On August 10, 2022, Colorado’s new statute extra limiting non-competition and non-solicitation provisions turns into environment friendly. The model new regulation, which handed earlier this 12 months, continues Colorado’s sample in direction of elevated scrutiny of post-employment restrictions and gives Colorado to the rising itemizing of states that restrict the utilization of out-of-state number of regulation and dialogue board provisions in agreements that comprise such restrictions.
Colorado’s present regulation
Our colleagues’ description of Colorado’s earlier statutory framework for restrictive covenants might be discovered proper right here. Briefly, Colorado’s earlier regulation invalidated non-compete restrictions besides they fell into one among 4 lessons: (1) covenants made in reference to the acquisition and sale of a enterprise, (2) covenants made for the security of commerce secrets and techniques and methods, (3) covenants for the restoration of payments incurred in educating and training employees who’ve been employed for decrease than 2 years, and (4) covenants for govt and administration personnel (and their expert employees) and officers. CRS 8-2-113. These exceptions, whereas restricted, are nonetheless allowed employers a superb amount of leeway inside the use post-employment restrictions, considerably for highly-compensated folks or these with entry to an employer’s delicate information.
Colorado’s sample away from that comparatively permissive framework grew to change into apparent in March, when it grew to change into the first state to impose misdemeanor felony obligation for the utilization of “stress, threats, or completely different strategy of intimidation to forestall any specific particular person from partaking in any lawful occupation.” Whereas it stays to be seen whether or not or not that felony obligation applies to easily asking an employee to sign an unenforceable restrictive covenant or if some exact attempt at enforcement is required (there will not be any indications that any felony charges have however been filed beneath the statute), it appeared as if additional restrictions on non-compete and non-solicit covenants have been on the horizon.
Colorado’s House Bill 22-1317 and its implications
Colorado’s legislature wasted no time in following up on its criminalization of overbroad restrictive covenants. House Bill 22-1317 (“the Act”) was handed in May and signed by Governor Jared Polis on June 8, 2022, making it environment friendly on August 10, 2022. As our colleagues beforehand well-known, the Act imposes important new restrictions on the utilization of non-competition and non-solicitations restrictions, bars out-of-state number of regulation or dialogue board provisions in numerous conditions, and imposes a uncover requirement that will require a separate uncover doc for any employee subject to such restrictions.
To be clear, whereas the Act normally refers to covenants “to not compete,” it ought to moreover apply to purchaser non-solicitation agreements as successfully. The Act retains the language of CRS 8-2-113 stating that the assembly supposed to guard “present state and federal case regulation in impression,” and Colorado courts have repeatedly found that non-solicit agreements are “a kind 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) (comparable).
Employers who need to proceed using post-employment restrictions with Colorado employees ought to concentrate to the following:
- The Act Eliminates Colorado’s earlier allowance of non-competition restrictions for “govt and administration personnel” and as an alternative, like many various states, will set an annual earnings threshold for enforcement. Non-competition provisions are solely permissible for individuals who, on the time of every execution of the settlement and enforcement, earn in further of the brink for a “extraordinarily compensated worker” as determined by the state’s Division of Labor. That amount, which is $101,250 for 2022, will most likely be adjusted yearly primarily based totally on inflation and is among the many elevated earnings thresholds inside the nation for non-compete enforcement. Purchaser non-solicits shouldn’t enforceable besides the particular person makes not lower than 60% of that “extraordinarily compensated worker” threshold—$60,750 for this 12 months—as soon as extra every on the time that the settlement is first entered into and when it is enforced.
- Together with the earnings thresholds referenced above, the Act bars enforcement of non-compete and non-solicit provisions besides the covenant “is for the security of commerce secrets and techniques and methods and isn’t any broader than inside purpose essential to protect the employer’s official curiosity in defending commerce secrets and techniques and methods.”
- The Act requires employees subject to a restrictive covenant to be given uncover of it sooner than they begin employment (for model new employees). For present employees provided with new restrictions, the uncover needs to be given to the employee the earlier of (1) the environment friendly date of any restriction, or (2) the environment friendly date of “any additional compensation or modifications inside the phrases or conditions of employment” that provides consideration for the restriction. Previous the timing requirements talked about above, the uncover ought to: (1) be in a separate doc, (2) be signed by the employee, (3) be accompanied by a reproduction of the settlement, (4) decide the settlement by title and state that the settlement includes a covenant to not compete that may restrict the workers’ selections for subsequent employment following their separation, and (5) degree out the actual paragraphs or sections inside the settlement the place the restrictions are contained.
- With regard to choice-of-law and dialogue board provisions, the Act requires the equipment of Colorado regulation to search out out the enforceability of a restrictive covenant, and bars out-of-state dialogue board alternative provisions, if the employer “primarily resided and labored in Colorado .” Whereas Colorado is not the first state to require the equipment of its private authorized tips to agreements with folks dwelling and residing there, not like California and Washington, the Act seems to the employee’s location on the time of terminationmoderately than execution of the Settlement, in determining whether or not or not Colorado regulation and dialogue board ought to apply.
- The Act creates some stiff penalties for even presenting an individual with an unenforceable settlement, irrespective of efforts to implement one. Notably, any employer who enters into, presents to a worker, or makes an try to implement an restrictive covenant not in compliance with the Act is subject to a private correct of movement and a $5,000 per violation penalty, along with injunctive help and attorneys’ fees and costs.
Colorado is unquestionably not the first state to limit the utilization of post-employment restrictions, nonetheless the Act creates some distinctive challenges and risks for employers. Whereas the Act is not retroactive, it arguably requires the equipment of Colorado widespread regulation to search out out a restrictive covenant’s enforceability if the employee is a Colorado resident on the time of termination, irrespective of when the settlement was signed. Even putting that problem aside, determining enforceability primarily based totally on the place the employee lives on the time of termination, as an alternative of the time of execution of the settlement, presents particular challenges in an interval of elevated distant working preparations.
Equally, whereas a uncover provision is included in numerous new state authorized tips regarding restrictive covenants, Colorado appears to be the first state to require that uncover in a separate doc signed by the employee, which employers might want to bear in mind by means of the onboarding course of. Any employer with employees in Colorado should immediately ensure that their new agreements are in compliance with the Act, or else risk important penalties from civil suits for even presenting unenforceable agreements to employees.
 The Act’s widespread prohibition on post-employment restrictions includes an exception for non-solicitation restrictions above a certain earnings threshold (talked about beneath). Nonetheless, that exception solely refers to covenants to not solicit purchasersand says nothing about covenants to not solicit employees. Regardless, employee non-solicitation provisions are nonetheless most likely permissible primarily based totally on present Colorado regulation, which pulls a distinction between the two. See Phoenix Cap., Inc. v. Dowell176 P.3d 835, 844 (Colo. App. 2007) (noting distinction between purchaser non-solicit and employee non-solicit, and discovering the latter to be acceptable because of it “would not impair the earlier employee’s talent to make a dwelling. ”)