Colorado Legislature Passes Bill to Significantly Restrict Non-Compete Agreements

UPDATE: Governor Polis signed the bill on June 8 and the new law becomes effective on August 10, 2022.

May 18, 2022

The Colorado General Assembly passed a bill that will substantially change the law regarding covenants not to compete (or non-compete agreements). Assuming Governor Polis signs the bill, it will become effective in August 2022.

For an overview of the current statute, scroll down to my February 26, 2022, article, “Non-Compete Agreements and Criminal Penalties.”

Under the new bill, a non-compete agreement (or “NCA”) for the protection of trade secrets is permissible only if the employee is a “highly compensated worker” and the NCA “is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.”

In other words, only highly compensated employees can be required to sign NCAs for the protection of trade-secrets. This seems peculiar because employees with access to a company’s trade secrets are not always “highly compensated” workers. Currently, a “highly compensated” employee is one who earns at least $101,250 annually. (See the current Colorado PAY CALC Order here.) Bear in mind that the threshold amount may change on an annual basis.

The new law will also put restrictions on covenants not to solicit the employer’s customers. For such a covenant to be enforceable, the employee must earn at least 60% of the threshold amount for highly compensated workers and the covenant must be “no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.”

NCAs for the sale of a business or its assets will still be permitted. The new law also retains the exemption for the recovery of training expenses, but with modifications. First, the expenses must be “distinct from normal, on-the-job training” (which I think is implicit in the current statute). Second, the recovery is limited to the “reasonable costs” of the training. Third, the amount recoverable “decreases over the course of the two years subsequent to the training proportionately based on the number of months that have passed since the completion of the training.”

The bill adds a provision that permits agreements “requiring the repayment of a scholarship provided to an individual working in an apprenticeship if the individual fails to comply with conditions of the scholarship agreement.”

The new law will not alter the current statute with respect to non-compete agreements with physicians.

The bill expressly permits “a reasonable confidentiality provision relevant to the employer’s business that does not prohibit disclosure of information that arises from the worker’s general training, knowledge, skill, or experience” or information that is “readily ascertainable to the public,” or that the employee “has a right to disclose as legally protected conduct.”

The bill adds notice provisions that are not required under the current statute. Under the new law, the employer must give notice of the NCA to a prospective employee before the worker accepts the offer of employment. The employer must give a current employee notice of an NCA at least 14 days before the earlier of (a) the effective date of the NCA or (b) the effective date of any additional compensation or change in the terms or conditions of employment given or made as consideration for the NCA.

The notice must be “in clear and conspicuous terms in the language in which the worker and the employer communicate,” and must be signed by the worker. Any NCA that would otherwise be valid becomes void if the required notice is not given.

Employers are prohibited from entering into, presenting to an employee or prospective employee, or attempting to enforce any NCA that is void. The bill contains significant penalties and remedies for violations. Employers who violate the statute could be liable for damages, a $5,000 penalty per individual harmed by the conduct, as well as the plaintiff’s attorney fees and costs.

Non-compete agreements signed before the effective date of this bill will not be affected.

Employers can still use confidentiality and nondisclosure agreements, provided they are not overly broad. While the new law significantly restricts the use of NCAs for the protection of trade secrets, employers still have the protections of the Colorado Uniform Trade Secrets Act and the federal Defend Trade Secrets Act.