On August 10, 2022, Colorado’s new statute additional proscribing non-competition and non-solicitation provisions turns into efficient. The brand new legislation, which handed earlier this 12 months, continues Colorado’s development towards elevated scrutiny of post-employment restrictions and provides Colorado to the rising checklist of states that prohibit using out-of-state alternative of legislation and discussion board provisions in agreements that include such restrictions.
Colorado’s present legislation
Our colleagues’ description of Colorado’s earlier statutory framework for restrictive covenants can be found right here. Briefly, Colorado’s earlier legislation invalidated non-compete restrictions until they fell into one in all 4 classes: (1) covenants made in reference to the acquisition and sale of a enterprise, (2) covenants made for the safety of commerce secrets and techniques, (3) covenants for the restoration of bills incurred in educating and coaching workers who have been employed for lower than 2 years, and (4) covenants for government and administration personnel (and their skilled workers) and officers. CRS 8-2-113. These exceptions, whereas restricted, are nonetheless allowed employers a good quantity of leeway within the use post-employment restrictions, notably for highly-compensated people or these with entry to an employer’s delicate info.
Colorado’s development away from that comparatively permissive framework turned obvious in March, when it turned the primary state to impose misdemeanor prison legal responsibility for using “pressure, threats, or different technique of intimidation to stop any particular person from participating in any lawful occupation.” Whereas it stays to be seen whether or not that prison legal responsibility applies to only asking an worker to signal an unenforceable restrictive covenant or if some precise try at enforcement is required (there aren’t any indications that any prison costs have but been filed underneath the statute), it appeared as if extra restrictions on non-compete and non-solicit covenants have been on the horizon.
Colorado’s Home Invoice 22-1317 and its implications
Colorado’s legislature wasted no time in following up on its criminalization of overbroad restrictive covenants. Home Invoice 22-1317 (“the Act”) was handed in Might and signed by Governor Jared Polis on June 8, 2022, making it efficient on August 10, 2022. As our colleagues beforehand famous, the Act imposes important new restrictions on using non-competition and non-solicitations restrictions, bars out-of-state alternative of legislation or discussion board provisions in lots of cases, and imposes a discover requirement that can require a separate discover doc for any worker topic to such restrictions.
To be clear, whereas the Act typically refers to covenants “to not compete,” it can additionally apply to buyer non-solicitation agreements as nicely. The Act retains the language of CRS 8-2-113 stating that the meeting supposed to protect “present state and federal case legislation in impact,” and Colorado courts have repeatedly discovered that non-solicit agreements are “a type of noncompete settlement. ” 23 LTD v. Herman2019 COA 113, 20, 457 P.3d 754, 758; Phoenix Capital, Inc. v. Dowell176 P.3d 835, 844 (Col. App. Ct. 2007) (identical).
Employers who want to proceed utilizing post-employment restrictions with Colorado workers ought to be aware of the next:
- The Act Eliminates Colorado’s earlier allowance of non-competition restrictions for “government and administration personnel” and as a substitute, like many different states, will set an annual revenue threshold for enforcement. Non-competition provisions are solely permissible for people who, on the time of each execution of the settlement and enforcement, earn in extra of the brink for a “extremely compensated employee” as decided by the state’s Division of Labor. That quantity, which is $101,250 for 2022, shall be adjusted yearly primarily based on inflation and is likely one of the increased revenue thresholds within the nation for non-compete enforcement. Buyer non-solicits will not be enforceable until the person makes not less than 60% of that “extremely compensated employee” threshold—$60,750 for this 12 months—once more each on the time that the settlement is first entered into and when it’s enforced.
- Along with the revenue thresholds referenced above, the Act bars enforcement of non-compete and non-solicit provisions until the covenant “is for the safety of commerce secrets and techniques and isn’t any broader than in all fairness needed to guard the employer’s professional curiosity in defending commerce secrets and techniques.”
- The Act requires workers topic to a restrictive covenant to be given discover of it earlier than they start employment (for brand spanking new workers). For present workers introduced with new restrictions, the discover have to be given to the worker the earlier of (1) the efficient date of any restriction, or (2) the efficient date of “any extra compensation or adjustments within the phrases or circumstances of employment” that gives consideration for the restriction. Past the timing necessities talked about above, the discover should: (1) be in a separate doc, (2) be signed by the worker, (3) be accompanied by a replica of the settlement, (4) establish the settlement by identify and state that the settlement incorporates a covenant to not compete that might prohibit the employees’ choices for subsequent employment following their separation, and (5) level out the particular paragraphs or sections within the settlement the place the restrictions are contained.
- With regard to choice-of-law and discussion board provisions, the Act requires the applying of Colorado legislation to find out the enforceability of a restrictive covenant, and bars out-of-state discussion board choice provisions, if the employer “primarily resided and labored in Colorado .” Whereas Colorado just isn’t the primary state to require the applying of its personal legal guidelines to agreements with people residing and residing there, not like California and Washington, the Act appears to be like to the worker’s location on the time of terminationfairly than execution of the Settlement, in figuring out whether or not Colorado legislation and discussion board should apply.
- The Act creates some stiff penalties for even presenting a person with an unenforceable settlement, no matter efforts to implement one. Particularly, any employer who enters into, presents to a employee, or makes an attempt to implement an restrictive covenant not in compliance with the Act is topic to a non-public proper of motion and a $5,000 per violation penalty, together with injunctive reduction and attorneys’ charges and prices.
Colorado is definitely not the primary state to restrict using post-employment restrictions, however the Act creates some distinctive challenges and dangers for employers. Whereas the Act just isn’t retroactive, it arguably requires the applying of Colorado frequent legislation to find out a restrictive covenant’s enforceability if the worker is a Colorado resident on the time of termination, no matter when the settlement was signed. Even placing that situation apart, figuring out enforceability primarily based on the place the worker lives on the time of termination, as a substitute of the time of execution of the settlement, presents explicit challenges in an period of elevated distant working preparations.
Equally, whereas a discover provision is included in lots of new state legal guidelines concerning restrictive covenants, Colorado seems to be the primary state to require that discover in a separate doc signed by the worker, which employers will need to remember in the course of the onboarding course of. Any employer with staff in Colorado ought to instantly make sure that their new agreements are in compliance with the Act, or else threat important penalties from civil fits for even presenting unenforceable agreements to workers.
 The Act’s basic prohibition on post-employment restrictions incorporates an exception for non-solicitation restrictions above a sure revenue threshold (mentioned under). Nevertheless, that exception solely refers to covenants to not solicit clientsand says nothing about covenants to not solicit workers. Regardless, worker non-solicitation provisions are nonetheless possible permissible primarily based on present Colorado legislation, which pulls a distinction between the 2. See Phoenix Cap., Inc. v. Dowell176 P.3d 835, 844 (Colo. App. 2007) (noting distinction between buyer non-solicit and worker non-solicit, and discovering the latter to be acceptable as a result of it “wouldn’t impair the previous worker’s capacity to make a residing. ”)