Colorado’s Restrictive Employment Agreements Act, HB 22-1317 will go into effect on August 10, 2022, significantly limiting the enforceability of noncompete agreements executed after that date. The law is not retroactive, so any agreements signed before August 10, 2022 are unaffected. But with the addition of civil and criminal penalties for using or even presenting noncompliant agreements, employers should prepare for this major change to noncompete law in Colorado. Here are the steps employers should take now to comply with the Restrictive Employment Agreements Act:
1. Identify agreements affected by the Act
In addition to restricting noncompete agreements, the Act includes requirements that affect the enforceability of customer nonsolicitation agreements, confidentiality agreements, training cost recovery agreements, provisions requiring payment of a scholarship to an individual working in an apprenticeship, and covenants for the purchase and sale of a business or the assets of a business. Employers should carefully review employment agreements, stock option agreements and any other agreements that may impose these types of covenants on employees in Colorado.
2. Ensure signing employees meet the salary threshold
Any employee you ask to sign a noncompete agreement or a customer nonsolicitation agreement must make enough to qualify for the statutory wage threshold in the Act. An employee signing a noncompete agreement must earn annualized cash compensation of at least the threshold amount for "highly compensated employee," which is currently $101,250 per year. An employee signing a customer nonsolicitation agreement must earn 60% of the highly compensated employee threshold, which is currently $60,750. The salary thresholds will increase each year. For example, in 2023, it will be $112,500 for noncompete agreements and $67,500 for customer nonsolicitation agreements. The salary thresholds must be met at the time the agreement is signed and at the time the employer seeks to enforce it. Going forward, employers should monitor the required salary level and the salary of employees subject to covenants not to compete.
3. Narrowly tailor agreements to protect trade secrets
Under the Act, the only permissible purpose for a noncompete agreement or a customer nonsolicitation agreement is to protect trade secrets. Employers should ensure that noncompete and customer nonsolicitation agreements clearly explain that they are being used to protect trade secrets. Additionally, the agreements should be narrowly tailored so that they are no broader than is reasonably necessary to protect trade secrets. This might require adjusting geographic, temporal or other limits utilized in the agreement.
4. Revise your confidentiality agreements
The Act clarifies that certain types of agreements are not prohibited and are not subject to the salary threshold and trade secrets requirements, so long as certain requirements are met. Significantly, the Act expressly permits employers to utilize “a reasonable confidentiality provision.” To be reasonable, the confidentiality provision cannot prohibit disclosure of information that arises from the worker’s general training, knowledge, skill or experience, whether gained on the job or otherwise. It also cannot prohibit disclosure of information that is readily ascertainable to the public or information that a worker otherwise has a right to disclose as legally protected conduct. Employers should verify that any confidentiality provisions meet these requirements, and we recommend adding language to such provisions to make clear that they meet the Act’s limitations.
5. Prepare notice forms for covenants not to compete
Employers will now be required to provide advanced notice of any covenant not to compete covered by the Act. Noncompete agreements and customer nonsolicitation agreements for the protection of trade secrets require notice. The Act also requires notice for “covenants not to compete” that may be contained in confidentiality agreements, training cost recovery agreements, provisions requiring payment of a scholarship to an individual working in an apprenticeship, and covenants for the purchase and sale of a business or the assets of a business. The notice must be provided to a prospective worker before the worker accepts an offer of employment and must be provided to a current worker at least 14 days before the covenant is effective or before the effective day of any changes in the terms or conditions of employment that provides consideration for the covenant. Employers must provide notice in a separate document that identifies the agreement by name and states that the agreement contains a covenant not to compete that could restrict the worker’s options for subsequent employment following their separation from the employer. It must also identify the specific sections of the agreement that contain the covenant. Finally, employers must include a copy of the agreement with the notice form, and the worker must sign the notice. Failure to provide notice will void an otherwise enforceable agreement under the Act.
Come August 10, 2022, there will be no escaping the Act’s requirements for new covenants not to compete. The Act makes clear that Colorado employers can no longer require a worker to adjudicate the enforceability of the covenant not to compete outside of Colorado. The Act also clarifies that Colorado law will govern, notwithstanding any contract provision to the contrary.
Employers should take the steps above to comply with the Act and consult with their attorneys when developing and revising their covenants not to compete.
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