New Restrictions on Noncompetition Agreements Under Colorado Law; and Including Confidentiality Agreements
By Dan Block
Changes in Colorado law effective August 10, 2022, based on a bill that passed the legislature and that has been signed by the Governor (the “Restrictive Employment Agreements Bill”), will significantly restrict the enforceability and legality of noncompetition restrictions under Colorado law; and will make certain confidentiality restrictions unenforceable and illegal.
New Limits on Noncompetition Restrictions
Under Colorado law prior to the effectiveness of the Restrictive Employment Agreements Bill, noncompetition restrictions could be enforced against executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.
When the Restrictive Employment Agreements Bill becomes effective, those categories of legal and enforceable noncompetition restrictions will cease to exist.
Instead, to have a legal and enforceable restriction against a former employee or an independent contractor owning, being employed or engaged by, or having another affiliation with a competing business, the employee or independent contractor must earn an amount of annualized compensation of at least the “threshold amount for highly compensated workers” as determined by the Colorado Division of Labor Standards and Statistics. That amount as of this year is $101,250.
For the narrower type of noncompetition restriction, that being a restriction against a former employee or independent contractor soliciting the customers of the former employer or engaging business, the employee or independent contractor must earn an amount of annualized compensation of at least 60% of that threshold amount. As of this year, that 60% amount is $60,750.
The threshold amount for highly compensated workers can be adjusted periodically by the Division of Labor Standards and Statistics.
The employee or independent contractor must have at least the threshold amount of annualized compensation at the time the restrictive covenant is entered into by the employee or independent contractor and at the time it is enforced. That time of enforcement requirement is troubling.
That is because a noncompetition restriction might be legal and enforceable when entered into by the employee or independent contractor—but not when the business wants to enforce the restriction. For example, an employee hired at a salary at or slightly above the threshold amount of annualized compensation leaves the business and takes a job with a competing company at a salary just below the threshold amount of annualized compensation. Or the employee’s new job with the competing company is at the same salary, but the threshold amount of annualized compensation has been increased above that amount.
Requirement of Need for Protection of Trade Secrets
Even if the employee or independent contractor has annualized compensation sufficient to meet the then-current threshold amount, the noncompetition restriction must be “for the protection of trade secrets and no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.” Except that the “for the protection of trade secrets requirement” doesn’t apply to restrictions on soliciting customers of the business.
The words “no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets” create a vague and subjective standard. That standard, particularly with the requirement that the general noncompetition restriction must be for the protection of trade secrets, will be difficult to establish. And it could mean that the business violated Colorado law by requiring the employee or independent contractor to enter into the agreement with the noncompetition restriction; and with the result that it cannot enforce the restriction.
And those requirements mean, for example, that a business will no longer be able to legally enter into and enforce a noncompetition restriction against an employee just to prevent an employee from quitting his or her high-level and highly paid position to immediately begin working for a competing company. The business will have to also be imposing the restriction to protect trade secrets.
Stand-Alone Trade Secrets Exception Deleted
Current Colorado law permits noncompetition restrictions that are a contract for the protection of trade secrets. That stand-alone basis for a legal and enforceable noncompetition restriction will no longer exist when the Restrictive Employment Agreements Bill becomes effective.
Confidentiality Restrictions Become Restraints Against Engaging in a Lawful Occupation?
Under the Restrictive Employment Agreements Bill, confidentiality restrictions are included in the statute making it illegal to use force, threats, or other means of intimidation to prevent a person from engaging in a lawful occupation.
But the Restrictive Employment Agreements Bill excludes from illegal means to prevent a person from engaging in a lawful occupation confidentiality provisions that do not prohibit disclosure of three types of information: (1) information that is readily ascertainable to the public; (2) information that a worker otherwise has a right to disclose as legally protected conduct; and (3) information that arises from the worker’s general training, knowledge, skill, or experience, whether gained on the job or otherwise.
That third category of information is of concern.
What constitutes information that arises from the worker’s “general training, knowledge, skill, or experience, gained on the job, that cannot be protected; and what constitutes information that arises from the worker’s training, knowledge, skill, or experience gained on the job that can be protected? Will a business have information that it considers to be its trade secret or otherwise confidential information that a judge deems to be information that arises from “general training, knowledge, skill, or experience,” and therefore, that cannot be protected? If that occurs, that trade secret or other confidential information of the business ceases to be a trade secret or otherwise protectable confidential information if disclosed.
Beware of the Notice Requirement
The Restrictive Employment Agreements Bill adds a new requirement under Colorado law for a legal and enforceable restriction of a person engaging in a lawful occupation, which is the notice requirement. That requirement applies to the general noncompetition restriction, the narrower non-solicitation of customers restriction, and a confidentiality restriction on an employee or independent contractor.
A notice of the covenant not to compete and the terms of the covenant not to compete, separate from the agreement containing the restriction, must be provided (a) to a prospective worker before the worker accepts the employer’s offer of employment; or (b) to a current worker at least fourteen days before the earlier of: (1) the effective date of the covenant, or (2) the effective date of any additional compensation or change in the terms or conditions of employment that provides consideration for the covenant.
Note that it appears that the notice requirement will apply to the general noncompetition restriction, to the narrower non-solicitation of customers restriction, and to a confidentiality restriction in a contract related to the sale of a business that will restrict an individual who will become an employee or independent contractor of the purchasing company.
New Civil Liability
In addition to a criminal penalty (as mentioned below), the Restrictive Employment Agreements Bill creates civil liability for a violation of the statute. An employer who violates the statute may be liable for actual damages and a penalty of $5,000 per worker or prospective worker harmed by the violation.
And that liability can arise not only by attempting to enforce an unenforceable noncompetition restriction, but also just by presenting an unenforceable noncompetition restriction to a worker or prospective worker as a term of employment.
Existing Agreements and New Agreements
As bad as the Restrictive Employment Agreements Bill is for businesses, at least it does not apply to covenants not to compete entered into or renewed before the effective date of the bill.
On or after the effective date of the bill, all the requirements under the bill must be met to create a legal and enforceable restrictive covenants agreement.
Two Common Misunderstandings about Existing Colorado Law
Many people have mistakenly thought that the existing Colorado law regarding restriction of a person engaging in a lawful occupation does not apply to independent contractors, and that would change under the Restrictive Employment Agreements Bill. However, the Colorado Court of Appeals ruled in 1990 that the statute applies to independent contractors.
Many people have not realized that a restriction of a person engaging in a lawful occupation that does not fit into a category of enforceability is not just unenforceable, but also illegal. It is. In March 2022, based on a bill that was signed by the Governor in 2021, a violation of the statute went from a misdemeanor with a low minimum and maximum fine and a short minimum jail sentence, to a Class 2 misdemeanor with a higher minimum fine and longer minimum jail sentence. The Restrictive Employment Agreements Bill doesn’t change that situation.
Dan Block is a shareholder of Robinson Waters & O’Dorisio, P. C. in Denver, Colorado. He specializes in employment law and other areas of business law. You can contact him at 303-297-2600 or at firstname.lastname@example.org.
The information contained in this article is for informational purposes only, and it does not constitute legal advice for any specific situation. The invitation to contact an attorney at Robinson Waters & O’Dorisio, P.C. is not intended as a solicitation in any jurisdiction in which that attorney is not licensed to practice law.