Colorado Criminalizes Certain Restrictive Covenants in Employment Agreements

​Colorado's legal landscape continues to shift. Through one sentence in a 304-page bill enacted in 2021, SB 21-271 criminalized violations of Colorado's restrictive-covenant statute, section 8-2-113, C.R.S.  Effective March 1, violations of section 8-2-113 are a Class 2 Misdemeanor. As a result, a violation of section 8-2-113 could lead to 120 days' imprisonment, a $750.00 fine per violation, or both.

What Does this Mean for Employers? 

As many Colorado employers know, noncompete agreements in Colorado, including customer nonsolicitation clauses, are considered void unless subject to one of four exceptions. Those exceptions relate to contracts: (1) for the purchase and sale of a business or the assets of a business; (2) for the protection of trade secrets; (3) for the recovery of the expense of educating and training an employee under certain conditions; and (4) for executive and management personnel.

Any restrictive covenants outside those exceptions are unlawful.  And now, come March 1, the knowing implementation of a void restrictive covenant is also a crime. So, for example, asking a janitor with no access to trade secrets and zero management responsibility to sign a noncompete could subject an employer and the managers involved in the noncompete program to criminal liability.

But perhaps more troubling—and often overlooked—is section 8-2-113(1). This section of the statute broadly provides that it is "unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit." This broad language is largely untested and, as recently as November 2020, the U.S. District Court for the District of Colorado, in dismissing a claim under section 8-2-113(1), made clear that "there are apparently no Colorado decisions with direct guidance on whether a party may seek damages for an improper threat under § 8-2-113(1)."

Even so, such broad language could arguably apply to any manner of threat, including threatening termination if an employee refuses to sign a noncompete that is void or unenforceable. So employers would be wise to remain cognizant of this broad language, especially if there are doubts about the application or scope of a noncompete to a particular employee or group of employees.

In short, SB 21-271 raises the stakes for Colorado restrictive covenants by creating Class 2 Misdemeanor criminal liability for violations. As a result, Colorado employers should take care to determine that the restrictive covenants presented to employees comply with the permitted exceptions under the statute. While the scope of the application of criminal liability for violation of section 8-2-113 remains uncertain, employers should consider reviewing their agreements and implementation procedures for compliance with the permitted purposes for restrictive covenants and the employee population being asked to sign.  

Steve Baumann and Tom Carroll are attorneys with Littler Mendelson in Denver. © 2022 Littler Mendelson. All rights reserved. Reposted with permission.