Following Passage of the Restrictive Employments Agreement Act
Last year, the Colorado legislature significantly revamped the state’s noncompetition and restrictive covenants statute. On August 10, 2022, the Restrictive Employments Agreement Act (the “Act”) became effective, implementing substantial changes to § 8-2-113, C.R.S., which statute encompasses Colorado’s restrictive covenant prohibitions. The Act has broad sweeping changes to traditional non-compete covenants, including eliminating the management and executive personnel exception for non-compete covenants, in addition to modifying the trade secrets exception to limit its application to only those meeting a compensation threshold for certain highly compensated workers who have access to actual trade secrets and who could legitimately use the trade secrets to improperly compete. Additionally, the Act now explicitly addresses non-solicitation covenants, prohibiting any non-solicitation covenant to workers who earn less than sixty percent (60%) of the threshold amount for highly compensated workers.
Applicable Limited Restrictive Covenants
The Act also covers restrictive covenants that remain permissible, which permissible covenants are extremely limited for a worker that does not earn the threshold amount for highly compensated workers, or sixty percent (60%) of the threshold amount for highly compensated workers. Restrictive covenants that remain applicable to all workers under the Act, notwithstanding the worker’s compensation threshold, are limited to the following few categories:
- (a) A provision providing for an employer’s recovery of the expense of educating and training a worker where the training is distinct from normal, on-the-job training, the employer’s recovery is limited to the reasonable costs of the training and 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, and the employer recovering for the costs of the training would not violate the “Fair Labor Standards Act of 1938”, 29 U.S.C. sec. 201 et seq., or article 4 of this title 8;
- (b) 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, whether gained on the job or otherwise, information that is readily ascertainable to the public, or information that a worker otherwise has a right to disclose as legally protected conduct;
- (c) A covenant for the purchase and sale of a business or the assets of a business; or
- (d) A provision requiring the repayment of a scholarship provided to an individual working in an apprenticeship if the individual fails to comply with the conditions of the scholarship agreement.
Any other non-compete covenants outside of the limited restrictive covenants that remain applicable to all workers under the Act notwithstanding their compensation threshold are only applicable to those workers making at least the threshold amount for highly compensated workers, or sixty percent (60%) of the threshold amount for highly compensated workers.
How to Determine Whether a Worker Meets the “Highly Compensated” Compensation Threshold
In order to determine if a worker earns the threshold amount for a highly compensated worker, or sixty percent (60%) of the threshold amount for a highly compensated worker, such that additional restrictive covenants become an option for that worker, the worker or prospective worker must make the threshold amount of “annualized cash compensation” required at the time the non-compete is entered into with the worker and at the time the non-compete covenant is enforced. The annualized threshold amount for highly compensated workers is determined by the Colorado Department of Labor and Employment, Division of Labor Standards and Statistics, which amount will change from year to year based upon the division of labor standards and statistics in the department of labor and employment. Currently, the Division of Labor Standards and Statistics has set the current threshold for a highly compensated worker at $112,500, and $67,500 for a worker making sixty percent (60%) of the threshold amount for a highly compensated worker.
Notice to Prospective Employees
In order for a non-compete covenant to be effective on any worker in Colorado, under the Act, a separate notice identifying the specific restrictive covenants must be provided to the worker at least fourteen (14) days before the earlier of the “effective date of the covenant; or [t]he effective date of any additional compensation or change in the terms or conditions of employment that provides consideration for the covenant,” and the separate notice must be signed by the worker. Additionally, prospective workers must receive the notice prior to accepting their offer of employment.
In the event a worker enters into a non-compete covenant in violation of the Act, or an employer presents a non-compliant non-compete covenant to a worker or attempts to enforce a non-compliant non-compete covenant on a worker, the non-compliant restrictive covenant is void under the Act, subjecting the employer to actual damages, reasonable attorney fees and costs and a statutory penalty of $5,000 per worker harmed by the violation, as well as penalties from the state. The Act also makes clear that it is a criminal violation for an employer to “use force, threats or other means of intimidation” to restrict a worker from engaging in lawful work. Given the inherent risks with non-compete provisions subsequent to passage of the Act, employers must ensure that any non-compete covenants entered into after August 10, 2022 strictly comply with the Act.
If your office has contractors that will earn an amount of annualized compensation less than $67,500, then we suggest that you remove all references to any non-compete covenant from your contract agreement for these contractors altogether, with the exception of the few permissible restrictive covenants described above that remain applicable to all workers under the Act notwithstanding the worker’s compensation threshold, as the intention of the changes to the non-compete statute last year were to significantly limit employers from imposing non-competes on workers earning less than the threshold amount, or 60% thereof, for highly compensated workers.
If your office has contractors that will earn the current threshold for a highly compensated worker at $112,500, or $67,500 for a worker making sixty percent (60%) of the threshold amount for highly compensated workers and you are interested in including more restrictive covenants in your contract agreement with such contractors, please contact our office for assistance with your additional restrictive covenants to ensure compliance with the Act.
The information provided herein is not intended to provide any legal advice to the reader. To the extent that you have questions or wish to discuss the restrictions and confines of the Act in more detail, please contact me to schedule an appointment to discuss your questions with an attorney.