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New Limits on Noncompete Agreements: What Colorado Employers Need to Know

When Colorado enacted its new noncompete agreements statute in August 2022, many employers expressed apprehension about what it would mean for their company and how to comply. Not only is the new law a dramatic departure from the old, but there are also serious financial penalties for violations.

Even companies based outside of Colorado must comply with the new law for any Colorado-based employees. Still, many businesses have yet to take the necessary steps to ensure compliance with the statute or are unaware of the nuances.

Here’s what employers need to know and do now.

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

What are Valid Noncompete Agreements?

Noncompete agreements will be considered valid and enforceable only if they are:

  1. Entered into with a “highly compensated worker” (i.e., a worker making at least $112,500 in 2023; but note that this dollar amount will change annually). Employees earning less than that amount cannot be bound by a non-compete
  2. designed to protect trade secrets; and
  3. no broader than necessary to protect the employer’s legitimate interest in protecting trade secrets.

It’s important to note that employees must be highly compensated both at the time they sign noncompete agreements and when an employer attempts to enforce the noncompete.

What is a Valid Non-Solicitation Agreement?

Non-solicitation agreements (agreements not to solicit an employer’s customers) will be considered valid and enforceable only if they are:

  1. Entered into with workers making at least sixty percent of the threshold amount for highly compensated workers (i.e., a worker making at least $67,500 in 2023; an amount will also change annually). Employees earning less than that amount cannot be bound by a non-solicitation; and
  2. no broader than necessary to protect the employer’s legitimate interest in protecting trade secrets.

READ — What Is Trade Secret Misappropriation: Is Your Business at Risk?

What About Other Restrictive Covenants?

The following types of restrictive covenants remain legal under the Act:

  1. Provisions providing for an employer’s recovery of the expense of education and training. For example, an accounting firm that pays for an employee’s CPA certification would be eligible to recoup those costs.

  2. Reasonable confidentiality provisions, as long as they do not prevent the disclosure of information that: (a) arises from the worker’s general training, knowledge, skill, or experience, whether gained on the job or otherwise; (b) is readily ascertainable to the public; or (c) that a worker otherwise has a right to disclose as legally protected conduct.

  3. Covenants for the purchase and sale of a business or the assets of a business.

  4. Provisions requiring the repayment of a scholarship.

What Are the Notice Requirements?

Even if the agreements are drafted appropriately, they are only enforceable if the employer provides adequate notice to employees and prospective employees. The notice requirement is unique to Colorado and very specific, so employers should be quite careful to comply.

Colorado companies must provide current employees with at least fourteen days’ notice of any noncompete or non-solicit agreements. In addition, employers must give prospective workers notice before they accept an offer of employment.

The notice must be contained in a separate document (not as part of the offer letter) and written in “clear and conspicuous language” so that a layperson can readily understand it. In addition, the employee or prospective employee must sign the notice.

Unfortunately, many employers don’t realize they can be penalized for even presenting prospective employees with invalid noncompete agreements.

READ — Changes To Non-Compete Rules Also Mean Paying More Attention To Your Trade Secrets

How Can Companies Protect Themselves?

Employers should think carefully about whether and what type of restrictive covenants they genuinely need to protect their business, given the potential legal pitfalls.

Employers should consider how much protection they can achieve from a well-drafted confidentiality agreement preventing departing employees from misappropriation of proprietary information or trade secrets.  If a business’s biggest concern is that a departing employee will potentially poach customers or clients, a non-solicitation agreement is a great option. Non-solicitation agreements have a lower salary threshold ($67,500 annually) and may provide the desired protection without the need for a blanket non-compete.

It is more important than ever to ensure that all agreements with employees comply with the new law and are properly executed, as failure to adhere could have serious legal consequences. Consulting with a knowledgeable legal representative will help employers navigate the complexities of these new regulations, protect their best interests, and provide employees with clear expectations.

Christine Lamb HeadshotChristine Lamb has nearly three decades of experience counseling executives and companies of all sizes on human resources and personnel issues and defending businesses in employment lawsuits.