How Will FTC’s Proposed Ban on Non-Compete Clauses Impact Colorado Law?

On January 8, 2023, the Federal Trade Commission (FTC) issued its groundbreaking proposed rulemaking that, if adopted, will ban the use of non-compete clauses for most workers nationwide. The FTC’s proposed rule comes on the heels of Colorado passing its new law on restrictive employment agreements in June 2022. The FTC’s entry into this area of regulation begs the question of what continued effect, if any, Colorado’s non-compete laws will have on Colorado employers and workers.

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FTC Proposed Rule

The FTC’s proposed Non-Compete Clause Rule will prohibit all employers, regardless of size, from imposing covenants not to compete on employees and independent contractors. There is no carve-out available for the use of non-compete clauses with executives or other highly compensated workers. The proposed FTC regulations prohibit employers from imposing non-compete clauses on newly retained talent, but they will also require employers to rescind covenants not to compete in existing agreements if those covenants are rendered unlawful under the new rule. The proposed rule, however, will not prohibit the use of properly drafted non-disclosure and non-solicitation clauses under federal law.

Colorado’s Restrictions on Covenants Not to Compete

On August 10, 2022, Colorado’s new legislation governing restrictive covenants went into effect. Generally, the new law restricted the use of non-compete clauses to only two situations:

  1. the purchase and sale of a business or its assets.
  2. for the protection of a trade secret if it is “no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets” and only if the individual earns an amount equal to or greater than a “highly compensated” worker both at the time the covenant is entered into and at the time it is enforced.

Colorado also added additional deterrents, requirements, and remedies, including specific notice requirements, to discourage employers from having restrictive covenants with their employees.  In addition, Colorado’s law limits customer non-solicitation covenants.

How Would the FTC’s Proposed Rules Affect Colorado’s Existing Laws?

The Supremacy Clause of the U.S. Constitution is clear that federal law preempts any state law that conflicts with the exercise of federal power. With this in mind, the FTC is proposing that the rule would supersede any state law to the extent that such law is inconsistent with the FTC’s rule and the state law does not afford greater protections to workers. Essentially, the FTC is proposing that its ban on non-compete clauses would set the “floor” for state regulation, meaning states can enforce laws that provide greater protections than provided by the proposed rule.

For example, the FTC rule will supersede Colorado’s limited exceptions to the ban on non-compete clauses because the FTC rule provides greater protections to employees – i.e., no non-compete clauses under any normal circumstances (the only exception being related to the sale of a business). As the FTC’s rule is currently proposed, there are also certain Colorado provisions that provide greater protections to workers than the FTC rule.

The proposed rule does not prohibit customer non-solicitation covenants unless they have “the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” Colorado law, however, prohibits the use of customer non-solicitation clauses when workers’ yearly compensation is less than 60% of a “highly compensated” worker ($67,500 in 2023). In this circumstance, Colorado law would likely be applicable to workers making less than the compensation threshold because it provides greater protections than the FTC’s rule.

Bottom Line

As the FTC’s rule is only a “proposed” rule, only time will tell how Colorado’s non-compete law will fare once the final rule is published. The FTC’s proposed rule is currently in the public comment phase of the rulemaking process. The FTC has solicited comments on various aspects of the rule, including whether there should be an exception for executives. The FTC will then “review the comments and may make changes, in a final rule, based on the comments and on the FTC’s further analysis.” Once a final rule is published, however, it will undoubtedly be subject to a myriad of legal challenges, which could delay its implementation and enforcement for months or years to come. Currently, Colorado law is the law of the land for Colorado employers and workers. Whether this changes, we will have to wait and see. 

 

Korte JSpencer Fane attorney, James Korte, focuses his practice on all aspects of traditional labor relations as well as state and federal employment law. He can be reached at 303.839.3765 or [email protected].