What Employers Need to Know in Order to Avoid Hefty Penalties
Under the recently passed HB22-1317, Colorado employers can no longer include non-compete clauses or other restrictive covenants in workers’ employment agreements, with a few exceptions. Governor Polis signed the bill on June 8, 2022 and it goes into effect this August. Although the new law will empower workers to have more agency in the job market, employers who fail to comply could face steep statutory fines and additional penalties.
At RZA Legal, we understand that many of our clients are employers in the Colorado cannabis industry. Therefore, we’ve addressed some common questions and summarized the key takeaways from the new law below. Please reach out if you have any questions, would like us to review a contract with restrictive covenants from a potential employer or business partner, or if you want us to help you ensure compliance.
What exactly does the new law do?
Subject to certain specific exceptions discussed below, employment agreements - including Independent Contractor Agreements - that restrict a worker’s ability to work anywhere else are void (i.e. not legally enforceable). Restrictive covenants include non-competes, non-solicitation agreements, and similar clauses. The law prohibits an employer from:
presenting to an employee or prospective employee as a term of employment, or
attempting to enforce any restrictive employment agreement or covenant not to compete that is void under the law
An employer who violates this provision is subject to a penalty of $5,000 for each employee or prospective employee, injunctive relief (meaning a court could halt the non-compete from taking effect), and actual damages (if the worker actually loses money or another job opportunity due to the non-compete inclusion in the agreement).
The law also prohibits the use of force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place the person sees fit. Violators will be charged with a Class 2 Misdemeanor.
What are the exceptions allowing employers to restrict a worker’s ability to compete?
All restrictive covenants presented to or signed by workers after the effective date of this law—with these few exceptions—will be void. However, if the employer provides proper notice (explained below) to the employee or prospective employee, the following agreements or covenants are allowed:
A reasonable confidentiality provision relevant to the employer's business that does not prohibit disclosure of information that arises from the employee's general training, knowledge, skill, or experience, whether gained on the job or otherwise, or information that is readily ascertainable to the public
A provision to allow an employer to recover expenses associated with educating and training an employee who has served an employer for a period of less than 2 years, provided that:
The training is distinct from normal, on-the-job training and not primarily for the benefit or convenience of the employer; and
The amount sought to be recovered is reasonable and prorated on a monthly basis over a two-year period following the training.
Agreements or covenants with “highly compensated employees” (those currently earning a salary of $101,250/year or more) and customer non-solicitation agreements with those earning 60% of the highly compensated employee threshold (i.e., $60,750).
Even then, the covenants must be no broader than reasonably necessary to protect trade secrets.
A covenant for the purchase and sale of a business or the assets of a business
A provision requiring the repayment of a scholarship provided to an individual working in an apprenticeship if the individual fails to comply with the conditions of the scholarship agreement.
What are the penalties if my employment agreements contain non-compete language?
Employers are subject to significant damages—including a $5,000 penalty per employee if they enter into, attempt to enforce, or present to current or prospective workers any noncompete that is void under the new statute. This can quickly add up to astronomical sums for employers who are not careful.
In addition to actual damages and penalties, workers and prospective workers may obtain injunctive relief and recover reasonable attorney fees and costs.
How can employers avoid fines and other penalties?
Employers must take care to analyze the statute and change their agreements and procedures. However, the courts will have discretion not to award a penalty, or to award less than the full amount of a penalty, if the employer shows that it acted in good faith and had reasonable grounds for believing it was not acting in violation of the statute. In order to avoid violating the new law:
Carefully review any of the restrictive covenants you use and analyze when and with whom they are used. Be sure to check any boilerplate language that may reach your employees through stock purchase plans or similar agreements.
If presenting or enforcing a restrictive covenant under one of the exceptions above, employers may not require the worker to adjudicate the enforceability of the covenant outside of Colorado. Furthermore, employers must provide proper notice of the restriction to the worker, subject to the following:
The terms of the covenant not to compete must be provided to:
a prospective worker before the worker accepts the employer's offer of employment; or
a current worker at least fourteen days before the earlier of the effective date of the covenant or the effective date of any additional compensation or change in the terms or conditions of employment that provides consideration for the covenant.
Notice of the restrictive covenant must be provided in a separate written document that is written in clear and conspicuous terms and in the language in which the worker and employer communicate about the worker's performance.
The notice must identify the agreement by name and state that the agreement contains a covenant not to compete that could restrict the workers' options for subsequent employment following their separation from the employer and must direct the worker to the specific sections or paragraphs of the agreement that contain the covenant not to compete.
The notice must be signed by the worker.
Finally, employers should take good-faith action steps to demonstrate that they take this new law seriously; doing so may persuade the court to reduce penalties should an unintentional violation occur.
What should I do if I have more questions?
Schedule a consultation with RZA Legal, of course! Our experienced team is here to help you navigate this dramatic change in the world of Colorado non-competes. We are focused on keeping your business running smoothly while maintaining constant compliance with the rapidly changing laws and regulations. For your added convenience, RZA offers flat-rate pricing and social equity discounts.
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