The 2022 legislative session of Colorado’s General Assembly closed with a bang. Among a number of new bills affecting employers, perhaps none was as closely watched as HB 22-1317, which provides substantial changes to noncompete and nonsolicitation agreements in Colorado. The bill passed both houses of the legislature and will become effective in August 2022 if Governor Polis signs it.
Although the General Assembly abandoned an earlier bill that would have completely overhauled restrictive covenants in Colorado,1 HB 22-1317 is nevertheless a major development. While employers felt a shift from the increased criminal penalties earlier this year, the shift with HB 22-1317 is seismic in comparison.
New Substantive Restrictions on Noncompetes and Customer Nonsolicitation Agreements
Under the bill, most noncompetes would be void unless the agreement is with “highly compensated” workers, for the protection of trade secrets, and no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting the trade secrets. In other words, the historical Colorado exception for executive and management personnel and their professional staff—which was always hotly litigated and subject to shifting judicial interpretation—is eliminated. The historical trade-secrets exception is now restricted to employees earning $101,250 annually (or the state “highly compensated” amount in effect when the covenant is executed in the future). As many multistate employers are aware, several states have begun requiring a certain wage threshold for restrictive covenants, with Colorado joining similar thresholds in Illinois, Oregon and Washington.
Customer nonsolicitation agreements would be similarly limited: they must be no broader than reasonably necessary to protect the employer’s legitimate interest in trade secrets, and the worker must earn at least 60% of the “highly compensated” annual threshold amount when the agreement is entered into and when it is enforced, e.g., $60,750 for 2022. Of note, employee nonsolicitation agreements, which have judicially remained outside the ambit of § 8-2-113, C.R.S., are not addressed in HB 22-1317. The General Assembly does intend to preserve existing caselaw about the sort of covenants the law affects, and therefore it would appear that the law does not apply to employee nonsolicitation agreements.
The new law is less disruptive of other historical exceptions to Colorado’s general prohibition on restrictive covenants. First, HB 22-1317 does not prohibit restrictive covenants for the sale of a business or its assets. Second, the law also maintains the ability for employers to recover reasonable training expenses. But it clarifies such recovery must be distinct from normal, on-the-job training, and the recovery must decrease proportionately based on the number of months that have passed since the worker completed the training. Third, HB 22-1317 retains the § 8-2-113 language that voids any noncompete with a physician, but allows employers to recover damages for any such competition, with certain exceptions for rare disorders.
Substantively, the law allows for reasonable confidentiality provisions as long as they do not prohibit disclosure of information arising from the worker’s general training, knowledge, skill, or experience, information readily ascertainable to the public, or information that the worker otherwise has a right to disclose as legally protected conduct. The “right to disclose as legally protected conduct” harkens to the lesser-known provision of the 2020 Public Health Emergency Whistleblower Act, as well as the 2016 federal Defend Trade Secrets Act. It is sure to be subject to much dispute, as historically, self-help outside the protection of the Defend Trade Secrets Act has been highly disfavored by courts.
Finally, agreements may require the repayment of a scholarship provided to someone working in an apprenticeship if the individual fails to comply with conditions of the scholarship agreement.
New Notice Requirements
In addition to the restrictions on restrictive covenants themselves, the bill also imposes brand-new notice provisions. Either before a new worker accepts an offer of employment, or 14 days before the effective date of the restriction or change in conditions of employment for current workers, employers must give notice of the covenant and its terms. The required 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 (separately from the signature on the restrictive covenant agreement itself).
Choice-of-Law and Venue Provisions
Similar to California Labor Code §925, HB 22-1317 restricts agreements about choice of law and venue. Notwithstanding any contractual terms to the contrary, Colorado law will apply to any workers who at the time of termination of employment primarily resided and worked in Colorado. Likewise, a restrictive-covenant agreement may not require adjudication outside of Colorado. As a result, this provision may cripple the enforcement of even existing restrictive covenants choosing law and venue outside of Colorado for Colorado employees, and would certainly come into play if employers renew an existing agreement after the act’s August 2022 effective date.
Increased Enforcement and Penalties
The new law affirms the existing criminal penalties for anyone who uses force, threats, or other means of intimation to prevent any person from engaging in any lawful occupation at any place the person sees fit. (The Legislative Counsel Staff’s Revised Fiscal Note on the bill observes zero offenders were sentenced and convicted in recent years and therefore assumes there will be minimal or no additional criminal case filings or convictions under the new bill).
In addition, employers are prohibited from entering into, presenting, or attempting to enforce any covenant that is void. Violators could be liable for actual damages, plus a $5,000 penalty per worker or prospective worker harmed by the conduct. Either the state attorney general or a harmed worker may pursue injunctive relief and the penalties, plus costs and attorneys’ fees.
While the fervor over the new law has been great, the key takeaways are more limited:
- Agreements signed before the August 2022 effective date are unaffected (unless and until they are renewed or renegotiated).
- Restrictive covenants for employee non-solicitation agreements are unlikely to be affected;
- Restrictive covenants for the protection of trade secrets—including customer non-solicitation agreements—are likely to be affected only if applied to those who are not “highly compensated”;
- Restrictive covenant relying solely on the management and executive personnel exception will no longer be viable, absent protection of trade secrets for “highly compensated” individuals;
- Confidentiality and nondisclosure agreements are unlikely to be affected so long as they are properly limited under existing law to exclude information arising from the worker’s general training, knowledge, skill, or experience, information readily ascertainable to the public;
- Choice-of-law and venue provisions for Colorado employees at the time of their termination will be unenforceable in agreements entered into after the effective date, and existing agreements could be impacted as well;
- The notice obligation will be a critical, but easily overlooked, provision that all employers with Colorado restrictive covenants should address proactively; and
- New per-employee penalties significantly increase the risk for any employers utilizing or enforcing restrictive covenants.
If Governor Polis signs HB 22-1317, it will become effective on or about August 10, 2022. Fortunately, the bill applies only to covenants entered into or renewed on or after the effective date and so Colorado employers are not required to comply or amend existing agreements immediately.
Should the bill become law, employers should consult knowledgeable counsel to address the issues and ensure their agreements comply with this new legal landscape. Among other things, employers with Colorado employees should seriously consider:
- Reviewing the employee population to which restrictive covenants currently apply, and whether they meet the applicable income threshold;
- Reviewing existing agreements to determine if they meet the requirements of the new law, and modify as necessary;
- Ensuring any agreements entered after the effective date are provided along with the required notice;
- Training managers and human-resources professionals about the scope of the new law and application to restrictive covenants; and
- Consulting knowledgeable counsel before attempting to enforce restrictive covenants against any departing employees.