Colorado to Restrict Noncompete Agreements for Lower-Wage Workers

​Colorado lawmakers passed legislation May 10 that will significantly limit the practice of using noncompete agreements for lower-wage workers in the state.

Gov. Jared Polis is expected to sign the bill into law, which will become effective August 10.

Noncompete clauses in employment contracts place limits on where employees can work after they leave a job. These agreements prohibit an employee from working for a competitor or from starting a competing business within a geographical area for a certain period after leaving a job.

Tens of millions of U.S. workers have signed noncompete agreements with their employers. However, many employment experts believe that noncompete agreements should not be applied to low-wage workers, such as those in retail, health care, and leisure and hospitality jobs.

The Colorado law would limit noncompetes to people making more than $101,250 per year. "Noncompetes stifle innovation," said Rep. Kerry Tipper, D-Jefferson, the bill's prime sponsor. "They make it difficult for employers to recruit talent, and they make it difficult for talent to go places and move up the ladder. What the bill did was to try and put some more safeguards on those noncompete provisions."

The law will virtually end the practice of most noncompetes in the state, said Michael Greco, an attorney in the Denver office of Fisher Phillips. "It will also empower workers and the [state] attorney general to punish violations through lawsuits for damages, statutory penalties and attorneys' fees," he said.  

Greco explained that all restrictive covenants presented to or signed by workers after the effective date—including noncompete and nonsolicitation agreements—will be void. The sole exceptions that will be permitted include:

• Noncompete agreements accompanying a sale of business.
• Noncompete agreements signed by "highly compensated employees," defined as those making more than $101,250 per year.
• Nonsolicitation agreements signed by workers earning 60 percent or more of the highly compensated employee threshold, or $60,750 per year.

Some confidentiality agreements will be permitted. "We expect confidentiality agreements to become much more important in Colorado workplaces given the impending limitations on noncompetes," Greco said.

Training cost recovery agreements will also be permitted, provided that the amount sought to be recovered is reasonable, he said.

"The law places Colorado among several other states with the strictest bans on restrictive covenant agreements for low-wage workers," said Eric Barton, an attorney in the Atlanta office of Seyfarth. "In the past six years, at least 10 states, as well as the District of Columbia, have passed legislation to limit and/or eliminate the use of noncompetes and other restrictive covenants for low-wage workers. All employers with workers in Colorado should take immediate steps to review their agreements to ensure they comply with the new law."

One of those new requirements is that employers must notify applicants about noncompete agreements and have them review the clauses before they accept a position with the company. "In order for any restrictive covenant to be enforceable under the new law, the employer must provide sufficient notice of the restrictions," Barton said. "In cases of a prospective worker, notice must be provided before they accept the offer of employment. In cases of a current worker, notice must be provided at least 14 days before the earlier of the effective date of either the covenant or the additional consideration to be provided to the worker."

Greco said that the notice must be in writing, signed by the worker, in a separate document with clear language and presented alongside the agreement containing the noncompete clause. "Failure to comply not only renders the covenants void, but it subjects employers to statutory penalties, compensatory damages and attorneys' fees," he said.

Employers will be subject to significant damages for noncompliance, Greco said, 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."

There is a sliver of good news for employers though, he said. "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."