While the Federal Trade Commission's (FTC) April 2024 sweeping rule prohibiting noncompete agreements has been top of mind for many employers, the rule may not be so surprising for businesses using restrictive covenants for employees and independent contractors located in Colorado. In August 2022, Colorado enacted legislation severely restricting the circumstances in which covenants not to compete and non-solicitation provisions are permissible. The legislation also curtailed the use of confidentiality agreements. Businesses with workers in Colorado and elsewhere are well advised to work with competent employment counsel to ensure compliance with state laws, which often differ significantly with respect to restrictive covenants. This article provides an overview of Colorado's approach to restrictive covenants.
Restrictive covenants signed or renewed on or after August 10, 2022 are banned unless they fit within one of the narrow substantive exceptions and satisfy certain procedural requirements.
- A confidentiality agreement is permitted only if it is relevant to the employer's business and "does not prohibit disclosure of information that arises from the worker's general training, knowledge, skill, or experience, whether gained on the job or otherwise, information that is readily ascertainable to the public, or information that a worker otherwise has a right to disclose as legally protected conduct." This carveout is obviously quite broad, and we have yet to receive meaningful judicial guidance.
- A customer non-solicitation agreement is permitted only if (1) the worker earns, at the time the covenant is entered into and at the time of enforcement, an amount sufficient to satisfy the annual cash compensation threshold; and (2) it "is no broader than reasonably necessary to protect the employer's legitimate interest in protecting trade secrets." The earnings threshold is equal to or greater than 60 percent of the threshold for highly compensated workers, which is a figure set by regulation. In 2024, the threshold is $74,250/year.
- A noncompetition agreement is permitted only if (1) the worker earns, at the time the covenant is entered into and at the time of enforcement, an amount sufficient to satisfy the annual cash compensation threshold; and (2) it "is no broader than reasonably necessary to protect the employer's legitimate interest in protecting trade secrets." The earnings threshold is equal to or greater than the amount for highly compensated workers. In 2024, the threshold is $123,750 /year.
Of course, all restrictive covenants must be reasonable with respect to scope, geographic proximity, and temporal limitation.
With respect to procedure, restrictive covenants are void unless the agreement is presented with the required notice and the terms of the agreement and notice are provided to a prospective worker before the worker accepts the offer of employment. If the worker is currently employed, the notice and agreement must be provided at least 14 days before the earlier of the effective date of the covenant or the effective date of any additional compensation or change in terms or conditions of employment that serve as consideration for the covenant. The notice must be provided separately from any other agreement or covenant and must be signed by the worker. The notice requirement is satisfied if it states that the "agreement contains a covenant not to compete that could restrict the workers' options for subsequent employment following their separation from the employer" and directs the worker to the specific section(s) containing the restrictive covenant(s).
The statute does not prohibit certain agreements: (1) for the purchase and sale of a business or the assets of a business; (2) to recoup repayment of scholarship funds for an apprenticeship where the apprentice fails to follow the terms of the apprenticeship; or (3) to recoup expenses of educating or training a worker where training is distinct from normal on-the-job training and recovery gradually decreases over the course of up to two years. There are special restrictions regarding physicians.
Restrictive covenants cannot purport to require the Colorado resident to adjudicate the enforceability of the agreement outside of Colorado.
The new statute provides that it is unlawful 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, and a person who violates this prohibition commits a class 2 misdemeanor. Both the signatory worker and the worker's new employer may seek declaratory judgment that the covenant is unenforceable. Violating employers can be liable for hefty penalties, actual damages, costs, and attorney's fees.
One complicating factor is that agreements signed prior to August 10, 2022 are analyzed under the law as it existed at the time the agreement was signed. As a result, while restrictive covenant litigation is extremely common, there are few court decisions defining the contours of the new law.
Colorado is not entirely unique in its approach. Numerous jurisdictions severely curtail the circumstances in which non-competes may be used. While many businesses are aware of the predictable employee-friendly states' approaches, such as California's ban on non-competes, many employers are surprised to find that states like North Dakota and Oklahoma are on the forefront of restrictive covenant legislation. While some states ban noncompete agreements, others may permit them but ban employee non-solicitation agreements, or severely curtail intellectual property assignment provisions. The point is that businesses seeking to use agreements containing any combination of noncompete, non-solicit, confidentiality, or assignment provisions are well advised to first vet the agreements through competent employment counsel who is familiar with the laws of the state in which the worker primarily resides and works. Knowledge of the FTC rule, no matter how sweeping it is, may only be part of the equation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.