Limitations on non-compete and non-solicit
The new law voids non-compete agreements, except those agreements (1) entered into with “highly compensated workers,” (2) for the protection of trade secrets, and (3) which are no broader than reasonably necessary to protect the employer’s interest in protecting its trade secrets. The new law does not affect certain restrictive covenants which will still be permitted, including sale of business restrictive covenants, confidentiality provisions, agreements providing for the recovery of expenses for certain employee training, and repayment of an apprentice scholarship if the individual fails to comply with the scholarship agreement.
The new law also voids non-solicitation agreements, except those entered into with employees earning salaries at or greater than 60 percent of the threshold amount for highly compensated workers, if the non-solicitation agreement is no broader than reasonably necessary to protect the employer’s interest in protecting its trade secrets.
The threshold salary amount for highly compensated workers is currently US$101,250 – an amount that will increase each year. This salary threshold must be met both at the time of signing and at the time of termination.
In addition to modifying the exemptions to Colorado’s prohibition on restrictive covenants, the new law requires that employers provide a separate written notice of the terms of a prospective employee’s non-compete agreement.
This separate written notice must be (1) provided at least 14 days before the earlier of the effective date of the non-compete agreement, or the effective date of additional compensation or revised conditions of employment that serve as consideration for the non-compete agreement; (2) be in clear and conspicuous terms in the same language used to discuss the employee’s performance; and (3) be signed by the employee.
Choice of law issues
The new law also provides that non-compete agreements with employees who primarily work or live in Colorado at the time of termination of their employment, may not require employees to adjudicate the enforceability of the agreement outside of Colorado. And Colorado law governs the enforceability of non-compete agreements for employees living and working in Colorado at the time of termination of the employment relationship.
Restrictive covenants entered into on or after August 10, 2022 must comply with the new law. It will not be retroactively applied to previously existing non-compete or non-solicitation agreements. However, a violation of the new law can result in a statutory penalty of US$5,000 per worker or prospective worker, a private right of action for actual damages, declaratory/injunctive relief, attorneys fees and cost.
Colorado’s new law is part of a multi-state trend in decreasing the enforceability of restrictive covenants on employees. Employers should monitor developments across relevant jurisdictions. Anyone with questions about restrictive covenant laws in Colorado or other states is encouraged to reach out to the authors of this article or the lawyer with whom they typically work with at Hogan Lovells.
Authored by Tao Leung and Katy Forsstrom.