In Colorado, the status of restrictive employment agreements—commonly known as non-compete agreements—will soon change dramatically due to a new bill, recently passed by lawmakers and expected to be signed by Governor Polis. Taking effect in August 2022, if signed, the law will dramatically impact the use of non-competes in the state. Violations could result in significant financial penalties of up to $5,000 per worker impacted, compensatory damages, lawsuits and attorneys’ fees. The net net? Employers need to prepare for the change now.
By using non-compete agreements, employers have attempted to prevent employees who leave from working at a competitor for a prescribed length of time. The enforceability of non-compete provisions has long been debated and parsed by courts in Colorado, which tend to interpret them narrowly. Despite this new law, employers need not despair if they lose an employee to a rival—there are still legal avenues to protect trade secrets, intellectual property and confidential information.
The new bill includes a limited number of exemptions; namely, non-competes will still be allowed when accompanying the purchase or sale of a business or to protect trade secrets with employees who are considered “highly compensated.” In 2022, in Colorado, that is defined as those earning $101,250 per year or more, although the bill clearly states that the non-compete must be “no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.”
Given that many companies have non-compete agreements embedded in employment contracts, what should Colorado employers do now to prepare for this change?
First, consider what your company was attempting to protect with a non-compete clause and analyze your options going forward. Your attorney can advise you on the addition of new or different provisions that can continue to provide protections for proprietary information.
Decide on your approach for both current and new employees. While the new law is not anticipated to apply retroactively to current non-compete agreements, employers should evaluate if it is a fair and appropriate practice to keep non-competes in place for previously hired employees but not for new hires.
Counsel with your attorney about adding new language that can help protect intellectual property, confidentiality and trade secrets. Understand that there can be a fine line between the type of information that is considered a trade secret, so it’s important to consult a lawyer specializing in employment law to avoid using language that a court could strike down.
Some non-compete agreements may have offered financial incentives like money or stock options as a quid pro quo for a non-compete. Re-think whether or not you want to continue to offer the rewards if the non-compete cannot legally be enforced, and revise the agreements accordingly.
Understand that in Colorado, non-solicitation of customers is considered a form of non-compete and is subject to similar restrictions. However, provisions barring solicitation of the company’s current employees are still allowable. Obtain legal advice before including any non-solicit verbiage in employment agreements.
Work with your employment attorney to prepare a new agreement that is compliant with the new law. Note that continuing to rely on previously signed agreements containing a void non-compete clause may open you up to potential risks if the court or an employee claims that the agreement is invalid because it has an unallowable non-compete provision in it.
Overall, this summer is an excellent time to take a look at your company’s employment agreements, review your goals with an employment attorney and make strategic decisions about how best to protect your company while remaining compliant with the law. And although some employers may be wary of this change, the upside of disallowing non-compete agreements is that great potential employees won’t be sidelined for lengthy periods of time. And in a hot job market, the wider the hiring pool and the more candidates that are available, the better!