In May-June 2022, the Colorado Legislature and Governor Polis signed into law House Bill
22-1317 (Restrictive Employment Agreements Act) enacting an income-based non-compete law that bans employee non-compete clauses for employees making less than a six-figure salary. The law also prohibits imposing non-solicitation agreements on employees who make less than $60,750 per year. In short, the bill imposes an income-based minimum on enforceable non-compete and non-solicitation agreements between employers and employees. The new restrictions apply to employment contracts signed or renewed after the legislation’s effective date which is August 10, 2022. The new law applies to any employees who primarily resided and worked in Colorado at the time of termination. The new law also affects relationships with non-employees such as independent contractors and subcontractors.
The bill contains strict and specific notice requirements employers must give to prospective employees who meet the above compensation criteria prior to accepting an offer of employment, and to current employees 14 days prior the effective date of a new agreement or any changes to a non-compete agreement or other restrictive covenants that provides consideration for such changes to employment conditions. To be effective the notice must be in writing, signed by the employee, and clearly identify the name of the separate agreement and the specific paragraph(s) where the agreement contains restrictive covenants, and must include a statement that the agreement and covenants could restrict the employee’s future employment options.
Another change the bill enacts is the requirement that agreements and restrictive covenants must be governed by Colorado law and venue if the employee primarily lives or works in Colorado.
Additional exceptions to the new law exist for the following circumstances:
- Non-disclosure and confidentiality agreements are permitted if they do not prohibit the disclosure of information related to an employee’s general training, knowledge, skill, or experience.
- Non-compete agreements continue to be permitted related to the sale of a business or business assets.
- There are no changes in the new law related to non-compete agreements involving physicians and the prior law remains in effect.
- Training cost reimbursement agreements are permitted if an employee does not remain with the employer long enough after receiving the training, provided the recovery amount is reasonable and is not related to normal on-the-job training. The recoupment must be prorated on a monthly basis over a two-year period from the date of receiving the training and may not violate the Fair Labor Standards Act. The law also allows recovery from employees who have been employed with the employer for longer than two years.
- Apprenticeship scholarship reimbursement agreements are allowed if the apprentice fails to comply with the conditions of the program agreement.
- The new law does not apply to agreements signed prior to the effective date of
August 10, 2022 unless they are renewed.
WHAT SHOULD EMPLOYERS DO NOW?
- Review existing non-compete and non-solicitation agreements, and non-disclosure and confidentiality agreements that may contain restrictive covenants and update as needed pursuant to the requirements of the new law, including choice of law and venue.
- Ensure new agreements for prospective new employees or changes to restrictive covenants in existing agreements that provide consideration for such changes to employment conditions for current employees comply with the new law as of the effective date of August 10, 2022.
- Review incentive, equity, equity-based, deferred compensation, and similar agreements, plans, and programs (i.e., stock, and restricted stock option agreements, etc.) and update as needed pursuant to the requirements of the new law, including choice of law and venue, and the notice requirement if applicable.
- You may want to review severance and release agreements with legal counsel to ensure any non-compete restrictive covenants are in line with the new law.
- Implement procedures and training for leaders and appropriate staff to ensure compliance with new law.
- Non-compete agreements may only be entered into with employees who earn annualized cash compensation equivalent to or greater than the threshold for highly compensated employee under Colorado’s PAY CALC Order. ($101,250 for 2022)
- Non-solicitation agreements may only be entered into with employees earning at least 60% of the annualized cash compensation equivalent to or greater than the threshold for highly compensated employee under Colorado’s PAY CALC Order. ($60,760 for 2022)
- Implement a system to review Colorado Department of Labor’s annual updates for PAY CALC thresholds and update payroll and affected program documents as necessary to remain in compliance.
- Review procedures related to employee promotions or transfers that historically may have involved agreements involving restrictive covenants and update as needed pursuant to the new requirements.
- Implement procedures to comply with the new notice requirements to ensure timely delivery. Prepare notices in compliance with the new law and the PAY CALC thresholds to be given to prospective new employees prior to accepting an offer of employment, as well as notices to be given to current employees for new agreements that may contain restrictive covenants, or if any changes will be made to existing agreements that contain restrictive covenants. This is critical to ensure agreements are not void and penalties and damages are not imposed against the employer.
- Consider alternative business strategies to protect trade secrets and sensitive competitive information.
An employer’s failure to comply with the requirements of the new law, including notice and choice of law and venue, will render agreements and restrictive covenants void, and will subject the employer to serious consequences including statutory penalties and compensatory damages, declaratory judgment, injunctive relief, and reasonable costs and attorneys’ fees. The statutory penalty is $5,000 per employee or prospective employee harmed by the conduct. The law contains a “safe harbor” related to statutory penalties for employers or prospective employers acting in good faith who have reasonable grounds to believe they were not violating the statute. (Note: The new law also clarifies 2021’s SB 21-271 that it is a Class 2 misdemeanor to use of force, threats, or other means of intimidation to limit a person from engaging in lawful employment.)
Implementing the requirements of the new law and documenting the steps you plan to take will make sure you are prepared and show good faith efforts that you and your need-to-know staff are taking the new law seriously.