On May 10, Colorado legislators approved HB22-1317, a bill that will effectively move the state into line with California and other states restricting the use of noncompetition covenants in the workplace except for highly paid workers. Governor Jared Polis has indicated he will sign the bill, so it likely will become effective in early August 2022, 90 days after the legislature adjourns.

What new legislation does

While we have been monitoring the narrowing landscape for noncompete use around the country, the passage of the 2022 Colorado bill marks a sea-change for this area of law in the Rockies. Here’s what the bill does in a nutshell:

Voids most noncompetes except for limited exceptions. Any employment agreement with a Colorado worker executed after the law’s effective date that contains restrictive covenants (including both nonsolicitation and noncompetition restrictions) is generally “void” except:

• Covenants associated with the sale of a business (or an asset sale);
• Noncompetition covenants entered into by a “highly compensated worker” (a threshold set by the Colorado Department of Labor and Employment, which is currently someone who earns at least $101,250 per year) and that aren’t broader than reasonably necessary to protect trade secrets; or
• Customer nonsolicitation covenants agreed to by workers who earn at least 60 percent as much as a “highly compensated worker” and that aren’t broader than reasonably necessary to protect trade secrets.

Offers narrowed take on confidentiality. Employee confidentiality agreements with Colorado workers are still enforceable, but the law bars any such agreements prohibiting the disclosure of information obtained from a worker’s “general training, knowledge, skill or experience whether gained on the job or otherwise.” We anticipate that whether information falls within the “general” and therefore unprotected category or whether it’s of a more secret, protected character will likely be a subject of future litigation.

Requires additional notice. Even if an agreement meets the narrow exceptions above, employers still must provide an additional statutory notice to workers to enforce them, specifically:

• For prospective hires, notice must be made before the job offer is given. For current workers, notice must be given at least 14 days before the earlier of the effective date of the covenant or additional consideration (something of value) to be provided to the employee.
• The notice must be in writing and signed by the worker, accompanying, but also in a separate document from, the agreement.
• The notice must use clear and conspicuous language, identify the agreement by name, direct the employee to the specific paragraphs with the restrictive covenants, and explain the covenant(s) could restrict the worker’s subsequent employment options upon separation from the employer.

Stipulates you can’t contract around the law. If the worker primarily lives or works in Colorado at the time of separation of employment, any forum selection clause can’t require adjudication outside of the state. Colorado law must govern the agreement.

Provides stiff penalties and enforcement regime. Employers that operate in “good faith” or can articulate a reasonable basis for believing they acted in compliance with the new law can avoid penalties. But the law gives Colorado courts discretion to issue penalties against employers of up to $5,000 per worker for attempting to procure violative agreements.

The law also gives current employees and new hires, along with the Colorado attorney general, grounds to seek injunctive relief to stop employers from violating the law and authorizes recovery of attorneys’ fees and costs.

What should you do?

It’s time to dust off all your workplace agreements with confidentiality and restrictive covenant clauses. Check every place where you have those kinds of agreements: equity incentive agreements, restrictive stock grants, stock option awards, and similar types of arrangements.

If you are still in the habit of requiring restrictive covenants from lower-wage workers, that era is over. If you use noncompetes with highly compensated employees, that’s fine, but you’ll need to take care to have them narrowly tailored to be no greater than necessary to protect your trade secrets. In addition, you’ll be required to prepare statutory notices for the employees to execute when they sign the agreements. Your forum selection and governing law clauses now need to be revisited as well.

As we’ve detailed elsewhere, and as we move away from a contract-based regime for protecting the most competition-sensitive data, there are many other steps you can take to get ahead of the curve. Technology allows us to take proactive measures to restrict the outbound flow of sensitive business data outside of employee-based contracts. Now is the time to consider them seriously.