On May 3, 2022, Colorado passed House Bill 22-1317 (HB 22-1317), which aims to radically curb the enforceability of any non-compete and other restrictive agreements for employers with employees working and/or residing within the state. If the house bill is signed by Governor Polis, it will then become effective 90 days after the legislature process comes to a close.
What Kind of Agreements Will Be Permitted?
Once HB 22-1317 officially becomes effective, it will practically void any restrictive documents (i.e., non-compete, non-solicitation, confidentiality agreements, etc.) moving forward. That is, aside from a few key exceptions:
- Non-Compete Agreement
- Agreements signed by highly compensated employees when the details of the non-compete agreement is no broader than reasonably necessary to protect company trade secrets. According to the Colorado Department of Labor (CO DOL), the minimum threshold for Highly Compensated Employees (HCEs) for 2022 is $101,250 annually. This figure is expected to continue to be set by the CO DOL and increased once per year;
- Agreements signed during the sale of a business or company assets.
- Non-Solicitation Agreements
- Documents signed by employees who are dealing directly with clients/customers and earn at least 60 percent of the HCE minimum salary threshold. For 2022, that equates to $60,750 annually.
- Confidentiality Agreements
- Contracts must not prohibit the release of information occurring from the employee’s general knowledge, skill, training, or experience, the information is readily discoverable to the general public, or the knowledge that the employee otherwise has a right to divulge as legally protected conduct.
- Scholarship/Training Cost Recovery Agreements
- Agreements are permitted only for the recovery of the costs associated with training, other than company provided, on-the-job training;
- The funds recovered are limited to the cost of the training for employees and will decrease over the course of a two-year period following the employee’s departure from the company;
- The recoupment of funds must not violate the terms of the Fair Labor Standards Act regarding deductions from wages;
- Repayment of scholarships may occur when an employee fails to comply with the requirements of the signed scholarship agreement.
Employer Notice Requirements
HB 22-1317 will require employers to provide proper notice of their use of any non-restrictive documents as a condition of or throughout the course of employment. Employers must provide a separate notice indicating any restrictive covenants being utilized and said notice must be provided to and signed by:
- Applicants prior to accepting an offer of employment; or
- Current employees 14 days before the effective date of the newly signed agreement or a change in conditions of employment.
The notice must identify the non-restrictive agreement and provide specific details on how the document may restrict the individual’s ability to secure future employment. The notice must also direct the individual to the specific sections within the agreement that contain said restrictive language. Along with providing this separate notice, employers are required to also provide a copy of the impeding document that the company is requesting the individual sign.
Penalties for Failing to Comply
According to the legislation, employers who fail to comply with the above-mentioned notice requirements will not only void their restricting agreements, but the employer may also be subjected to harsh financial penalties, including court fees and compensatory damages. HB 22-1317 has further indicated that any agreement that fails to meet the statutory requirements will officially be invalid and will enforce a fine of up to $5,000 per employee if the company enters into, attempts to enforce, or presents to current or potential employees any restrictive agreement that has been void under the law.
Next Steps for Employers
Should the law be signed and become effective, the bill will only apply to newly entered or renewed agreements on or after the effective date. So, at this time, employers will not have to amend any pre-existing documentation to meet the new requirements. If passed, it is recommended that employers utilizing such restrictive documentation speak with their legal counsel in order to ensure that any agreements will comply with the potential caveats and make any necessary alterations.