Changes in Colorado law effective August 10, 2022, based on a bill that passed the legislature and that has been signed by the Governor (the “Restrictive Employment Agreements Bill”), will significantly restrict the enforceability and legality of noncompetition restrictions under Colorado law; and will make certain confidentiality restrictions unenforceable and illegal.
New Limits on Noncompetition Restrictions
Under Colorado law prior to the effectiveness of the Restrictive Employment Agreements Bill, noncompetition restrictions could be enforced against executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.
When the Restrictive Employment Agreements Bill becomes effective, those categories of legal and enforceable noncompetition restrictions will cease to exist.
Instead, to have a legal and enforceable restriction against a former employee or an independent contractor owning, being employed or engaged by, or having another affiliation with a competing business, the employee or independent contractor must earn an amount of annualized compensation of at least the “threshold amount for highly compensated workers” as determined by the Colorado Division of Labor Standards and Statistics. That amount as of this year is $101,250.
For the narrower type of noncompetition restriction, that being a restriction against a former employee or independent contractor soliciting the customers of the former employer or engaging business, the employee or independent contractor must earn an amount of annualized compensation of at least 60% of that threshold amount. As of this year, that 60% amount is $60,750.
The threshold amount for highly compensated workers can be adjusted periodically by the Division of Labor Standards and Statistics.
The employee or independent contractor must have at least the threshold amount of annualized compensation at the time the restrictive covenant is entered into by the employee or independent contractor and at the time it is enforced. That time of enforcement requirement is troubling.
That is because a noncompetition restriction might be legal and enforceable when entered into by the employee or independent contractor—but not when the business wants to enforce the restriction. For example, an employee hired at a salary at or slightly above the threshold amount of annualized compensation leaves the business and takes a job with a competing company at a salary just below the threshold amount of annualized compensation. Or the employee’s new job with the competing company is at the same salary, but the threshold amount of annualized compensation has been increased above that amount.
Requirement of Need for Protection of Trade Secrets
Even if the employee or independent contractor has annualized compensation sufficient to meet the then-current threshold amount, the noncompetition restriction must be “for the protection of trade secrets and no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.” Except that the “for the protection of trade secrets requirement” doesn’t apply to restrictions on soliciting customers of the business.
The words “no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets” create a vague and subjective standard. That standard, particularly with the requirement that the general noncompetition restriction must be for the protection of trade secrets, will be difficult to establish. And it could mean that the business violated Colorado law by requiring the employee or independent contractor to enter into the agreement with the noncompetition restriction; and with the result that it cannot enforce the restriction.
And those requirements mean, for example, that a business will no longer be able to legally enter into and enforce a noncompetition restriction against an employee just to prevent an employee from quitting his or her high-level and highly paid position to immediately begin working for a competing company. The business will have to also be imposing the restriction to protect trade secrets.
Stand-Alone Trade Secrets Exception Deleted
Current Colorado law permits noncompetition restrictions that are a contract for the protection of trade secrets. That stand-alone basis for a legal and enforceable noncompetition restriction will no longer exist when the Restrictive Employment Agreements Bill becomes effective.
