In May 2022, Colorado legislators passed a law (HB 22-1317) that largely bans employee non-compete clauses, except for certain situations. Governor Jared Polis signed the bill into law on June 8, 2022, giving it an effective date of August 10, 2022.Essentially, all restrictive covenants (a fancy legal way of saying: non-competes, non-solicitations, or similar agreements) will be void.Provided that the restrictions are deemed reasonable in geographic or temporal scope, the sole exceptions to the non-compete prohibitions are: 

1. Non-competes that accompany the sale of a business. Non-compete agreements are often included in the context of buying a business. To protect the buyer’s intention of buying a successful, established company, the buyer usually negotiates a non-compete so that the value of that business is not undermined by the seller starting a new, identical business that is in direct competition of the company being purchased.

2. Those signed by a “highly compensated employee” which means someone making more than $101,250 per year. This figure will be a threshold set by the Colorado Department of Labor annually.

3. Non-solicitation for customers will only be enforceable for employees earning 60% of the highly compensated employee threshold, or $60,750 per year.

4. Training cost recovery is permitted, provided:

• The training is distinct from normal, on the job training; and
• The amount sought to be recovered is reasonable and prorated on a monthly basis over two years from receiving such training. Also, that recouping this expense will not violates the Fair Labor Standards Act.

 Also, the new law requires the employer to provide the employee with a separate, written notice of the non-compete covenant(s) and their terms, and such notice also must be signed by the employee. If an employer fails to (1) qualify for one of the provided exceptions; (2) craft a covenant to be “reasonable” in geographical or temporal scope; or (3) to provide the required written notice, then the non-compete will be void.
 

Serious Potential Penalties for Employers

Aside from all non-competes being void unless they meet the statutory requirements. This is very important because employers will be subject to significant damages – $5,000 penalty per employee – which can add up quickly because it applies if an employer so much as presents a void non-compete to its employee(s). The courts will have discretion not to award a penalty, or to award less than the full amount of a penalty, if the employer shows that it acted in good faith and had reasonable grounds for believing it was not acting in violation of the statute. This will be difficult for employers to prove if they did not analyze their procedures and statutes ahead of time.In addition to actual damages and penalties, workers and prospective workers may obtain injunctive relief and recover reasonable attorneys’ fees and costs. The Attorney General is also authorized to sue for relief under the statute.
 

Colorado Law and Venue Will Be Applied

If your worker primarily resided or worked in Colorado at the time their employment was terminated, then Colorado law will apply under this new law.
 

Criminal Penalties

The new law provides that it will be a Class 2 misdemeanor for a person to “use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place the person sees fit.” In addition, employees will have the right to request a declaratory judgment that a given non-compete or non-solicitation agreement is void or unenforceable, as well as injunctive relief to prevent the enforcement of such agreements.
 

What Can Employers Do Now?

• Don’t wait for this law to take effect. You have a short window to be proactive.
• Analyze all of your agreements, your handbooks, your stock options, restricted stock agreements, and similar plans for boiler plate or actual covenants.
• Look at which of your current employees have signed non-competes and analyze whether you need to void them or modify them.
• Implement the notice procedures in compliance with this new law. If you don’t, the non-compete agreement is not only void, but this also exposes employers to statutory penalties.
• Don’t use a one size fits all for all of your employees when it comes to non-competes.
• Document the steps you are taking to comply. You will want to show you made a good faith effort to comply to avoid penalties.
• Evaluate your confidentiality agreements as they will become increasingly important in light of these new rules. Notably, non-competes to protect trade secrets will be void, unless the compensation requirement is met.

 Basecamp Legal offers a range of legal services for new and growing companies. We will help you make the important, early legal decisions so you hit the ground running. As you grow, we will help you with your day-to-day legal needs so you can focus on your business. We help companies throughout Colorado, California, Idaho, Washington, and Wyoming. You can learn more about our business services here.