On June 8, Governor Polis signed into law HB 22-1317. This law amends the statute relating to restrictive employment agreements and takes effect on August 9, 2022.
Employers need to think carefully about whether their noncompete covenants and non-solicitation covenants are valid before inserting such restrictions in agreements with employees and/or contractors. A long-standing exception exists for the protection of trade secrets (defined below), however, this law clarifies and limits the application of the trade secrets exception with employees. Companies will need to know what is permitted before including non-compete or non-solicitation paragraphs in employee – and potentially independent contractor – agreements.
In Colorado, covenants not to compete (and non-solicitation covenants) are considered void unless such covenants fall within certain limited exceptions. Under the new law, employers may not enter into, present to prospective employees, or attempt to enforce any covenants not permitted under the law.
Instead of describing everything companies cannot do, this article focuses on what companies CAN do in agreements with employees.
What You Can Do:
- You can restrict the disclosure of confidential information, which information (a) does not arise from general training, knowledge, skill, or experience (regardless if learned on the job or elsewhere), (b) is not readily ascertainable to the public, (c) or the worker otherwise has a right to disclose as legally protected conduct - e.g., the right to be a whistleblower.
- Confidential information is generally defined as information to which the general public does not have access. Examples of such information often includes personnel or financial information, prospective marketing information, and research and development.
- While trade secrets are also a type of confidential information, such information, if known to others, would give others a significant advantage in the marketplace. Owners must make ongoing efforts to carefully protect trade secrets from disclosure.. Examples of trade secrets are: the Coca-cola recipe, the Google search algorithm, and the recipe for Twinkies.
- In Colorado, a trade secret is defined as "the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. To be a "trade secret" the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes."
- Covenants not to compete that are related to the purchase and sale of a business or assets of a business are not prohibited.
- Non-compete covenants are only permissible for the reasonable protection of trade secrets, and may be utilized only with "workers" identified as "Highly Compensated". In 2022, such compensation is $101,250 annually. Each year, this definition may change based on the definition set forth by the Department of Labor and Employment, Division of Labor Standards and Statistics.
- Covenants protecting trade secrets must still be reasonable in time and geographic limitation and not broader than reasonably necessary to protect the employer's legitimate business interests in protecting the secrets.
- Covenants to prevent the solicitation of customers are only valid (both at the time of the covenant and at the time such covenant is to be enforced) for the reasonable protection of trade secrets and only if the worker earns at least 60% of the "Highly Compensated" definition. For 2022, this would be $60,750 annually.
Requirements:
Notice. If a non-compete provision is permissible (as above), an employer must provide notice to the worker or prospective worker by a separate document (a) before employment or (b) within 14 days of (i) the effective date of the covenant or (ii) the effective date additional compensation or changes in employment start to provide new consideration for the covenant. The notice must be clear, identify the agreement by name, state that it "contains a covenant not to compete that could restrict the workers' options for subsequent employment following termination," and reference the specific sections or paragraphs that contain the covenant.
Colorado residents. The restrictions in this statute apply to any worker who primarily resides in Colorado. Employers cannot require that another state's law bind such residents.
Penalties:
An employer who enters into, presents to a worker or prospective worker, or attempts to enforce a covenant not to compete that is void under the statute is liable for:
- Actual damages
- A penalty of $5,000 per work or prospective worker harmed by the conduct
- An injunction to stop conduct
- Reasonable costs and attorneys’ fees (in private actions brought by a worker or prospective worker)
The use of force, threats, or other means of intimidation to prevent any person from engaging in lawful occupation is a class 2 misdemeanor (up to 120 days imprisonment or up to $750 in fines, or both). A non-compete or non-solicitation provision that violates Colorado law may be considered such a threat.
If an employer acted in "good faith" and had "reasonable grounds" to believe their actions were not in violation of the statute, a court may, in its discretion, reduce the penalty or award.
A worker, a prospective worker, or the Colorado Attorney General's Office all have standing to bring an action against employers for inclusion or enforcement of invalid noncompete covenants and non-solicitation covenants in employment relationships.
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