Colorado lawmakers recently passed a bill that will block businesses from entering into restrictive covenants such as non-competition and customer non-solicitation agreements with certain healthcare workers and refine the current exemption allowing restrictive covenants related to the sale of a business. Senate Bill 25-083 is expected to be signed into law by Governor Polis and take effect on August 6, affecting agreements entered into after that date. However, some questions and ambiguities remain. This Insight will review the bill and provide specific steps employers can take to prepare for the new law.
What Healthcare Providers Need to Know
Under current state law, restrictive covenants are void in Colorado unless they fall within several narrow statutory exceptions, most notably the trade secrets exception. Under this exception, a company can enter into certain restrictive covenants with employees as long as their purpose is to protect trade secrets, the scope of the restrictive covenant is reasonable, and certain annual compensation threshold requirements and other procedural requirements are met.
Special Rule for Physicians
But there’s a special rule for physicians under current law. Even if a restrictive covenant meets one of the statutory exceptions, Colorado law does not allow agreements that prevent physicians from practicing medicine. Instead, the law permits only “damages-for-competition” clauses for physicians. In other words:
- A healthcare employer can’t prevent a physician from leaving and working for a competitor.
- But it could generally require that, if a physician were to do so, the physician would owe certain damages to the former employer (with some limited exceptions for patients with rare disorders).
But again, this special rule applies only to physicians. That means, under current state law, businesses generally can enter into restrictive covenants with other healthcare workers, provided the covenants otherwise meet the statutory requirements.
The New 2025 “Healthcare Provider” Exception
Under the 2025 amendments, restrictive covenants will be prohibited if they restrict “healthcare providers” from practicing in their field. “Healthcare providers” is defined by the new statute to specifically include those engaged in the licensed practice of medicine (including physician assistants), the practice of advanced practice registered nursing, the practice as a certified midwife, and the practice of dentistry.
The new statute also explicitly prohibits covenants restricting healthcare providers from disclosing to their patients:
- where they will be practicing next;
- their new professional contact information; or
- that they have a right to choose a healthcare provider.
The new statute eliminates old language allowing for recovery of damages relating to competition for physicians. Therefore, it appears that a liquidated damages provision for healthcare providers is no longer a viable alternative.
What Businesses Need to Know About The Sale-of-Business Exception
Current law permits certain restrictive covenants entered into in relation to the purchase and sale of a business or the assets of a business. The 2025 statute expands upon this exception and adds an additional requirement for sales by certain minority shareholders.
The New Sale-of-Business Exception
- Under the new law, restrictive covenants will be permissible if they are related to the purchase and sale of (a) a business, (b) a direct or indirect ownership share in a business, or (c) all or substantially all of the assets of a business.
- Additionally, for certain minority owners, the new statute includes a new requirement that the temporal length of a restrictive covenant cannot exceed a certain number of years calculated by a prescribed formula.
- There is no such temporal limitation for sales by a majority owner, so the temporal restriction would likely be assessed under the existing “reasonableness” test.
- Regarding the calculation, the “total consideration” received by the individual from the sale of the business must be divided by the “average annualized cash compensation received by the individual from the business, including income received on account of their ownership interest during the preceding two years or during the period of time that the individual was affiliated with the business, whichever period of time is shorter.” The length in years of the restrictive covenant cannot exceed the result of this equation.
To illustrate: a minority owner of a business had total compensation in 2026 of $200,000. In 2027, their total compensation was $300,000. On January 1, 2028, the business is sold, and the minority owner receives $1,000,000 in connection with that sale. Their average annualized compensation in the two years preceding the sale was $250,000. Therefore, if the purchasing company were to execute a non-competition agreement in connection with this sale, it could not exceed four years in length ($1,000,000/$250,000).
What Should You Do to Prepare?
This new law is not retroactive, so it will not affect any restrictive covenants executed prior to August 6, 2025.
- To the extent that you already have healthcare provider employees subject to valid restrictive covenants under prior versions of this statute, you likely will want to ensure that they maintain their grandfathered-in status.
- If you have healthcare provider employees that are not currently covered by a valid restrictive covenant agreement, and you want to execute restrictive covenant agreements with them, you should evaluate whether it would be beneficial to your business to execute such agreements prior to the August 6 effective date of the new statute.
- Likewise, if you are contemplating the sale of your business (with closing after August 6), you should evaluate the extent to which key employees are currently covered by restrictive covenants or might need to be covered in the future in connection with the sale.
- If those employees are not presently covered by restrictive covenants, you should evaluate whether having them executing restrictive covenant agreements before (rather than after) the August 6 effective date would be more valuable to your business and any putative buyer.
- You should also evaluate whether you should adjust the present compensation of any individuals that may need to sign restrictive covenant agreements with a putative buyer to ensure that the buyer can expect that its interests will be reasonably protected in the event of a sale. If the buyer cannot effectively protect its interests, that could diminish the value of your business in a putative sale or could wholly preclude a sale from proceeding.
Conclusion
As you can see, the new restrictive covenant statute is not as simple as it might appear at first glance. Businesses need to be deliberate in their strategy to ensure compliance with this ambiguous new statute.
