In Colorado, overly broad non-compete agreements are typically thrown out by courts. Starting next month, they could bring new criminal penalties for employers.
As of March 1, violations of Colorado’s law on non-compete agreements will be considered a class 2 misdemeanor, which carries a maximum sentence of 120 days in jail, $750 in fines or both. The penalties were added as part of last year’s Senate Bill 21-271, a 300-page misdemeanor sentencing reform bill that reclassified and tweaked the penalties for low-level crimes ranging from writing bad checks to defacing a cave.
Employment law attorneys have noted that Colorado law already provides criminal penalties for unlawful non-competes, but these penalties are currently limited to $250 in fines and 60 days in jail. The changes taking effect in March up the ante for employers whose non-compete clauses fall afoul of the law.
In Colorado, non-compete agreements are illegal unless they are designed to protect trade secrets, recover the expense of training a new employee, target executive or management personnel and their professional staff or are made in connection with the purchase or sale of a business. Even if an employee falls into one of those exceptions, courts will evaluate the agreement to make sure it is reasonable in duration and geographic scope.
“I think the first major thing to remember is this didn’t change the underlying non-compete law in Colorado,” said Ballard Spahr attorney Jessica Federico. “So if you were putting into place restrictive covenants that fit into these exceptions, there’s nothing to worry about.”
Where employers can go wrong, according to Federico, is if they’re “trying to shoehorn a rank-and-file employee into one of these exceptions, and it doesn’t really work.” Most often, she said, employers try to fit employees into the “trade secrets” exception. “But even ‘trade secret’ is defined under Colorado law,” Federico said. “In general, a trade secret has to be truly a secret that provides some sort of business advantage. And it has to be something that the business is taking measures to prevent from being disclosed.”
Can we expect employers to pay fines or do time for making employees sign a void non-compete? “That’s sort of an outstanding question. What is going to constitute a violation?” Federico said, adding it’s not clear whether simply requiring employees to sign an agreement could trigger penalties or whether an employer would need to threaten or actually attempt to enforce an unenforceable non-compete. “Arguably, based on the way it’s drafted, all of those things could raise the specter of criminal penalties,” she said. “But that’s something that remains to be seen.”
In the face of this uncertainty, Federico said employers should revisit their existing non-competes to make sure they comply with the allowable exceptions under the statute. But employers should probably be reviewing their restrictive covenants anyway, she added, as non-competes and non-solicitation agreements face growing scrutiny at the federal level and new restrictions in several states.
“On a state level, we’re just seeing more and more non-compete legislation,” Federico said. “Usually it’s related to entering into non-competes with low-wage workers or, again, people that don’t have access to trade secrets and confidential business information. It really is a state-by-state approach.”
In the past few years, Maryland, New Hampshire and Rhode Island enacted laws making non-competes unenforceable for workers earning around $30,000 or less annually. Virginia enacted a similar law in 2020, but the threshold there is currently closer to $60,000. Last year, Illinois passed a law prohibiting non-competes with workers earning less than $75,000, while Washington state bars non-compete agreements for employees earning less than about $107,000.
Non-competes have also gotten the attention of the White House. In July, President Joe Biden signed an executive order broadly aimed at promoting competition in the U.S. economy. In it, he urged the Federal Trade Commission to ban or limit non-compete clauses and other agreements that “may unfairly limit worker mobility.” While the agency has yet to rein in restrictive covenants, it held a workshop with the Department of Justice on promoting competition in labor markets in December, which was seen as a first step toward regulating non-competes.
Non-compete agreements, which typically prohibit employees from working with rival companies for a certain period, are estimated to cover nearly a fifth of all U.S. workers. A 2019 survey from the Economic Policy Institute found that between 27.8% and 46.5% of private sector workers are subject to non-competes, and it estimated that the practice is growing