Colorado Limits the Use of Non-Compete Agreements

Twenty percent of America’s workforce are subject to some form of a Non-Compete Agreement (Agreement) with their employers.  These Agreements have been popular among employers in certain industries but have also been viewed by many as an obstruction to the formation of new businesses and as a form of wage suppression for lower-paid workers.

Agreements between employer/worker generally restrict the worker from seeking employment with the employer’s competitor, starting up a new business that would compete with the current employer’s business, or soliciting customers of the current employer.  These Agreements typically apply to a certain geographic region and/or length of time.

Colorado has long favored free competition in employment, generally not enforcing the Agreements except in the following certain circumstances:

                1. as part of the purchase/sale of a business or business’ assets;
                2. to protect trade secrets;
                3. where the worker was employed 2 years or less (worker would have to repay employer the cost of any education/training expenses); and
                4. where the worker is an executive or manager.

Effective August 10, 2022, with the passage of H.B. 22-1317, the State of Colorado placed further limits on the use of Agreements and further defined the exceptions listed above.

All Colorado Agreements would continue to be enforceable when there is a purchase or sale of a business or the business’ assets involved, to protect the integrity of the purchase or sale.  Enforcement against “highly compensated” workers will require that the individual earn “in excess of $101,250”.  Workers making less than this threshold salary cannot be prohibited from seeking employment with a competitor, nor from opening a business in competition with their current employer.

There are additional new rules and definitions related to Non-Solicitation Agreements, very popular with sales employers.

The new Colorado law still allows for reasonable Non-Disclosure Agreements; i.e., to protect trade secrets, but those will not be enforceable if they relate to the disclosure of:  1) a worker’s general work knowledge; 2) public information; or 3) information that the worker has a legal right to share.

If you are a Colorado employer who has, or will be, executing Agreements with current and/or prospective workers, this new law contains specific notification requirements that must be met for the Agreements to be enforceable.

The State may yet issue specific guidance as to whether the statute is meant to apply to independent contractors and other non-employee-type workers; however, it is notable that the law references “workers” rather than “employees.”

Of additional interest, on January 5, 2023, the Federal Trade Commission released a Notice of Proposed Rulemaking (NOPR) to limit Non-Compete Agreements in a similar manner to the new Colorado law.  The NOPR will be available for public comment for 60 days once published in the Federal Register and will take effect 60 days after final publication.  Employers would be given 180 days to comply.

Colorado employers should consult an experienced business attorney to ensure agreements containing non-compete, non-solicit and/or confidentiality/non-disclosure clauses satisfy the requirements of the new law.

Tim Brynteson