In the last days of the 2022 legislative session, Colorado lawmakers gave final approval to a bill to restrict the use of noncompete agreements. House Bill 22-1317, which is awaiting the governor’s signature, makes most restrictive covenants unenforceable for workers earning less than six figures and requires employers to notify employees of any agreements they are expected to sign.
Most noncompete agreements were already void in Colorado unless designed to protect trade secrets, recover the expense of training a new employee, target executive or management personnel and their professional staff or made in connection with the purchase or sale of a business.
HB22-1317 eliminates the exception for management, which the bill’s proponents said was applied too broadly. “The body of law on [the] management and executive exception swallows the rule,” Rep. Kerry Tipper, one of the bill’s prime sponsors, said during a bill reading last month. “It’s so expansive that basically anyone can fit into that.”
The bill also narrows the trade secrets exception so that noncompete agreements can only be enforced against workers whose income exceeds the Colorado Department of Labor and Employment’s “highly compensated employee” threshold. That threshold is currently $101,250 per year and is set to rise.
The change puts Colorado in the company of a growing number of states that prohibit the use of noncompetes against low- and middle-income workers. Washington currently prohibits noncompete agreements for workers earning less than about $107,300 while Oregon and Illinois recently raised their thresholds to $100,533 and $75,000, respectively.
“This is one of the few areas of employment law right now where you have seen these efforts in red states and blue states — for different philosophical or political motivations,” said Ogletree Deakins shareholder Michael Bell. “But the notion of only applying noncompetes to highly compensated employees is definitely a larger movement.”
Bell said that Colorado’s shifting threshold could be a “little bit difficult” for employers to comply with. The compensation limit will rise to $112,500 in 2023 and nearly $124,000 in 2024, after which it will be adjusted for inflation. But overall, Bell said he expects the income limits to be one of the easier aspects of the new law for employers to follow. “Usually, the types of employees that these [agreements] typically have been enforced against have been at or near those thresholds,” he said.
HB22-1317 also says that an enforceable noncompete must be no broader than is necessary to protect the employer’s interest in guarding trade secrets. This standard has “always been a hallmark of enforcement,” Bell said, “but that’s typically been a creature of the courts interpreting it,” rather than having the requirement spelled out in the statute. “That could take the discretion away from the courts to ‘blue pencil’ or to modify agreements that are overbroad because, essentially, they’ll just be void,” he added.
The bill also limits nonsolicitation agreements meant to protect trade secrets but imposes a lower threshold than for noncompetes. The nonsolicitation threshold is 60% of the CDLE’s highly compensated worker minimum, putting it at around $60,000 for 2022.
The governor is expected to sign the bill and the new law will take effect in August. Bell said the changes won’t affect restrictive covenants that are already in place. “But I think going forward, employers are going to have to take a hard look at the practice of a one-size-fits-all agreement,” he said, adding that “what may be a reasonable restriction for a really high C-suite executive may not be a reasonable restriction for perhaps a lower-level salesperson.”
In addition, employers will need to follow new notice requirements for noncompetes and other restrictive employment agreements. Under HB22-1317, an employer must notify a prospective worker about any restrictive covenants before the worker accepts an employment offer. Current employees must be notified of a new noncompete agreement at least 14 days before the agreement or any changes to pay or terms of employment take effect. Employers must provide the notice in a separate document from other employment agreements, and the worker must sign it. “If you don’t provide that separate notice, the agreement is void,” Bell said.
Bell said employers have been asking about the new law’s provisions on confidentiality agreements. HB22-1317 clarifies that “reasonable” confidentiality provisions are allowed as long as they don’t prohibit disclosure of information that “arises from the worker’s general training, knowledge, skill, or experience,” publicly available information or information the worker has a legal right to disclose.
“Before this law, Colorado courts had not interpreted simple confidentiality provisions as noncompetes that had to comply with the statute,” Bell said. “And now, suddenly, they are viewed as another type of restrictive covenant.” Employers have been asking whether this means they must provide notice of confidentiality agreements, Bell said, adding that “it does appear that [they] do.” Unlike noncompete or nonsolicitation agreements, confidentiality agreements aren’t subject to income thresholds, he added.
Another thing for employers to be aware of, according to Bell, is that HB22-1317 limits choice of law and choice of venue provisions in noncompetes and other restrictive agreements. Under the new law, Colorado workers can’t be forced to adjudicate noncompete disputes outside of Colorado. It also states that Colorado law must govern agreements an employer has with workers who lived or worked in the state at the time of their termination.
“Those choice of law provisions are something that are in a lot of employers’ agreements, especially multi-state employers’ agreements,” Bell said. “ I think, at a minimum, if you’re a multi-state employer, you either need a separate Colorado agreement or you’ve got to have an addendum to your agreement that really complies with all of these provisions, including the choice of law.”