Danger: Rocky Road Ahead!

Colorado Poised to Dramatically Limit the Enforceability of Non-Competes and Other Restrictive Covenants for Low-Wage Workers

Earlier this week, the Colorado state legislature voted to pass HB22-1317, which if signed into law by Democratic Governor Jared Polis, would place Colorado among several other states with the strictest bans on restrictive covenant agreements for low-wage workers. A spokesperson for Governor Polis has already indicated that the governor plans to sign the bill. If executed, the bill would become effective 90 days after the legislature adjourns (early August 2022), so immediate and very substantial changes appear to be right around the Rocky Mountain road.

Key-Takeaways:

1. Any restrictive covenant executed by a Colorado worker after the law’s effective date will be deemed presumptively “void.” This includes both non-compete and non-solicitation agreements. There are, however, several stated exceptions, which include: (a) restrictive covenants associated with the sale of business; (b) restrictive covenants executed by a “highly compensated worker” when the non-compete is no broader than reasonably necessary to protect trade secrets; and (c) restrictive covenants executed by workers earning sixty percent or more of the “highly compensated worker” threshold. Under the new law, a “highly compensated worker” is someone who is currently earning $101,250 per year or more. (NOTE: This figure is tied to the threshold set by the Colorado Department of Labor and will be modified annually.
2. Confidentiality agreements still remain valid but can only be used if they do not prohibit disclosure of information arising from a worker’s general training, knowledge, skill, or experience.
3. In order for any restrictive covenant to be enforceable under the new law, the employer must provide sufficient notice of the restrictions. In cases of a prospective worker, notice must be provided before they accept the offer of employment. In cases of a current worker, notice must be provided at least 14-days before the earlier of the effective date of either the covenant or the additional consideration to be provided to the worker. (NOTE: The law spells out numerous steps employers must follow to provide proper “notice.” These notices must: (a) be in writing and signed by the worker; (b) in a separate document with clear and conspicuous language; (c) include the agreement containing the non-compete; (d) identify the non-compete agreement by name and state that it contains a covenant that could restrict the worker’s future employment options; and (e) direct the worker to the specific paragraphs of the non-compete agreement that contain the non-compete.
4. If the worker in question primarily resided or worked in Colorado at the time their employment ends, any “choice-of-forum” clause in the non-compete agreement cannot require adjudication outside of Colorado. Additionally, in these situations, Colorado law must govern the  enforceability of the non-compete agreement.
5. Employers can be fined $5,000 per worker if they enter into, attempt to enforce, or present to any current or prospective worker a restrictive covenant that violates the new law. That said, the new law also gives Colorado judges full discretion to determine whether or not to issue a monetary penalty (or to issue a penalty less than $5,000), if the employer can successfully demonstrate that they acted in good faith and had reasonable grounds for believing they were not violating the new law.
6. Workers and prospective workers, along with the Colorado Attorney General, may obtain injunctive relief if they demonstrate a violation of the new law. Workers and prospective workers, may also recover reasonable attorneys’ fees and costs if they can establish the restrictive covenant(s) in question do not comply with the new law.

In the past six years, at least 10 states, as well as the District of Columbia, have passed legislation to limit and/or eliminate the use of non-competes and other restrictive covenants for low-wage workers. Colorado certainly appears poised to join that ever growing list. As such, all employers with workers in Colorado should take immediate steps to review their agreements to ensure they comply with the new law. Seyfarth will continue to monitor the situation and post additional updates on this blog as further developments occur.