Recovery of education expenses by employers,
Confidentiality provisions,
Covenants for purchase and sale of a business or assets of a business, and;
Provisions on scholarship repayment.
Here are the important takeaways for Colorado business owners to understand.
Unlawful Intimidation of Employees Could Result in Criminal Penalties
SB21-271, which was also passed during the 2022 Colorado legislative session. This law criminalizes an employers’ attempt to unlawfully intimate workers to prevent them from engaging in lawful occupation. Employers that attempt to enforce a void restrictive covenant could potentially also have criminal liability, commiting a Class 2 Misdemeanor, depending on the circumstances.
Covenants Not to Compete Are Void
The new Colorado law states that covenants not to compete, which restricts the right of any person to receive compensation for the performance of labor for any employer, are void. Any employer who violates this new law will be liable for actual damages in addition to $5,000 per employee.
However, there are exceptions to this complete restriction.
The covenant may be enforceable if, at the time the noncompete is entered into AND at the time it is enforced:
The employee earns an amount of annualized cash compensation equivalent to or greater than the threshold amount for highly compensated workers,
The noncompete covenant is intended for the protection of trade secrets, AND
The noncompete covenant is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
Calculating the Threshold Amount for Highly Compensated Workers
The threshold amount for highly compensated workers is determined by the Colorado Division of Labor Standards and Statistics in the Department of Labor Employment and is subject to change on a yearly basis.
The current threshold amount in 2022 is $101,250 per year or more. The determination for the current threshold amount with regard to the agreement shall be made either as of the effective date of this statute or at the time the covenant not to compete is executed by the parties.
The worker’s cash compensation is based either on the employee’s yearly compensation or—for an employee who has been with an employer less than a year—on what the employee reasonably was expected to earn during the calendar year.
Exception for Colorado Covenants Not to Solicit
Covenants not to solicit customers may be enforceable against a previous employee if at the time the agreement is entered into AND at the time the covenant is enforced:
The employee earns an amount of annualized cash compensation equivalent to or greater than sixty (60%) percent of the threshold amount for highly compensated workers and
The covenant is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
60% of the threshold amount for highly compensated workers is $60,750 in 2022.
Additional Exceptions in the 2022 Colorado Law
Additional exceptions in the 2022 law allow for restrictive agreements related to the recovery of education expenses by employers, confidentiality provisions, covenants for purchase and sale of a business or assets of a business, and scholarship repayment.
Recovery of Education Expenses
The law states that recovery of expenses of educating and training a worker are recoverable should an employee breach the agreement if:
The training was distinct from normal, on-the-job training and
The training was limited to reasonable costs.
The amount recoverable is limited to reasonable costs reduced in the subsequent two years in an amount proportionate to the number of months that have passed since the completion of the training.
Reasonable Confidentiality Provisions
The 2022 law allows an exception for reasonable confidentiality provisions that are relevant to the employer’s business. The confidentiality provisions must not prohibit the disclosure of information:
That arises from the employee’s general training, knowledge, skill or experience, whether gained on the job or otherwise,
That is readily ascertainable to the public, or
That the employee has the right to disclose as legally protected conduct.
Purchase and Sale of a Business or Business Assets
The new law also exempts covenants for the purchase and sale of a business or the assets of a business. Previously, under Colorado state law, noncompete covenants were prohibited when included as part of a contract for the sale of a business or business assets.
Repayment of Apprenticeship Scholarships
Finally, the new law allows a provision requiring the repayment of a scholarship provided to an individual working in an apprenticeship if the individual fails to comply with the conditions of the scholarship agreement.
Notice of the Covenant Not to Compete
To be considered permissible, the employer must provide notice of the noncompete covenant to the employee either before the employee accepts employment or, for a current employee, at least fourteen (14) days before the effective date of the covenant or the effective date of the change in compensation or terms or conditions that provides consideration for the covenant.
The notice of the covenant must:
Be separate from the agreement and any other covenant,
Be in clear and conspicuous terms,
Be In the language the employer and employee use to communicate,
Identify the agreement by name,
State that the agreement contains “a covenant not to compete that could restrict the workers’ options for subsequent employment following their separation from the employer,”
Direct the employee to the specific sections of paragraphs of the agreement that contain the covenant not to compete, and
Be signed by the employee.
The employer must also provide the employee with a copy of the agreement that contains the covenant. The employee has a right to request a copy of the covenant agreement a maximum of once a year from the employer.
Review Your Restrictive Covenants Agreements Today
If you are an employer and have any agreement with restrictive covenants, review them for compliance with the new law and make any necessary changes. Going forward, if you try and enforce restrictive covenants, ensure that you have an agreement with the employee in place and that you have provided the proper notice to the employee.
Need help drafting a restrictive covenant agreement or reviewing your current agreements?
Our firm will walk you through the requirements and help draft contract provisions that protect your business from violations.
