Colorado Legislature Passes New Restrictions on Use of Non-Compete Agreements

The Colorado legislature recently passed a bill, now awaiting the governor’s signature, which will substantially limit the ability to enforce non-compete agreements against any workers other than those who are deemed “highly compensated.” In addition, the new law will impose new, stringent notice requirements and penalties if employers fail to comply with the new statutory requirements. If the governor signs the bill, which he is expected to do, the law will go into effect this August, giving employers only a few months to put into place processes to ensure compliance with the law’s new requirements. This bill comes on the heels of a recent change to Colorado’s non-compete law which criminalized the enforcement of non-compete agreements that violate its general non-compete statute.

Colorado’s non-compete statute, C.R.S. § 8-2-113, was relatively unchanged for the roughly four decades from 1982, when it was enacted, until 2021. The law generally prohibited agreements not to compete but excepted restrictive covenants in contracts for the purchase of a business or its assets, agreements to protect trade secrets, and agreements with executive and management personnel and their professional staff. It also allowed employers to recover the expense of educating and training employees who left employment less than two years after being hired. And while the law made non-compete agreements with physicians void, it permitted the recovery of monetary damages against a physician who breached the agreement, though not against physicians treating patients with rare medical conditions. In 2021, the Colorado legislature amended the law to make an employer’s violation of the law a Class 2 misdemeanor.

Under the new law, any non-compete or non-solicitation agreement with a Colorado employee is presumptively void unless the agreement is (a) with a “highly compensated” employee; (b) is for the protection of trade secrets, and (c) is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting those trade secrets. This marks a change from the previous hotly debated and much-litigated exception for executive and management personnel and their professional staff. Under the new law, a “highly compensated” employee is someone earning at least $101,250 per year, subject to annual adjustments. Customer non-solicitation agreements can be used, provided that the employee entering the agreement earns at least 60% of the “highly compensated” amount when entered, and the agreement must also be no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.

The bill also imposes new notice requirements on employers. Specifically, employers must provide new or prospective employees with a copy of the restrictive covenants before they accept an offer of employment. For existing employees, the employer must provide a copy of the restrictive covenants at least 14 days before the earlier of the effective date of the agreement or of any additional compensation or change in the terms or conditions of employment that provides consideration for the covenant. Regarding the notice, it must be contained in a separate written document from any other covenants with the employer and written: “in clear and conspicuous terms in the language in which the worker and employer communicate about the worker’s performance.” Additionally, the notice must be signed by the worker.

If an employer violates the law, it could find itself liable for not only actual damages but also a $5,000 statutory fee per worker or prospective worker harmed by the violation. The does contain a safe harbor provision that allows the court to reduce or eliminate the penalty if the employer can establish a good faith and reasonable basis for believing it was not in violation of the law. In addition, the law allows the courts to enter injunctive relief and attorneys’ fees to aggrieved workers.

With indisputable convenience for clients, we cover Chicagoland and beyond with offices in Chicago, Oakbrook Terrace, and Wilmette. Additionally, Lubin Austermuehle also has decades of experience assisting businesses and business owners who are accused or victims of shareholder oppression.

At Lubin Austermuehle, we focus on relationships and are driven by results. When it comes to unraveling complex issues of restrictive covenants and other business disputes, we are proud of our track record of outright victories in court or substantial and lucrative settlements for our valued clients. In every case, our goal is to resolve disputes as quickly and successfully as possible, helping business clients protect their investments and get back to business as usual. We serve clients throughout Illinois and the Chicagoland area including Joliet and Mokena. You can contact us online here or call us on our toll-free number at 833-306-4933 or locally at 630-333-0333.

 

Contact Information