My column in February covered Colorado legislation making violations of the state noncompete law a criminal offense punishable by three to 12 months in county jail and/or $250 to $1,000 in fines. The column also provided an overview of the noncompete law in Colorado. 

But in its latest session, the Legislature enacted and the governor signed into law House Bill 22-1317, which radically changes Colorado law on noncompete and other restrictive employment agreements.  The measure took effect Aug. 10.

Under Colorado law, noncompete agreements are void from the outset and unenforceable unless one of four exceptions is met. Under the previous law, only the following noncompete agreements were lawful in Colorado:

Any contract for the purchase and sale of a business or the assets of a business.

Any contract to protect trade secrets.

Any contractual provision providing for recovery of the expense of educating and training an employee who’s served an employer for less than two years.

Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.

As in the previous version of the law, special rules also apply to noncompete agreements between physicians. 

The new law shuffles the deck. It excepts only two types of noncompete agreements and subjects them to significant restrictions:

Noncompete agreements for highly compensated employees.

Nonsolicitation of customers.

For both types of agreements, several conditions must be met for the agreements to be valid:

Both types of agreements are limited in scope to what’s necessary to protect trade secrets. 

Employees must meet certain income thresholds. An employee subject to an agreement not to compete with the employer must earn 100 percent of the threshold amount for highly compensated workers as defined in Colorado’s annual PAY CALC Order — currently set at $101,250.  Employees subject to agreements not to solicit customers must earn at least 60 percent of the highly compensated employee threshold —currently $60,750. 

The determination of who constitutes executive and management personnel and executive staff led to numerous legal challenges in the past. The new income threshold test is easier to apply. But it sweeps in many nonmanagerial employees who provide important services to the employer while eliminating many mid-management employees who might have been covered by the old exception. 

The new law also creates a category of restrictive agreements expressly not prohibited by law:

Recovery of training expenses. 

Sale of business. 

A reasonable confidentiality provision relevant to the employer’s business.

Repayment of scholarships. 

The prior version of the law excepted agreements for the protection of trade secrets from the general prohibition on noncompete agreements. 

Now, the explicit exception for trade secrets is gone except for limiting noncompete agreements for highly compensated employees and agreements prohibiting the solicitation of an employer’s customers. But the new law creates a significant new category of agreements to protect an employer’s confidential information that aren’t considered restrictive agreements at all.

 For years I’ve reviewed confidentiality agreements and agreements to protect confidential information and trade secrets although the previous version of  the law didn’t except confidential information unless it rose the level of trade secrets. It remains to be seen how Colorado administrative agencies and courts will define a relevant confidentiality provision. But this provision could allow employers to protect information that fails to meet the narrow definition of trade secrets so long as the agreement doesn’t prevent employees from competing with employers or soliciting its customers. 

Finally, new rules apply to all restrictive agreements. 

The new law requires employers to provide employees with separate written notices of restrictive agreements and their terms, and employees must sign the notices. The common law limitations of the scope of noncompete agreements are now specified in the statute. A restrictive agreement must be reasonable in geographical or temporal scope or the agreement is void from the outset.

Another new provision limits the choice of forum and law in legal challenges to an agreement or its breach.

It’s common for companies entering into business agreements to specify the law of a specific state will govern the interpretation of an agreement and disputes will be heard in a particular forum, usually courts in the state where the business is headquartered or conducts the majority of its business. 

The new law prohibits a forum selection clause designating any jurisdiction other than Colorado for agreements with employees who, at the time of termination of employment, primarily work or live in Colorado. Similarly, a choice-of-law provision designating anything other than Colorado law would be unenforceable as to any employee who, at the time of termination of employment, primarily worked and lived in Colorado.

Every agreement should be examined on its own facts and merits. I recommend any employer planning to implement a restrictive agreement first consult legal counsel. The Employers Council can assist members with this process. 

Employers should carefully examine any restrictive agreements binding prospective or new employees to avoid being a party to a legal action for inducing a breach of contract or interfering with a contract.