HB22-1317 Would Limit Non-Compete Agreements

On June 8, 2022, Governor Jared Polis signed into law House Bill 22-1317, which stands to significantly limit the enforceability of any non-compete agreements executed after the law’s effective date for employers with employees working or living in Colorado. This new law takes effect in August 2022.

Exceptions to General Non-Compete Prohibition Are Further Narrowed

In Colorado, non-compete agreements are generally UNENFORCEABLE with certain, limited exceptions. One of these exceptions, known as the “executive and managerial exception,” had been broadly interpreted by the courts and effectively swallowed the rule limiting non-competes. The new bill eliminates that executive and managerial exception.

Another broadly interpreted exception, for non-competes “necessary to protect trade secrets,” is also eliminated by the new law. Under the new law, exceptions to the general rule will exist only for two types of agreements:

1. Those involving “highly compensated employees” (HCEs), i.e., those earning at least $101,250, but only where the covenant in question was designed to protect trade secrets; and
2. Covenants for the non-solicitation of customers for employees earning over 60% of the HCE salary threshold.

For both agreements, the new law would require that the salary threshold be met both at the time the contract was executed and “at the time [the covenant] is enforced.”

Notice Requirements

Colorado employers have had license to enact a non-compete as a condition of continuing employment, with notice or added consideration. This latitude is eliminated by HB 22-1317, which requires the employer to provide the employee with a separate, written notice of the non-compete covenant(s) and their terms, which must be signed by the employee in order for the non-compete to be enforceable. Otherwise, the covenant will be considered void by the Courts.

Summary

This post explains only the most significant changes. There are new penalties—criminal and civil—and other new provisions in this bill.

If you are an employer, we recommend that you draft new non-compete agreements and notices for any employees who still qualify and have those documents executed.

For employees, this law is not retroactive, so if you have left employment and seek to compete based on the new law, your situation should be separately evaluated.