Q: Does Colorado have a law prohibiting an employer from requiring employees to sign a restrictive covenant agreement?
A: Yes. On August 10, a new Colorado law took effect that voids noncompete and customer nonsolicitation covenants with certain Colorado employees, depending on their compensation level. The new law places significant penalties upon noncompliant employers and will void any provision that violates the law.
The new law voids noncompete covenants entered into with an employee not considered a “highly compensated worker,” i.e., those workers who currently earn at least $101,250 per year. The Colorado Department of Labor adjusts the salary threshold annually for a highly compensated worker.
Even for those highly compensated workers, the noncompete covenant must be for “the protection of trade secrets” and not “broader than is reasonably necessary” to protect the employer’s trade secrets.
Notably, employers must provide a pre-hire notification to prospective and current employees of the noncompete agreement. The notification must be in a separate document, using “clear and conspicuous terms,” and must be signed by the prospective or current worker. The employer also must provide the prospective or current worker with a copy of the noncompete covenant, identify the agreement by its name, and direct the worker to the specific sections of the covenant that outline the restrictions.
For prospective workers, the pre-hire notification must be provided to the worker before he or she accepts an offer of employment. For current workers, the notification must be provided at least 14 days before the earlier of the effective date of: (1) the covenant; or (2) any additional compensation or change in the terms or conditions of employment in consideration for the noncompete covenant.
The law also restricts a company’s ability to designate choice of law outside of Colorado. If the noncompete covenant applies to a worker who, at the time of termination, primarily resided or worked in Colorado, the employer cannot require the worker to adjudicate the covenant’s enforceability outside Colorado.
The law also voids customer nonsolicitation covenants entered into with a “worker” who has an annual compensation threshold of less than 60% of the compensation threshold for a “highly compensated worker” (i.e., $60,750). For those workers for whom a nonsolicitation provision is allowed, the customer nonsolicitation covenant cannot be “broader than reasonably necessary to protect the employer’s legitimate business interest in protecting trade secrets.”
The new law continues to allow employers to use post-employment confidentiality covenants, so long as the employer does not attempt to restrict the disclosure of information related to the worker’s general training or knowledge, whether gained on the job or elsewhere, or if such information is readily attainable by the public or relates to information a worker can rightfully disclose.
Penalties for Noncompliance
Employers should think twice before asking employees to sign a noncompete or nonsolicitation covenant if they do not meet the salary thresholds outlined above or if the agreement does not otherwise meet all of the requirements of the new law. Importantly, the new law states that if the employer presents, enters into, or attempts to enforce a noncompete covenant that violates the above requirements, the employer is liable for actual damages, a penalty of $5,000 per worker harmed by the conduct, and other equitable relief, as well as possibly facing action from the state attorney general.
Moreover, violations of the noncompete law qualify as a Class 2 misdemeanor, punishable by 120 days in jail, a fine of up to $750, or both.
The new law does not indicate that it applies retroactively, meaning any noncompete or nonsolicitation covenant entered into before the August 10, 2022 effective date should be analyzed under the more-relaxed former law. Importantly, the former law had no requirement that an employee under a noncompete covenant be a “highly compensated worker.” Moreover, the law did not require pre-hire notifications to prospective or current employees, and it did not restrict the covenant’s choice-of-law provision.
However, employers will want to be careful to comply with the new law going forward, and employers should revise any existing templates to determine if they are compliant with the new law. Remember, even presenting a prospective or current employee with a voidable noncompete covenant is a violation of the new law.
If you have any questions or would like further guidance regarding this new law or its implications, please contact a member of our Labor + Employment Practice Group.