Colorado Continues to Whittle Away at Non-Compete Agreements

OVERVIEW

Effective August 10, 2022, employers in Colorado will need to comply with additional limitations with regard to restrictive covenants. Specifically, Colorado’s general law renders non-competition provisions illegal. The law then sets forth a small number of narrow exceptions to permit certain restrictions, namely:

1. Non-competes and non-solicits for a worker who, at the time the covenant is entered into and at the time it is enforced, earns a certain annualized cash compensation at or above a specified threshold
2. Recovery of certain education and training expenses
3. Reasonable confidentiality
4. Covenants for the purchase and sale of a business or assets thereof
5. Repayment of a scholarship provided to an apprentice who fails to comply with the scholarship agreement.

In each case, the law further provides that notice of the restrictive covenant and the terms of the covenant must be provided in writing. Failure to comply with the new state law subjects the employer or company to significant penalties.

The details of each of these exceptions, the notice requirement and penalties are provided below.

HIGHLY COMPENSATED EMPLOYEES

Under the highly compensated employee exception, first, restrictive covenants are permitted only if deemed necessary for the protection of trade secrets and only to the extent reasonably necessary to protect those trade secrets.

In order to be subject to a non-competition provision, an employee must be a “highly compensated employee” who is currently receiving cash compensation (salary, fee or other compensation) in an annualized amount equal to $101,250 as of 2022. (We note that the salary threshold is to be reviewed and adjusted yearly).

To be subject to a non-solicitation provision, an employee must be earning at least 60% of the threshold amount—more specifically, an annualized amount equal to $60,750 (or, $101,250 multiplied by .60)—as of 2022 (also to be adjusted annually).

These salary thresholds must be met both at the time the contract was executed and at the time the covenant is enforced. It is unclear what “at the time it is enforced” is intended to mean, and whether this will be interpreted as the employee’s final salary at the employer enforcing the covenant or the employee’s current compensation at the new competing employer. However, we suspect that courts will interpret the law based on the employee’s final salary before termination.

OTHER PERMISSIBLE RESTRICTIVE COVENANTS

The Colorado law provides the following additional exceptions to the general prohibition of restrictive covenants in these circumstances:

1. Covenants for the purchase and sale of a business or the assets of a business
2. Provisions permitting the recovery of training and education expenses, if the training is distinct from normal on-the-job training, limited to the reasonable costs of the training and decreasing pro rata per month over two years following the training, and only to the extent such recovery would not violate the Fair Labor Standards Act (FLSA)
3. Provisions requiring the repayment of a scholarship provided to a worker in an apprenticeship, but only if the individual fails to comply with the conditions of the scholarship
4. Reasonable confidentiality agreements relevant to the employer’s business, if such agreements do not prohibit disclosure of information that a) arises from the “worker’s general training, knowledge, skill, or experience, whether gained on the job or otherwise,” b) “is readily ascertainable to the public,” or c) “a worker otherwise has a right to disclose as legally protected conduct.”

NOTICE REQUIREMENT FOR NON-COMPETE AGREEMENTS

Even if the above exceptions are met, any non-compete is void unless notice is provided as required under the new law. Specifically, notice of the covenant not to compete and the terms of the covenant must be provided in a separate document in either of the following ways:

1. To a prospective worker before the worker accepts the employer’s offer of employment
2. To a current worker at least 14 days before the earlier of a) the effective date of the covenant or b) the effective date of any additional compensation or change in the terms and conditions of employment that provides consideration for the covenant.

The notice must be in clear and conspicuous terms and must be signed by the individual. The notice must be provided with the agreement containing the non-compete, identifying the agreement by name. Moreover, the notice must state that the agreement contains a non-compete that could restrict the employee’s options for subsequent employment following their termination of employment and must direct the employee to the specific section or paragraph of the agreement containing the non-compete.

The worker may request an additional copy of the covenant not to compete once each calendar year.

RESTRICTIONS SPECIFIC TO PHYSICIANS

The Colorado law provides that any non-compete covenant or provision of an employment, partnership or corporate agreement between physicians that restricts the right to practice medicine upon termination of the agreement is void. However, the law permits physicians to agree to pay damages in an amount reasonably related to the injury suffered by reason of termination of such an agreement. While this provision may read like a liquidated damages provision, the few Colorado court opinions on the statute do not support the parties estimating and defining liquidated damages in advance. Rather, the Colorado Court of Appeals has held that damages payable pursuant to this statute cannot be analyzed prospectively, but rather must be determined upon the termination of employment. (See Crocker v. Greater Colorado Anesthesia, P.C., 2018 COA 33 (Colo. App. 2018); See also Wojtowicz v. Greely Anesthesia Servs., P.C., 961 P.2d 520 (Colo. App. 1997).)

PENALTIES FOR VIOLATIONS

Employers that violate Colorado’s new restrictive covenant law may be found liable for actual damages, reasonable costs, attorneys’ fees, and statutory penalties of up to $5,000 “per worker or prospective worker harmed by the conduct.” Statutory penalties may be reduced or eliminated upon the employer’s showing of a good-faith and reasonable belief that its acts or omissions were not violative of the law.

CHOICE OF LAW

The new Colorado law provides that Colorado law must govern the enforceability of a non-competition covenant for any employee, who, at the time of termination, primarily resides and works in Colorado.

EFFECTIVE DATE

The new Colorado law, including the “highly compensated worker” exception, will only apply to covered agreements entered or renewed on or after August 10, 2022. These requirements will not apply retroactively.

THE McDERMOTT DIFFERENCE

For any assistance in drafting and enforcing restrictive covenant agreements—in Colorado or otherwise—please feel free to contact the McDermott employment team.